Rating Company Buy Qingdao Haier -...

Deutsche Bank Markets Research

Rating

Buy Asia

China

Consumer

Retail / Wholesale Trade

Company

Qingdao Haier

Date

4 May 2016

Forecast Change

Globalization by establishing own brands

Reuters Bloomberg Exchange Ticker 600690.SS 600690 CH SHH 600690

Forecasts And Ratios

Year End Dec 31 2014A 2015A 2016E 2017E 2018E

Sales (CNYm) 96,525.2 89,351.1 91,661.1 96,906.2 102,733.0

Reported NPAT (CNYm) 5,337.5 4,300.8 4,944.5 5,049.3 5,678.8

DB EPS FD(CNY) 0.93 0.70 0.81 0.82 0.93

OLD DB EPS FD(CNY) 0.87 0.73 0.82 0.95 –

% Change 6.9% -3.2% -1.6% -13.2% –

DB EPS growth (%) 21.3 -24.3 14.8 1.8 12.4

PER (x) 8.7 16.3 10.8 10.6 9.4

EV/EBITDA (x) 2.4 7.1 3.7 3.1 2.4

Yield (net) (%) 3.0 1.9 2.8 2.8 3.2

Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses

the year end close

A true global company; maintaining Buy

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.

Price at 3 May 2016 (CNY) 8.71

Price target - 12mth (CNY) 10.16

52-week range (CNY) 15.83 - 7.50

Shanghai Composite 2,938

Richard Rui-Huang, CFA

Research Analyst

(+852 ) 2203 6202

[email protected]

Anne Ling

Research Analyst

(+852 ) 2203 6177

[email protected]

Key changes

Price target 10.80 to 10.16 ↓ -5.9%

Sales (FYE) 99,113 to 91,661 ↓ -7.5%

Op prof margin (FYE)

7.3 to 7.2 ↓ -0.9%

Net profit (FYE)

5,054.1 to 4,944.5

↓ -2.2%

Source: Deutsche Bank

Price/price relative

4

8

12

16

20

5/14 11/14 5/15 11/15

Qingdao Haier

Shanghai Composite (Rebased)

Performance (%) 1m 3m 12m

Absolute 1.9 5.2 -34.6

Shanghai Composite -2.3 7.2 -33.9

Source: Deutsche Bank

We like Haier’s brand equity and its leading position in the washing machine and refrigerator segment. We believe management has identified the channel management issue and is optimizing the channel management. About 95% of its products sold overseas are own-brand products. We expect the GE Appliance deal to be completed by mid-2016, and it is likely to raise EPS by 15-16% in 2017-18E. Overseas business accounted for 20% of total sales in 2015 after consolidation of Haier Singapore, and is likely to increase to 44% after consolidation of GE Appliance; maintaining Buy.

2016 to continue optimizing sales channel management We expect Qingdao Haier to continue streamlining its sales channel in 2016 and expect it to report organic growth of 3-6% during 2016-18E with bottom-line growth of 5-10% during the same period, mainly driven by GP margin expansion with a focus on development of high-end products. For 2016, we expect NP to grow 15% yoy to RMB4.9bn, including a one-off gain (RMB528m) from the re-classification of Bank of Qingdao (3866.HK, NR) from 1Q16.

GE Appliance to raise NP by 15-16% in 2017-18E We expect GE Appliance to raise Qingdao Haier’s net profit by 15-16% in 2017-18E. In 2016, the increase should be about 10% of Haier’s net profit, as it is likely to start consolidation in 2H16. In our model, we have not factored in the acquisition of GE Appliance, as it is still awaiting approval.

Valuation and risks We maintain our Buy rating, while lowering our DCF-based target price (9.5% COE, 2% long-term growth rate) by 6% to RMB10.16 to reflect the constraint output in air conditioners and the investment for high-end products. We have not factored in the GE deal as it is still awaiting approval. Our target price translates into 12x/11x FY16E/17E PE. Downside company risks include: 1) failure to develop overseas markets, 2) failure to integrate the acquired business, 3) delay in acquiring GE Appliance and 4) the continued connected transaction with Haier Electronics.

4 May 2016


Qingdao Haier


Model updated:03 May 2016

Running the numbers

Asia

China


Qingdao Haier Reuters: 600690.SS Bloomberg: 600690 CH

Buy Price (3 May 16) CNY 8.71

Target Price CNY 10.16

52 Week range CNY 7.50 - 15.83

Market Cap (m) CNYm 53,333

USDm 8,225

Company Profile

Qingdao Haier is primarily engaged in the manufacture and distribution of household appliances including refrigerators, air conditioners, washing machine, and small household appliances.

