Concepcion Industrial Corporation FRI 05 MAR 2021

4Q20 earnings outperform estimates

on strong ref sales
CIC 4Q20 earnings decline 10% y/y but beat estimates. CIC booked Php274Mil in

BUY
net income to common shareholders during 4Q20, down 9.9% y/y. This brought FY20
net income to Php471Mil, down 50% y/y but ahead of our estimates at 166% of FY20
forecast. The outperformance was mainly driven by higher-than-expected sales from CIC’s
refrigerator segment CDI. CDI reported a 9% growth in sales for 4Q20 as the company
benefitted from the growing number of consumers operating their own food businesses TICKER: CIC
at home. Hence, CDI’s sales in FY20 reached Php3.8Bil, accounting for 115% of revenue
forecast. This brought FY20 revenues to Php10.8Bil, down 28.5%, but still ahead of our FAIR VALUE: 33.40
estimates at 106% of full-year forecast.
CURRENT PRICE: 21.50
CDI and Midea see strong demand amid shifting consumer trends. CIC’s refrigerator UPSIDE: 55.35
sales under CDI grew 9% in 4Q20 to Php1.4Bil. Growth was driven by the strong demand
for CDI’s no frost refrigerators and commercial refrigerators. Due to the ongoing pandemic,
people spent more time at home, and this pushed more consumers to start their own
small food businesses, increasing demand for refs. Meanwhile, CIC’s consumer appliance SHARE PRICE MOVEMENT
business, Midea, also performed well with 4Q sales up 10.7% y/y to Php694Mil. Midea
benefitted from similar consumer trends with demand for kitchen appliances increasing
significantly. Other small home and DIY appliances also saw better sales during the fourth 110

quarter. Midea’s strong e-commerce presence also helped boost sales as foot traffic inside
mall-based stores have not yet returned to pre-pandemic levels.
100
Management expects 2021 to be a better year, but not back to pre-COVID levels.
Management expects 2021 to be a better year for CIC given that it lost almost one quarter
of operations in 2020 amid the strict COVID-19 lockdown in the second quarter which
is the peak period for AC sales. Management also said they are seeing some signs of 90

recovery as quarantine restrictions ease. However, CIC still does not expect 2021 profits to
return pre-COVID levels. Furthermore, earnings in the first quarter of 2021 will most likely
remain weak given the tough economic backdrop. CIC also disclosed that its suppliers
have signaled potential price increases amid rising commodity prices, but CIC is somewhat
80
5-Dec-20 5-Jan-21 5-Feb-21 5-Mar-21
hedged having two months’ worth of inventory. Finally, some supply chain issues arose
in 1Q21. Thankfully, CIC was able to leverage on its strong relationship with its suppliers, CIC PSEi

limiting the delays in raw material shipments by only one to two weeks.
Maintain BUY rating. We currently have a BUY rating on CIC with a FV estimate of ABSOLUTE PERFORMANCE
Php33.40/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 1M 3M YTD
and increasing share in the fast-growing laundry market. Upside to our FV estimate is also
significant at 53%. CIC 5.10 -5.46 -7.48
PSEi -1.96 -3.55 -3.62
FORECAST SUMMARY
in Php Mil 2018 2019 2020E 2021E 2022E 2023E
Net Revenues 14,202 15,066 10,134 14,559 15,760 17,063
% change y/y 2.5 6.1 (32.7) 43.7 8.2 8.3 MARKET DATA
Gross Profit 5,082 5,386 3,526 5,017 5,442 5,905
% change y/y 5.9 6.0 (34.5) 42.3 8.5 8.5 Market Cap 8,702.33Mil
Gross Margin (%) 35.8 35.7 34.8 34.5 34.5 34.6 Outstanding Shares 401.96Mil
Net Profit 1,457 1,430 376 1,139 1,485 1,642 52 Wk Range 17.04 - 31.20
% change y/y (4.6) (1.9) (73.7) 202.8 30.4 10.6
3Mo Ave Daily T/O 4.37Mil
Net Margin (%) 10.3 9.5 3.7 7.8 9.4 9.6
Net Profit after Minority Interest 913 947 284 739 958 1,069
% change y/y (7.5) 3.7 (70.0) 160.2 29.7 11.6
Net Profit after Minority Interest Margin (%) 6.4 6.3 2.8 5.1 6.1 6.3
EPS (Php) 2.25 2.35 0.70 1.83 2.37 2.65
% change y/y (7.4) 4.3 (70.0) 160.2 29.7 11.6

RELATIVE VALUE
P/E (X) 9.5 9.2 30.5 11.7 9.1 8.1
Justin Richmond Cheng, CFA
P/BV (X) 1.8 1.7 1.7 1.5 1.3 1.2
ROE (%) 19.5 18.7 5.4 13.3 15.3 15.2 Research Analyst
Dividend yield (%) 5.6 5.6 3.3 1.0 2.6 3.3 justin.cheng@colfinancial.com
so urce: CIC

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
 E AR N I N G S AN ALY S I S I C I C : 4 Q 2 0 E AR N I N G S O U T PE R F O R M ESTIM ATES ON
S TRONG REF SA LES

FRI 05 MAR 2021

CIC 4Q20 earnings decline 10% y/y but beat estimates

CIC booked Php274Mil in net income to common shareholders during 4Q20, down
9.9% y/y. This brought FY20 net income to Php471Mil, down 50% y/y but ahead of our
estimates at 166% of FY20 forecast. The outperformance was mainly driven by higher-
than-expected sales from CIC’s refrigerator segment CDI. CDI reported a 9% growth
in sales for 4Q20 as the company benefitted from the growing number of consumers
operating their own food businesses at home. Hence, CDI’s sales in FY20 reached Php3.8Bil,
accounting for 115% of revenue forecast. Meanwhile, 4Q aircon (-36%) and elevator and
escalator (-19%) sales remained challenged given the weak aircon market conditions and
building construction delays. CIC’s consolidated revenues reached Php3.3Bil in 4Q20,
down 20.6% y/y. This brought FY20 revenues to Php10.8Bil, down 28.5%, but still ahead
of our estimates at 106% of full-year forecast.

