Concepcion Industrial Corporation MON 24 MAY 2021

CIC’s 1Q21 earnings decline 16% y/y,

below estimates

BUY
CIC’s 1Q21 earnings decline 16% y/y, below estimates. CIC booked Php58Mil in net
income to common shareholders during 1Q21, down 16% y/y. Results underperformed
our estimates, accounting for only 7.9% of our full-year forecast. The underperformance
was mainly due to higher-than-expected operating expenses as sales were broadly in line.
CIC’s operating expenses grew 13.7% y/y outpacing the 5-7% growth in sales and gross TICKER: CIC
profit. The company invested significantly in building its e-commerce platform, investing
in new businesses, and a more aggressive marketing and brand campaign. Meanwhile, FAIR VALUE: 33.30
CIC booked Php2.9Bil in revenues during the first quarter of 2021, up 5.3% y/y. This was CURRENT PRICE: 20.00
broadly in line with COL estimates, accounting for 19.8% of full-year forecasts. Growth was
led by the strong growth in its refrigerator business, partially offset by lower commercial UPSIDE: 66.50
aircon and elevator and escalator sales.
Commercial aircon business and COPI continue to book lackluster sales. Sales from CIC’s
commercial aircon division remained weak, down 24% y/y amid weak market conditions.
Management shared that most customers in the commercial side have adopted a wait
and see attitude. They continue to receive requests for new project quotations; however,
the awarding of orders have mostly been postponed to late 2021 or 2022. Meanwhile, the
consumer aircon business managed to grow by 11% y/y in 1Q21, boosted by investments
in energizing the Carrier brand and new product introductions. Nevertheless, the weak
commercial operations dragged overall sales with 1Q21 total aircon sales up only 1.9% to
Php1.7Bil. Meanwhile, CIC’s elevator and escalator business (COPI) saw 1Q21 sales drop
20% y/y due to continued delays in project completion, deliveries, as well as construction
stoppages. On the positive note, COPI’s gross profit managed to grow by 3.3% amid better
sales mix thanks to higher maintenance revenues.
Reducing estimates, maintain BUY. Considering the weaker-than-expected 1Q21 results,
we are reducing our operating income forecast by 9.1% and 10.3% in 2021 and 2022,
respectively. The reduction in our operating income forecast was mainly driven by our
higher operating expense assumption amid CIC’s continued investments in e-commerce
and brand building activities. Meanwhile, we lowered our tax expense assumption to factor
in the CREATE law. Following these changes, we reduced our net income forecast for CIC
by 1.7% in 2021 and 2.9% in 2022. Furthermore, the lower earnings forecast, and lower
tax assumption caused our FV estimate to remain marginally unchanged at Php33.3/sh.
We like CIC for its positive long-term growth prospects given its market leading position
in the underpenetrated air-conditioning and refrigerator markets and increasing share in
the fast-growing laundry market. We maintain our BUY rating on CIC with upside to our FV
estimate significant at 70%.
FORECAST SUMMARY
in PhpMil 2018 2019 2020E 2021E 2022E 2023E
Net Revenues 14,202 15,066 10,769 14,314 15,496 16,779
% change y/y 2.5 6.1 (28.5) 32.9 8.3 8.3
Gross Profit 5,082 5,386 3,946 4,935 5,353 5,808
% change y/y 5.9 6.0 (26.7) 25.1 8.5 8.5
Gross Margin (%) 35.8 35.7 36.6 34.5 34.5 34.6
Net Profit 1,457 1,430 961 1,107 1,425 1,728
% change y/y (4.6) (1.9) (32.8) 15.1 28.8 21.2
Net Margin (%) 10.3 9.5 8.9 7.7 9.2 10.3
Net Profit after Minority Interest 913 947 471 727 931 1,131
% change y/y (7.5) 3.7 (50.3) 54.3 28.1 21.5
Net Profit after Minority Interest Margin (%) 6.4 6.3 4.4 5.1 6.0 6.7
EPS (Php) 2.25 2.35 0.70 1.80 2.31 2.80
% change y/y (7.4) 4.3 (70.0) 156.0 28.1 21.5

RELATIVE VALUE
P/E (X) 8.9 8.5 28.4 11.1 8.7 7.1 Justin Richmond Cheng, CFA
P/BV (X) 1.7 1.5 1.5 1.4 1.2 1.1 Research Analyst
ROE (%) 19.5 18.7 5.4 13.1 14.9 16.1 justin.cheng@colfinancial.com
Dividend yield (%) 6.0 6.0 3.5 1.1 2.7 3.5
so urce: CIC

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MON 24 MAY 2021

CIC’s 1Q21 earnings decline 16% y/y, below estimates

CIC booked Php58Mil in net income to common shareholders during 1Q21, down 16% y/y.
Results underperformed our estimates, accounting for only 7.9% of our full-year forecast.
The underperformance was mainly due to higher-than-expected operating expenses
as sales were broadly in line. CIC’s operating expenses grew 13.7% y/y outpacing the
5-7% growth in sales and gross profit. The company invested significantly in building its
e-commerce platform, investing in new businesses, and a more aggressive marketing and
brand campaign. Meanwhile, CIC booked Php2.9Bil in revenues during the first quarter
of 2021, up 5.3% y/y. This was broadly in line with COL estimates, accounting for 19.8%
of full-year forecasts. Growth was led by the strong growth in its refrigerator business,
partially offset by lower commercial aircon and elevator and escalator sales.