Price Performance

4

8

12

16

20

May 14Aug 14Nov 14Feb 15May 15Aug 15Nov 15Feb 16

Qingdao HaierShanghai Composite (Rebased)

Margin Trends

6.46.87.27.68.08.48.89.2

13 14 15 16E 17E 18E

EBITDA Margin EBIT Margin

Growth & Profitability

05101520253035

-10

-5

0

5

10

15

13 14 15 16E 17E 18E

Sales growth (LHS) ROE (RHS)

Solvency

-100

-80

-60

-40

-20

0

13 14 15 16E 17E 18E

Net debt/equity (LHS) Net interest cover (RHS)

Richard Rui-Huang, CFA

+852 2203 6202 [email protected]

Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E

Financial Summary

DB EPS (CNY) 0.77 0.93 0.70 0.81 0.82 0.93

Reported EPS (CNY) 0.77 0.93 0.70 0.81 0.82 0.93

DPS (CNY) 0.23 0.25 0.22 0.24 0.25 0.28

BVPS (CNY) 5.3 8.1 3.7 4.3 4.9 5.5

Weighted average shares (m) 5,441 5,736 6,108 6,088 6,104 6,104

Average market cap (CNYm) 35,255 46,455 70,064 53,333 53,333 53,333

Enterprise value (CNYm) 18,691 20,883 48,707 28,585 25,064 20,926

Valuation Metrics P/E (DB) (x) 8.4 8.7 16.3 10.8 10.6 9.4

P/E (Reported) (x) 8.4 8.7 16.3 10.8 10.6 9.4

P/BV (x) 1.75 1.13 2.68 2.03 1.79 1.58

FCF Yield (%) 14.0 11.3 4.5 10.7 11.1 12.8

Dividend Yield (%) 3.6 3.0 1.9 2.8 2.8 3.2

EV/Sales (x) 0.2 0.2 0.5 0.3 0.3 0.2

EV/EBITDA (x) 2.8 2.4 7.1 3.7 3.1 2.4

EV/EBIT (x) 3.1 2.7 8.4 4.3 3.7 2.8

Income Statement (CNYm)

Sales revenue 86,172 96,525 89,351 91,661 96,906 102,733

Gross profit 21,856 26,711 25,236 26,285 28,089 29,795

EBITDA 6,790 8,533 6,835 7,753 7,978 8,882

Depreciation 692 860 1,054 1,108 1,178 1,309

Amortisation 0 0 0 0 0 0

EBIT 6,098 7,673 5,781 6,645 6,801 7,574

Net interest income(expense) 46 257 498 259 322 388

Associates/affiliates 580 646 696 765 842 926

Exceptionals/extraordinaries 0 0 0 0 0 0

Other pre-tax income/(expense) 0 0 0 0 0 0

Profit before tax 6,724 8,576 6,975 7,670 7,965 8,888

Income tax expense 1,164 1,527 1,053 1,158 1,202 1,341

Minorities 1,386 1,711 1,621 1,568 1,713 1,867

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 4,174 5,338 4,301 4,945 5,049 5,679

DB adjustments (including dilution) 0 0 0 17 17 17

DB Net profit 4,174 5,338 4,301 4,962 5,067 5,696

Cash Flow (CNYm)

Cash flow from operations 6,688 7,540 5,678 7,326 7,652 8,633

Net Capex -1,757 -2,270 -2,492 -1,650 -1,744 -1,849

Free cash flow 4,931 5,270 3,186 5,676 5,907 6,784

Equity raised/(bought back) 381 4,987 342 0 0 0

Dividends paid -1,391 -1,468 -1,764 -1,483 -1,515 -1,704

Net inc/(dec) in borrowings 72 2,291 -1,017 0 0 0

Other investing/financing cash flows 364 -496 -7,257 0 0 0

Net cash flow 4,358 10,584 -6,511 4,193 4,392 5,080

Change in working capital 1,523 921 -379 224 509 565

Balance Sheet (CNYm)

