FINANCIAL ANALYSIS REPORT OF

GREE ELECTRIC APPLIANCES, INC.

OF ZHUHAIGROUP 2林德佳 张文 刘紫云 刘含璐 杨闯 王铁源 王菲 曹天予

Background of Appliances Industry

Total Output Value

2010 2011 2012 20130

2000

4000

6000

8000

10000

12000

14000

7388

9642 1019411447

Appliances industry total output value（ billion yuan ）

Gross output v...

Characteristics

C1

C2

C3

Text4The highly competitive market of industry Increasingly

economies of scale and high market

concentration rate

Increased industry barriers

Short-term Liquidity

Short-term liquidity indicates the ability to pay due debt of an entity. Proper analysis of short-term liquidity provides us an insight of the operation and performance of an entity. For Gree, we selected some representative indicators including working capital, current ratio, quick ratio, conservative quick ratio and cash ratio and compare them with those of Haier and the industry average in order to present an overall evaluation of short-term liquidity.

Current Ratio= Total Current Assets/Total Current Liabilities

Quick Ratio= (Current Assets-Inventories)/Current Liabilities

Peer Comparison

2009 2010 2011 2012 20130.00

2.00

4.00

1.04 1.10 1.12 1.08 1.08

1.48 1.26 1.21 1.27 1.30 2.85

3.89 3.85 3.16 2.86

Current Ratio Compar-ison

current ratio of Greecurrent ratiio of Haieraverage current ratio

2009 2010 2011 2012 20130.00 1.00 2.00 3.00 4.00

0.90 0.87 0.85 0.86 0.94

1.28 1.07 0.98 1.04 1.12

2.42 3.38 3.26

2.60 2.33

Quick Ratio Comparisonquick ratio of Greequick ratio of Haieraverage quick ratio

High Leverage&High Profitability Strategy

Bank-initiative Short-term Loan

Stable Relationship with Suppliers

High Quality of Accounts Payable

Analysis of Financial Leverage

The debt to assets ratio =

Times Interest Earned = =

The Debt to Assets Ratioa. Comparison with historical datadeclining more than 70% (40% and 60%) high level of debt, more risk for creditors  b. Comparison with Haier and Industry AverageGree>Haier>Industry average

More than 60%enough confidence to pay debtsGree should debt more reasonably.

2009 2010 2011 2012 201330.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

The

Deb

t to

Ass

ets

Rati

o

Times Interest Earned

a. Comparison with historical dataThe interest charges of Gree are negative, so interest income is larger than interest expense in recent five years. In addition, in recent three years, the absolute value of times interest earned is increasing, which means the support capability of interest is strong.

Year 2009 2010 2011 2012 2013

GREE -33.8403 -15.3651

-12.979

4

-17.993

7

-92.890

1

OPM StrategyManagement strategy: firms take full use of the large size to enhance its bargaining power with suppliers and buyers

For the suppliers: Extend the payment date of accounts payable which is no interest Use the money to invest other projects

For the buyers: Shorten the credit period of accounts receivable Receive buyer’s partial payment in advance

By using these cash for expansion, the firm can further enhance the competitiveness.

Analysis of Financial Leverage High debt ratio of Gree Large debts especially current debts. Financial expense is negative Interest revenue > Interest expense No interest Debt are mainly are accounts payable and unearned revenue

Thus, we can refer that the bargaining capacity of Gree with suppliers is strong OPM strategy succeed

Although Gree maintain high debt ratio, thanks to good effect of the non-interest debt strategy and OPM strategy, the financial risk can be controlled effectively.

Operation Capacity

Inventory Total asset

Fixed-asset

Current-asset

Accounts receivable

¿Sales

Average accountsreceivable

Accounts receivable turnoverInventory turnover

¿Cost of sales

Average inventory

Total asset turnover

¿Sales

Average total asset

Fixed-asset turnover

¿Sales

Average ¿ −asset ¿

Current-asset turnover

¿Sales

Average current asset

45%

55%

We can see clearly from the chart that the inventory turnover of GREE is little lower than the industrial inventory turnover and much lower than Haier’s, which means Haier have lower occupancy of assets level and GREE’s inventory management need to be improved. Besides, Haier has high inventory turnover because of JIT.