Exhibit 1: Results Summary

% of COL
In PhpMil 1Q20 1Q21 % Change
est
Revenues 2,735 2,880 5.3 19.8
Gross Profit 986 1,056 7.1 21.0
Gross Margin (%) 36.1 36.7 - -
Operating income 215 184 -14.7 11.1
Operating margin (%) 7.9 6.4 - -
Net income 70 58 -16.0 7.9
Net Margin (%) 2.5 2.0 - -

Source: CIC, COL Estimates

CDI and Midea continue to deliver strong sales

Sales from the refrigerator business under CDI grew 18.3% y/y in 1Q21 to Php971Mil.
Growth continued to be driven by the strong demand for CDI’s no frost refrigerators and
low-cost units. The refrigerator market continued to benefit from changing consumer
behaviors brought about by the pandemic where people spent more time at home.
Hence, the overall consumer ref market managed to grow 17% y/y in 1Q21.

The company’s consumer appliance business under Midea also delivered robust sales
with 1Q21 sales up 84.5% y/y to Php770Mil. Midea benefitted from similar consumer
trends with demand for kitchen appliances increasing significantly. The company’s
presence in e-commerce platforms benefitted Midea as topline growth was led by strong
sales in online retail channels.

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MON 24 MAY 2021

Commercial aircon business and COPI continue to book

lackluster sales

Sales from CIC’s commercial aircon division remained weak, down 24% y/y amid weak
market conditions. Management shared that most customers in the commercial side
have adopted a wait and see attitude. They continue to receive requests for new project
quotations; however, the awarding of orders have mostly been postponed to late 2021 or
2022. Meanwhile, the consumer aircon business managed to grow by 11% y/y in 1Q21,
boosted by investments in energizing the Carrier brand and new product introductions.
Nevertheless, the weak commercial operations dragged overall sales with 1Q21 total
aircon sales up only 1.9% to Php1.7Bil.

Meanwhile, CIC’s elevator and escalator business (COPI) saw 1Q21 sales drop 20% y/y due
to continued delays in project completion, deliveries, as well as construction stoppages.
On the positive note, COPI’s gross profit managed to grow by 3.3% amid better sales mix
thanks to higher maintenance revenues.

Exhibit 2: Segment Sales Breakdown

In PhpMil 1Q20 1Q21 % Change

CCAC 1,697 1,729 1.9

CDI 821 971 18.3
COPI 212 169 -20.3

Source: CIC

CIC to steadily raise prices in 2H21 amid rising input costs

CIC’s gross profit margin in 1Q21 expanded by 60 bps y/y, notwithstanding the rise in
commodity prices. This was partly due to the favorable peso movement and hedging
activities that offset the higher costs. CIC said while they still have hedges in place for
2Q21, the company will have to steadily raise prices by 5-7% in 2H21. Note that key
raw materials for CIC such as copper, aluminum, and steel have risen by 40-60%, while
shipping costs are also rising due to container shortage. Management added that CIC
could see a deterioration in gross margin by 1 to 2 percentage points, but it will prioritize
maintaining its market share and keeping overall gross profit stable to higher.

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MON 24 MAY 2021

Reducing estimates to factor in higher-than-expected opex

Considering the weaker-than-expected 1Q21 results, we are reducing our operating

income forecast by 9.1% and 10.3% in 2021 and 2022, respectively. The reduction in
our operating income forecast was mainly driven by our higher operating expense
assumption. Specifically, we slightly raised our opex forecast by 2% in 2021 and by 4%
in 2022 amid CIC’s continued investments in e-commerce and brand building activities.
We also fine-tuned our sales forecast, reducing it by 1.7% in 2021 and 2022. Meanwhile,
we lowered our tax expense assumption to factor in the CREATE law. Following these
changes, we reduced our net income forecast for CIC by 1.7% in 2021 and 2.9% in 2022.
Furthermore, the lower earnings forecast, and lower tax assumption caused our FV
estimate to remain marginally unchanged at Php33.3/sh.