Cash and other liquid assets 20,641 31,225 24,715 28,908 33,300 38,380

Tangible fixed assets 6,248 7,373 8,421 8,963 9,529 10,070

Goodwill/intangible assets 0 0 0 0 0 0

Associates/investments 4,679 8,030 11,701 12,467 13,309 14,235

Other assets 29,524 35,720 31,124 31,851 33,502 35,336

Total assets 61,093 82,349 75,961 82,188 89,640 98,021

Interest bearing debt 4,078 6,369 5,351 5,351 5,351 5,351

Other liabilities 36,984 44,057 38,207 39,406 41,610 44,148

Total liabilities 41,062 50,426 43,558 44,757 46,961 49,499

Shareholders' equity 14,494 24,608 22,694 26,155 29,690 33,665

Minorities 5,537 7,315 9,708 11,276 12,989 14,856

Total shareholders' equity 20,031 31,923 32,402 37,431 42,679 48,521

Net debt -16,563 -24,857 -19,363 -23,556 -27,949 -33,029

Key Company Metrics

Sales growth (%) 8.5 12.0 -7.4 2.6 5.7 6.0

DB EPS growth (%) 26.0 21.3 -24.3 14.8 1.8 12.4

EBITDA Margin (%) 7.9 8.8 7.6 8.5 8.2 8.6

EBIT Margin (%) 7.1 7.9 6.5 7.2 7.0 7.4

Payout ratio (%) 30.0 26.4 31.1 29.9 30.0 30.0

ROE (%) 32.6 27.3 18.2 20.3 18.1 18.0

Capex/sales (%) 2.0 2.4 2.8 1.8 1.8 1.8

Capex/depreciation (x) 2.5 2.6 2.4 1.5 1.5 1.4

Net debt/equity (%) -82.7 -77.9 -59.8 -62.9 -65.5 -68.1

Net interest cover (x) nm nm nm nm nm nm

Source: Company data, Deutsche Bank estimates

4 May 2016


Qingdao Haier


Company update

Valuation and risks

We expect Qingdao Haier to report organic growth of 3-6% during 2016-18E

with bottom-line growth of 5-10% during the same period, mainly driven by GP

margin expansion with a focus on development of high-end products. For 2016,

we expect NP to grow 15% yoy to RMB4.9bn, including a one-off gain

(RMB528m) from the re-classification of Bank of Qingdao (3866.HK, NR) as a

long-term investment from available for sales in 1Q16.

We lower our FY16-17 sales forecast by 8-11% to reflect the prolonged de-

stocking process and Qingdao Haier’s efforts in restructuring its sales

management (Figure 1). We expect GE Appliance to raise Qingdao Haier’s net

profit by 15-16% in 2017-18E (Figure 2). In 2016, the increase should be about

10% of Haier’s net profit, as it is likely to start consolidation in 2H16. In our

model, we have not factored in the acquisition of GE Appliance, as this deal is

still pending approval and awaiting the audited numbers in PRC GAAP.

Our primary valuation methodology is DCF. As most of Haier’s business comes

from China, we use the China COE (9.5%) provided by Deutsche Bank’s

economics team. We use beta of 1. The long-term growth rate is 2%, which is

in line with our 2.0-2.5% TGR sector assumption for the other consumer stocks

that we cover. Our DCF-based target price is RMB10.16 (old TP RMB10.8). This

translates into 12/11x FY17/18 P/E.

Figure 1: Key changes

Current forecast Previous forecast Market forecast % change vs. previous forecast

Diff from market forecast

RMBm FY16E FY17E FY18E FY16E FY17E FY16E FY17E FY18E FY16E FY17E FY16E FY17E FY18E

Sales 91,661 96,906 102,733 99,113 108,315 94,022 103,638 121,870 -8% -11% -3% -6% -16%

EBIT 6,645 6,801 7,574 7,249 8,296 5,813 6,549 8,048 -8% -18% 14% 4% -6%

Net profit 4,945 5,049 5,679 5,054 5,838 4,956 5,374 6,509 -2% -14% 0% -6% -13% Source: Deutsche Bank estimates, Bloomberg finance LP

Downside company risks include: 1) failure to develop overseas markets, 2)

failure to integrate the acquired business, 3) delay in acquiring GE Appliance

and 4) the continued connected transaction with Haier Electronics.

2016 outlook

Key guidance for 2016 from the earnings conference call

Management expects mid-single-digit and mid-high-single-digit growth for

2016 top-line and bottom-line organic growth, respectively. For overseas

business, management expects sales to grow by double-digits in LCY in key

markets including Europe and Japan. The Russia refrigerator factory is

expected to be put into operation in April 2016.

Capex is budgeted at RMB1.5bn, flattish as in 2015.

M&A plan. It will not have further M&A deals in the short term, but will remain

attentive to potential opportunity in Europe and Latam to expand its business.

4 May 2016


Qingdao Haier


GE Appliance is expected to consolidate in 2H16. The performance of GE

Appliance in 1Q16 was above management’s expectations, and it believes this

is likely to continue in 2016. Haier and GE Appliance have identified more than

100 synergy projects including products, technology, procurement and supply

chain management. It expects to realize these synergy effects after the deal

closure.