Inventory turnover

2009 2010 2011 2012 201302468

101214161820

Inventory turnover GREEInventory turnover HaierInventory turnover industry

45%

55%

Accounts receivable turnover of GREE is much higher than that of industry and Haier, which is very outstanding. High accounts receivable turnover means its inventory can be traded for cash quickly, and the quality of the current assets is high (the current assets’ liquidity is good and the bad debt loss is less). Therefore, the profitability is high.

2009 2010 2011 2012 20130

1020304050607080

Accounts re-ceivable turnover GREEAccounts re-ceivable turnover HaierAccounts re-ceivable turnover in-dustry

Accounts receivable turnover

Gross profit margin

It measures the relative profitability of the firm’s sales after the cost of sales has been deducted

ProfitabilityNet profit

marginIt measures how profitable a company’s sales are after all expenses, including taxes and interest, have been deducted.

ROA

It measures the overall profitability of all assets, and it is an important index in the evaluation of asset operation efficiency.

ROE

It measures the rate of return that the firm earns on stockholders’ equity

In recent years, GREE has an increasing trend in gross margin ratio, which shows the profitability is increasingly strengthen. Maybe GREE have taken actions to increase its sales and control the cost of sales.

2009 2010 2011 2012 201310%

20%

30%

40%

GreeHaier

Gross Profit Margin

As we can see from the chart, the net profit margin of GREE is obviously above Haier’s. It may be the negative financial expenses that increases the EAT, which means GREE’s financial structure contains high proportion of current liabilities, especially the non-interest liabilities like accounts payable.

2009 2010 2011 2012 20130%

2%

4%

6%

8%

10%

12%

GreeHaierAverage

Net Profit Margin

2009 2010 2011 2012 20130%2%4%6%8%

10%12%14%

GreeHaierAverage

We can see that Haier’s ROA is higher than GREE’s, showing its assets operation is more effective than GREE and GREE needs to enhance sales ability and cut down the inefficient investment project.

ROA

We can find that the ROE of GREE and Haier is larger than the industry average. The higher the ROE is, the higher the level of protection of investors is. So GREE should maintain this trend to keep good profitability.

2009 2010 2011 2012 20130%

10%

20%

30%

40%

GreeHaierAverage

ROE

Development Capacity

Business revenue

growth rateProfit growth

rateTotal

assets growth

rate

Fixed assets growth rate

Working capital growth rate

Development Capacity=

Text1

Text2 Text4

.

2009-12-31 2010-12-31 2011-12-31 2012-12-31 2013-12-31-10.0000%

0.0000%

10.0000%

20.0000%

30.0000%

40.0000%

50.0000%

60.0000%

70.0000%

Fixed assets growth rate

GREE Haier

2009-12-31 2010-12-31 2011-12-31 2012-12-31 2013-12-310.0000%

10.0000%

20.0000%

30.0000%

40.0000%

50.0000%

60.0000%

70.0000%

80.0000%

Total assets growth rate

GREE Haier

2009-12-31 2010-12-31 2011-12-31 2012-12-31 2013-12-310.0000%

10.0000%

20.0000%

30.0000%

40.0000%

50.0000%

60.0000%

70.0000%

80.0000%

90.0000%

Increase rate of sales

GREE Haier

2009-12-31 2010-12-31 2011-12-31 2012-12-31 2013-12-31-100.0000%

0.0000%

100.0000%

200.0000%

300.0000%

400.0000%

500.0000%

600.0000%

Working capital growth rate

GREE Haier

Text1

Text2 Text4

. 2009-12-31

2010-12-31

2011-12-31

2012-12-31

2013-12-31

01020304050607080

P/E Analysis

GREE

HAIER

AV-ER-AGE

Price-to-Earnings Ratio=

Both GREE and Haier are below the industry average. There are some reasons:Firstly, GREE’s high financial leverage makes the investors feel unsecure. Secondly, in order to achieve rapid growth of revenue and profit, there must be considerable capital spending. It will bring unknown risk and investors don’t have confident of GREE. Thirdly, as the top of the industry, GREE has a high EAT so that it has a high EPS which may make its P/E lower.

Marketed-based Ratio

Dividend Policy

ROE

2009 2010 2011 2012 20130.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%50.00%pa

yout

rat

io

The payout ratio of GREE is higher than Haier but lower than industry. We find that earning per share of GREE is so high, comparing with Haier and industry.