Exhibit 3: Summary of changes in estimates

2021E 2022E
in PhpMil
Old New % Change Old New % Change
Revenues 14,559 14,314 (1.7) 15,760 15,496 (1.7)
Gross Profit 5,017 4,935 (1.6) 5,442 5,353 (1.6)
GPM (%) 34.5 34.5 - 34.5 34.5 -
Operating Income 1,653 1,503 (9.1) 2,117 1,899 (10.3)
Operating Margin (%) 11.4 10.5 - 13.4 12.3 -
Net Income 739 727 (1.7) 958 931 (2.9)
Net Margin (%) 5.1 5.1 - 6.1 6.0 -
Source: COL Estimates

Maintain BUY rating

We currently have a BUY rating on CIC with a FV estimate of Php33.3/sh. We continue

to like CIC for its positive long-term growth prospects given its market leading position
in the underpenetrated air-conditioning and refrigerator markets and increasing share
in the fast-growing laundry market. Upside to our FV estimate is also significant at 70%.

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MON 24 MAY 2021

Concepcion Industrial INCOME STATEMENT (IN PHPMIL)

Corporation (CIC)
2017 2018 2019 2020E 2021E 2022E
Revenues 13,859 14,202 15,066 10,134 14,314 15,496
% Growth 12% 2% 6% -33% 41% 8%
COMPANY BACKGROUND Gross Profit 4,797 5,082 5,386 3,526 4,935 5,353
% Growth 9% 6% 6% -35% 40% 8%
Concepcion Industrial Corporation (CIC) is
Operating Profit 2,297 2,165 2,084 551 1,503 1,899
one of the Philippines’ most established % Growth 10% -6% -4% -74% 173% 26%
and leading suppliers of air conditioners Interest Expense (1) (7) (36) - - -
and refrigerators. The company generates Pretax Income 2,251 2,142 2,079 570 1,577 2,010
revenues through the manufacture and Tax Expense (723) (685) (649) (194) (471) (585)
sale of airconditioning and refrigeration Net Income 1,528 1,457 1,430 376 1,107 1,425
% Growth 9% -5% -2% -74% 194% 29%
products to the residential and commercial/
Net Inco me after M ino rity Interest 987 913 947 284 727 931
industrial markets. It operates subsidiaries,
EPS 2.4 2.3 2.3 0.7 1.8 2.3
namely Concepcion-Carrier Airconditioning % Growth 8% -7% 4% -70% 156% 28%
Company (CCAC, 60% owned,
airconditioning) and Concepcion Durables, BALANCE SHEET (IN PHPMIL)
Inc. (CDI, wholly owned, refrigeration). In 2017 2018 2019 2020E 2021E 2022E
2013, CIC formed a join venture with GD Cash & Equivalents 2,240 1,325 1,606 2,487 2,297 2,842
Midea Holdings to establish Concepcion Trade Receivables 3,848 3,963 4,098 2,789 3,939 4,264
Inventories 2,289 2,839 2,333 1,810 2,570 2,779
Midea, Inc. (CMIP, 40% owned, consumer
Other Current Assets 141 776 1,177 1,066 1,098 1,107
appliances). A year after, CIC again formed PPE 405 556 683 563 568 571
another joint venture with UTC-Asia Pte Ltd Investment in Associate 125 81 119 139 213 324
to form Otis E&M Co. Philippines, Inc. (Otis, Other Non-Current Assets 1,299 1,427 2,122 2,122 2,122 2,122
51% owned, elevators). Total Assets 10,347 10,968 12,138 10,976 12,806 14,009
Accounts Payable 3,600 3,332 3,598 2,455 3,485 3,769
ST Debts - 425 45 - - -
REVENUE BREAKDOWN
Other Current Liabilities 215 156 346 346 346 346
LT Debts - - - - - -
5.9% Other Non-Current Liabilities 74 156 536 522 522 522
Total Liabilities 4,104 4,226 4,871 3,670 4,700 4,983
Stock Holders' Equity 4,473 4,886 5,230 5,230 5,871 6,584
Minority Interest 1,769.8 1,855.9 2,037.4 2,076.0 2,234.9 2,441.8
29.6% Total Liabilities & Equity 10,347 10,968 12,138 10,976 12,806 14,009
BVPS 11.0 12.0 13.0 13.0 14.6 16.3

CASHFLOW STATEMENT (IN PHPMIL)