Streamline the business structure between Qingdao Haier and Haier

Electronics (1169.HK, Hold). Haier plans to unify white goods manufacturing

into one platform. It is working on proposals, but there is still no timetable, as

this requires minority shareholders’ consent from both sides. The principal of

the proposal is to promote business development for both companies.

Strengthen Kitchenware business. It plans to develop high-end products for

kitchenware business by adopting the strategy of 1) controlling the existing

distribution channel including KA (Gome and Suning) and specific stores, 2)

adding in-store shopping experiences including bakeries and cooking and 3)

offering packaged solutions including water purifiers, air purifiers and smart

appliances to consumers for home decorations.

Refrigerator is expected to gain market share from small brands through 1)

penetrating into the lower-tier market, 2) improving product quality and 3)

moving faster in response to market demands. It also plans to have better

control over retail outlets at the county and town levels, and will further extend

its distribution to the village level.

Air conditioner business is expected to recover in 2016, as 1) its products are

newly launched (peers are selling old model products with ex-factory date in

2014-15), 2) its distributors should be more profitable in 2016 than its peers

and 3) it should better control the distribution channel.

For the overseas market, it plans to 1) continue promoting its own brands with

a focus on the mid-high-end segment – the Haier brand is 95% of its total

overseas sales – and 2) localize manufacturing – it is planning localized

manufacturing in India and Pakistan. To recap, its refrigerator factory in Russia

was put into operation in April 2016.

Sales channel optimization. Haier should focus on marketing its product

quality and appeal to consumers by selling user-friendly and healthy products.

It should continue to optimize its sales channel by 1) integrating online channel

management to eHaier by May 2016; 2) establishing a Haier club by allying 58

local distributors including Wuhan Gongmao, Changsha Baida and Baotou

Tongli etc.; 3) adding 100 home decoration solution stores by end-2016 and 4)

helping specific stores develop in Tier 2 and Tier 3 cities by offering more

marketing resources.

1Q16 review

1Q16 Recurring NP declined 3% yoy to RMB968m, on an 8% yoy decline in

sales revenue to RMB22bn. GP margin improved 1.1 ppts, partly offset by a 0.8

ppts increase in opex ratio. Management believes that it performed better than

the overall industry. Key takeaways from the earnings conference call are the

following:

4 May 2016


Qingdao Haier


Domestic sales by product category

Refrigerator – Sales value increased in 1Q16 after sales volume picked up in

4Q15. This is attributable to the development in the third- and fourth-tier

channels. Haier believes that it has competitive advantages in 1) full product

range offerings including low- to high-end products, 2) advanced technology in

dry/wet separation storage and 3) a leading position in distribution channels

including online, KA and specialty stores.

Washing machine is expected to bottom up from its trough at the end of 2015.

Haier carried out a restructuring program for its washing machine business

during January-February 2016. The detailed restructuring items include 1)

offering a full product range including low- and high-end products, 2) de-

stocked inventory including channel inventory and its own inventory by

adopting the make-to-order model and 3) downsized product models by

cutting half of SKUs. Management believes that these initiatives will improve

its competitiveness.

Air conditioner – products upgrade to mid-high-end market. Haier has

upgraded its product offerings from the low-end products to the mid-high-end

products. It should differentiate its products from peers with a focus on user-

friendly and health functions.

Water heater – quality-driven strategy. Haier plans to maintain its product-

quality-driven strategy in water heater in 2016. It should continue to improve

product quality, with a focus on mid-high-end products. This should improve

its overall ASP in 2016.

Overseas performance by market Japan – growth momentum should continue in 1Q16 (+20% yoy in lcy).

India and Pakistan – it aims to range in the top position in 2016 with 1.5-2x industry growth.

America – it has completed a Venezuela government project.

Europe – sales grew 22%/15% in lcy in 2015/1Q16.

Russia – it launched the localized refrigerator with growth of 76%/50% in 2015/1Q16 in lcy.

Middle East and Africa –volatile FX should impact payment.

