Incident 1:1) Hisense Hitachi distributed 75% of retained earnings up to 2023 and distributed 3.25 billion yuan in cash; 2) Hisense Home Appliances and Bosch agreed that Hisense Hitachi will distribute no less than 60% of the annual profit to shareholders every year for the next five years, and distribute an additional 20% of the total annual profit over the five-year period after ensuring Hisense Hitachi's daily operating cash flow and fixed investment.

Incident 2: On July 23, Bosch announced the acquisition of Johnson Controls (JCI)'s global household and light commercial (R&LC) HVAC business for $8.1 billion and included it in the energy and building technology business segment. As part of this deal, the Bosch Group also plans to wholly acquire Johnson Controls-Hitachi Air Conditioning Joint Venture (JCH), of which Johnson Controls holds 60% of the shares and Hitachi holds 40% of the shares. The JCI consideration portion was $6.7 billion, and the remaining $1.4 billion was paid to Hitachi.

The impact of the Hisense Hitachi Profit Distribution Agreement:

1) Cash distribution of 75% of retained earnings is a win-win for all parties, which can not only meet the cash out requirements for the sale of funds from Johnson & Hitachi's business, but also reduce Bosch's cash acquisition costs and facilitate transactions. At the same time, it can also increase the disposable cash of Hisense Home Appliances (about 1.6 billion).

2) Lock in the stability and high level of Hisense Hitachi's future dividend ratio. For the parent company of Hisense Home Appliances, on the one hand, it will improve the overall ROE level, and on the other hand, strengthen its control over Hisense Hitachi's capital, and lift the financial restrictions on increasing the dividend ratio in the future. Previously, Hisense Hitachi's profit distribution ratio fluctuated greatly (80%/140% in 21/22, 30%/50% in 20/23), and was unable to provide stable and predictable disposable cash flow to the parent company.

3) Bosch's acquisition of the Johnson HVAC asset package will not affect the long-term authorized use of Hisense Hitachi's Hitachi and York brands in the future, and will not have a substantial impact on the business level.

Valuation anchor: According to Johnson Controls's announcement, the HVAC business entity R&LC HVAC's consolidated revenue for fiscal year 2023 is about 4.5 billion US dollars, the total transaction consideration is 8.1 billion US dollars, and the JCI consideration portion is 6.7 billion US dollars, including the North American pipeline business 4.6 billion US dollars, which is equivalent to 16.7 times the EBITDA for fiscal year 2023, and also includes about 2.1 billion US dollars for 60% of the Johnson Controls-Hitachi air conditioning joint venture. Equivalent to 7.5 times FY2023 EBITDA (7.5 times/60% = 12.5 times). Whether it is 12.5 times or 16.7 times the EBITDA valuation, the valuation level is far higher than the current valuation level of Hisense Home Appliances 10 times. It is recommended to pay attention to the company's overfalling stock price repair opportunities.

Investment advice: We expect the company's net profit to be 3.4/3.9/4.5 billion yuan in 24-26, up 20%/15%/16% respectively, corresponding to a valuation of 11/9/8 times, and maintain the “Highly Recommended” rating.

Risk warning: repeated epidemics, sharp rise in raw material prices, real estate completion falling short of expectations, terminal demand falling short of expectations, uncertainty about the implementation of employee shareholding plans, etc.