GREE’s dividend per share is also higher than Haier. GREE Company may take the high earning and high dividend policy. We think both GREE and Haier are in a steadily increasing condition.

Payout

Comprehensive Financial Analysis In this part , we will use DuPont analysis for GREE company to analyze the financial ratio in a comprehensive way. We make use of the internal relationship between each financial ratio evaluate the company. DuPont analysis is based on the ROE ratio, which indicates the profitability, operating, capital structure of a company.

Return on Equity30.83%

Return on investment

8.18%

Net profit margin9.22%

Earnings after Tax

10,935,755,177.19

Total operating revenues

120,043,070,005.50

Sales118,627,948,20

8.59

Other operating revenues

1,415,121,796.91

Total operating costs

109,487,926,142.16

Cost of Sales80,385,939,82

2.61

Other operating costs

27,394,050,849.68

Other revenues

2,336,780,081.98

Income taxes expenses

1,956,168,768.13

Sales118,627,948,20

8.59

Total Asset Turnover88.73%

Sales118,627,948,20

8.59

Total Assets133,702,103,359

.54

Equity multiplier3.77

Debt ratio73.47%

Total Debt 98,235,425,674.

76

Total Assets133,702,103,35

9.54

Current Assets103,732,522,181.

91

Cash38,541,684,47

0.83

Marketable Securities

1,246,106,661.88

Accounts Receivables

1,849,275,342.79

Inventories13,122,730,425

.78

Other Current Assets

48,972,725,280.63

Non-current Assets

29,969,581,177.63

DuPont Analysis for Gree 2013 

From the view of capital structure, the portion of liabilities keeps going down. The increasing rate of asset is larger than liabilities From the view of operation, the total assets turnover ratio is steadily going down, which demonstrates the increasing rate of asset is larger than sales. We may draw a conclusion that assets utilization is low because the sales should keep pace with the increasing rate of the assets. From the view of the profitability, we find that the financial expenses is negative, which indicates the interest revenue is larger than interest expenses. We contribute the negative financial expenses to the high level of current liabilities (especially the Accounts payable) which has low interests expenses. Also, GREE Company often invest in a lot of fields, which give it more interest revenues.

According to the financial ratio analysis all above, we can see that the capital structure and the profitability is in a relatively steady condition. The short-term liquidity of GREE is a little weaker than Haier, which is based on the different policy of two company. GREE lays stress on the high leverage policy so that the debt ratio is much higher than the benchmark and the average industry. But I don’t think that GREE is in danger. GREE is the top of the appliance industry and it is confident of its liquidity. High leverage makes the utilization more flexible. Here, we’d like to share some suggestions about GREE Company.

Conclusions

SuggestionsThe scale of the loan can be expanded befittingly. When

computing liquidity indices, we can get a debt ratio around 80%, which is theoretically high. But take a close look at the balance sheet, notes payable, accounts payable and advances from customers make up 60% of the liability. Large amount of commercial credit indicates high ability of commercial credit financing. Similarly, considerable amount of short-term loan also shows GREE’s favorable credit around banking dealers. And only 5% of the liability is long-term, which reduces the interest risk and assures sustainability.According to previous DuPont Analysis, the larger the proportion of the debt, the larger the equity multiplier. In the way, the entity can obtain higher ROE. Thus, the scale of GREE’s loan is acceptable only if it takes full account of operating and financing risk.

SuggestionsThe profitability of GREE company shows that

the net profit margin rate and gross margin rate is lower than industry and Haier. We may conclude that the portion of EAT in sales is low which means the expenses and costs is so large. GREE Company must pay attention to the large expenses and it may make full use of the ABC system or other method of management to control the expenses in a relatively reasonable level.

Suggestions Operation capacity of GREE still has room for growth. From the analysis of operation capacity, we can conclude that operation capacity of GREE needs to be strengthened. All in all, the turnover rates except accounts receivable turnover rate are lower than Haier’s. Therefore, GREE’s utilization efficiency of assets needs to be enhanced, through boosting the selling capacity, using JIT, expanding demand and enhancing the company’s popularity, to become a leader in air-condition market. 

Thank you!