64.4%
2017 2018 2019 2020E 2021E 2022E
Pretax Income 2,251 2,142 2,079 570 1,577 2,010
Depreciation & Amortization 74 108 124 153 155 156
Other Non-Cash Exp (Gains) 161 588 1,250 (20) (74) (111)
Interest Expense (Income) -4 -2 25 0 0 0
CCAC CDI Otis
Decrease (Increase) in Working Cap -728 -2,191 -173 787 -911 -260
Income Tax Paid -594 -728 -555 -194 -471 -585
Operating Cash Flow 1,160 -83 2,748 1,296 276 1,211
Capex -207 -259 -251 -33 -160 -160
Other Investments -83 -58 -124 0 0 0
Investing Cash Flow -290 -317 -376 -33 -160 -160
Proceeds (Payment) Debts 0 425 -380 -45 0 0
Payment of Cash Dividends -653 -919 -1,382 -338 -306 -506
Others -1 -21 -80 0 0 0
Financing Cash Flow -653 -514 -1,842 -383 -306 -506
Change in Cash 217 -914 531 881 -190 545

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MON 24 MAY 2021

INVESTMENT THESIS: KEY RATIOS

2017 2018 2019 2020E 2021E 2022E
Strong competitive advantage with a GPM (%) 34.6% 35.8% 35.7% 34.8% 34.5% 34.5%
proven track record OPM (%) 16.2% 14.4% 20.6% 3.8% 9.7% 11.3%
CIC is the number one seller and NPM (%) 11.0% 10.3% 9.5% 3.7% 7.7% 9.2%
manufacturer of air conditioners and Current Ratio (X) 2.2 2.3 2.3 2.9 2.6 2.7
Debt to Equity Ratio 0.0 0.1 0.0 0.0 0.0 0.0
refrigerators in the country. CIC’s operations
Days Receivable 101.34 102 99 100 100 100
are backed by a long operational history of Days Inventory 89.8 102.9 100.4 100.0 100.0 100.0
over 50 years and it owns numerous highly Days Payable 145.0 133.4 135.7 135.6 135.6 135.6
recognized brands such as Carrier, Condura, Asset T/O (%) 1.3 1.3 1.2 0.9 1.1 1.1
Kelvinator, and Toshiba. We believe that ROAE (%) 23.8 19.5 18.7 5.4 . 0.0
CIC can sustain its market leadership
MAJOR CORPORATE DEVELOPMENTS (5-YEARS)
position given its strong brand equity and
research and development capability, wide
distribution network, scale, and culture of Formed joint venture with Midea 11/20/2013
cost efficiency.

Formed joint venture with Otis 03/28/2014

Attractive long-term growth potential,
but short-term profitability to be
challenged Acquired majority stake in tech startup Teko Solutions Asia, Inc. 11/28/2018
CIC’s revenues and profits to common
shareholders increased by a CAGR of
10% and 8% during the past five years
respectively. Growth is expected to remain
strong in the medium-to-long term,
primarily driven by Filipinos increasing
purchasing power and the low level of air
conditioner and refrigerator ownership
in the Philippines compared to its ASEAN
neighbors. Meanwhile, given the impact of
the coronavirus 2019 pandemic, short term
profits are expected to be depressed due
to the challenging economic environement
and quarantine restrictions laid out by the
government.

Midea: Providing access to the fast

growing laundry market
Results of its newly formed JV Midea
are promising, as revenues are growing
rapidly, reaching Php2.0Bil in 2019.
Furthermore, the company also recorded
its first profitable year in 2019. This growing
business unit provides CIC access to the
fast growing market for washing machines
where penetration rate is still very low at
only 30%.

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MON 24 MAY 2021

Valuation RELATIVE VALUATION

Methodology 2020E
P/E
2021E 2020E
EPS Growth
2021E
Concepcion Industrial Corporation 28.4 11.1 -70.0 156.0
Hitachi Ltd 34.8 6.8 -55.3 411.3
Panasonic Corp 11.2 17.1 -20.2 -34.3
Daikin Industries Ltd 26.3 34.9 2.1 -24.5
Mitsubishi Electric Corp 14.6 20.1 -12.1 -27.1
Haier Electronics Group Co 16.0 13.3 -24.5 20.1
Midea Group Co Ltd-A 16.8 14.4 2.8 16.6
Median (Ex. CIC) 16.4 15.7 -16.2 -4.0

VALUATION ASSUMPTIONS

For DCF
Risk Premium 6.5%
Risk Free Rate 4.0%
Beta 130.0%
Cost of Equity 12.5%
Cost of Debt 5.0%
Tax Rate 30.0%
WACC 12.5%
Terminal Growth Rate 4.0%

PV (FY20E-FY24E) 1,019
PV of Terminal Value 15,697
Enterprise Value 16,716
Less: Net Debt 2,487
Equity Value 19,203
Effective share in Equity 13,442
O/S 406
FV Estimate 33.30

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MON 24 MAY 2021

IMPORTANT RATING DEFINITIONS

BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may
be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are
subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of
a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies
mentioned in this report and may trade them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG, CFA
SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@colfinancial.com

COL FINANCIAL GROUP, INC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 8