Figure 2: GE Appliance assumptions

YE Dec, USDm 2016E 2017E 2018E

Sales 6,450 6,643 6,843

yoy change 3% 3% 3%

EBITDA 548 565 582

yoy change -1% 3% 3%

EBITDA margin 9% 9% 9%

D&A 210 212 214

EBIT 338 353 367

EBIT -2% 4% 4%

EBIT margin 5.2% 5.3% 5.4%

Finance cost @2.5% pa 81 81 81

PBT 257 272 286

Tax (ETR 40%) (103) (109) (115)

Net profit 154 163 172

yoy change na 6% 5%

NP in RMBm 957 1,010 1,065

Source: Deutsche Bank estimates

4 May 2016


Qingdao Haier


Figure 3: P&L Adjusted

YE Dec RMBm 2013A 2014A 2015A 2016F 2017F 2018F

Net sales 86,172 96,525 89,351 91,661 96,906 102,733

COGS (excl dep) (64,316) (69,815) (64,115) (65,376) (68,817) (72,938)

Gross profit 21,856 26,711 25,236 26,285 28,089 29,795

GP margin 0 0 0 0 0 0

Other income 372 712 739 1,127 667 745

SG&A (16,130) (19,749) (20,193) (20,767) (21,956) (22,967)

EBIT 6,098 7,673 5,781 6,645 6,801 7,574

Finance cost 46 257 498 259 322 388

Associate 580 646 696 765 842 926

Extraordinary 0 0 0 0 0 0

PBT 6,724 8,576 6,975 7,670 7,965 8,888

Taxation (1,164) (1,527) (1,053) (1,158) (1,202) (1,341)

MI (1,386) (1,711) (1,621) (1,568) (1,713) (1,867)

Net profit 4,174 5,338 4,301 4,945 5,049 5,679 Source: Deutsche Bank estimates, company data

Figure 4: P&L PRC GAAP

YE Dec RMBm 2013A 2014A 2015A 2016F 2017F 2018F

Gross sales 86,606 96,930 89,748 92,045 97,312 103,164

Cost of goods sold (64,660) (70,170) (64,658) (65,714) (69,174) (73,317)

Gross profit 21,945 26,759 25,090 26,331 28,138 29,847

Business taxes (433) (405) (397) (384) (406) (431)

Sales expense (10,307) (12,580) (13,101) (13,713) (14,497) (15,060)

Admin expense (5,479) (6,813) (6,549) (6,717) (7,101) (7,528)

Core EBIT 5,726 6,962 5,042 5,518 6,134 6,829

Finance income 46 257 498 259 322 388

Core operating profit 5,772 7,219 5,540 5,777 6,456 7,217

Provision for impairment (217) (223) (318) (276) (292) (309)

G/L on the changes in fair value 0 112 (90) 0 0 0

Income from investments 622 1,193 1,320 1,743 1,337 1,471

Operating profit 6,176 8,300 6,452 7,244 7,501 8,378

Non-operating income 602 378 618 531 580 638

Non-operating expenses (55) (102) (96) (106) (116) (128)

Profit before taxation 6,724 8,576 6,975 7,670 7,965 8,888

Taxation (1,164) (1,527) (1,053) (1,158) (1,202) (1,341)

Net Profit 4,174 5,338 4,301 4,945 5,049 5,679 Source: Deutsche Bank estimates, company data

4 May 2016


Qingdao Haier


Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

Qingdao Haier 600690.SS 8.71 (CNY) 3 May 16 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=600690.SS

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Richard Rui-Huang

Historical recommendations and target price: Qingdao Haier (600690.SS) (as of 5/3/2016)

12

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

May 14 Aug 14 Nov 14 Feb 15 May 15 Aug 15 Nov 15 Feb 16

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

1. 07/10/2015: Upgrade to Buy, Target Price Change CNY11.51 2. 15/02/2016: Buy, Target Price Change CNY10.80

4 May 2016


Qingdao Haier


Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

54 %

36 %

10 %18 %16 % 16 %

050

100150200250300350400450500

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2.Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

4 May 2016


Qingdao Haier


Additional Information

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macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation

(including changes in assets holding limits for different types of investors), changes in tax policies, currency

convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and

settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed

income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to

FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the

index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended

to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon

rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is

also important to acknowledge that funding in a currency that differs from the currency in which coupons are

denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to

the risks related to rates movements.

4 May 2016


Qingdao Haier


Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk.

The appropriateness or otherwise of these products for use by investors is dependent on the investors' own

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be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be

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for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized

Options”, at http://www.optionsclearing.com/about/publications/character-risks.jsp. If you are unable to access the

website please contact your Deutsche Bank representative for a copy of this important document.

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exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by

numerous market factors, including world and national economic, political and regulatory events, events in equity and

debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed

exchange controls which could affect the value of the currency. Investors in securities such as ADRs, whose values are

affected by the currency of an underlying security, effectively assume currency risk.

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4 May 2016


Qingdao Haier


Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are

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David Folkerts-Landau Chief Economist and Global Head of Research

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Research

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FICC Research & Global Macro Economics

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