Exhibit 1: Results Summary

% of COL
In PhpMil 4Q19 4Q20 % Change FY19 FY20 % Change
Forecast
Revenues 4,128 3,279 -20.6 15,066 10,769 -28.5 106.3%
Gross Profit 1,425 1,303 -8.6 5,386 3,946 -26.7 111.9%
Gross Margin (%) 34.5 39.7 - 35.7 36.6 -
Operating income 529 426 -19.4 2,024 961 -52.5 174.5%
Operating margin (%) 12.8 13.0 - 13.4 8.9 -
Net income to common 304 274 -9.9 947 471 -50.3 165.8%
Net Margin (%) 4.9 7.6 - 5.9 2.6 -

Source: CIC, COL Estimates

CDI and Midea see strong demand amid shifting consumer

trends

CIC’s refrigerator sales under CDI grew 9% in 4Q20 to Php1.4Bil. Growth was driven by the
strong demand for CDI’s no frost refrigerators and commercial refrigerators. Due to the
ongoing pandemic, people spent more time at home, and this pushed more consumers
to start their own small food businesses, increasing demand for refs.

CIC’s consumer appliance business, Midea, also performed well with 4Q sales up 10.7%
y/y to Php694Mil. Midea benefitted from similar consumer trends with demand for
kitchen appliances increasing significantly. Other small home and DIY appliances also
saw better sales during the fourth quarter. Midea’s strong e-commerce presence also
helped boost sales as foot traffic inside mall-based stores have not yet returned to pre-
pandemic levels.

COL Financial Group, Inc. 2

 E AR N I N G S AN ALY S I S I C I C : 4 Q 2 0 E AR N I N G S O U T PE R F O R M ESTIM ATES ON
S TRONG REF SA LES

FRI 05 MAR 2021

CCAC and COPI sales remain challenged

On the other hand, sales of CIC’s AC division (CCAC) remained lackluster amid weak
market conditions. In particular, 4Q20 aircon sales declined by 36% y/y to Php1.6Bil.
This brought FY20 CCAC sales to Php6.3Bil, down 36% y/y. Despite the drop, aircon
sales were within our expectations at 101% of our FY20 forecast. Both consumer and
commercial aircon sales fell in 4Q. Demand was also hurt by poor weather conditions as
the Philippines suffered from two major typhoons in November.

Meanwhile, CIC’s elevator and escalator business (COPI) saw 4Q20 sales drop 19% y/y
due to delays in project completion and deliveries as well as construction stoppages. On
the bright side, COPI’s gross profit and net profit grew north of 20% in 4Q20, thanks to
higher maintenance revenues.

Exhibit 2: Segment sales breakdown

In PhpMil 4Q19 4Q20 % Change FY19 FY20 % Change

CCAC 2,554 1,624 -36.4 9,710 6,236 -35.8

CDI 1,317 1,435 9.0 4,453 3,823 -14.1
COPI 252 204 -19.0 884 673 -23.9
Midea* 627 694 10.7 1,970 2,197 11.5

*CIC has a 40% effective interest in Midea

Source: CIC

Exhibit 3: Segment net profit breakdown

In PhpMil 4Q19 4Q20 % Change FY19 FY20 % Change

CCAC 290 195 -32.8 1,132 470 -58.5

CDI 159 215 35.2 380 332 -12.6
COPI 33 42 27.3 107 57 -46.7
Midea 25 27 8.0 61 48 -21.3

*CIC has a 40% effective interest in Midea

Source: CIC

COL Financial Group, Inc. 3

 E AR N I N G S AN ALY S I S I C I C : 4 Q 2 0 E AR N I N G S O U T PE R F O R M ESTIM ATES ON
S TRONG REF SA LES

FRI 05 MAR 2021

Management expects 2021 to be a better year, but not back

to pre-COVID levels

Management expects 2021 to be a better year for CIC given that it lost almost one
quarter of operations in 2020 amid the strict COVID-19 lockdown in the second quarter
which is the peak period for AC sales. Note that CIC’s AC segment accounts for around
60% of total sales. Management also said they are seeing some signs of recovery as
quarantine restrictions ease. However, CIC still does not expect 2021 profits to return
pre-COVID levels. Furthermore, earnings in the first quarter of 2021 will most likely
remain weak given the tough economic backdrop. CIC also disclosed that its suppliers
have signaled potential price increases amid rising commodity prices. The company is
currently somewhat hedged having two months’ worth of inventory. Finally, some supply
chain issues arose in 1Q21. Thankfully, CIC was able to leverage on its strong relationship
with its suppliers, limiting the delays in raw material shipments by only one to two weeks.

Maintain BUY rating

We currently have a BUY rating on CIC with a FV estimate of Php33.40/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 53%.

COL Financial Group, Inc. 4

 E AR N I N G S AN ALY S I S I C I C : 4 Q 2 0 E AR N I N G S O U T PE R F O R M ESTIM ATES ON
S TRONG REF SA LES

FRI 05 MAR 2021

Concepcion Industrial INCOME STATEMENT (IN PHPMIL)

Corporation (CIC)
2017 2018 2019 2020 2021E 2022E
Revenues 13,859 14,202 15,066 10,134 14,559 15,760
% Growth 12% 2% 6% -33% 44% 8%
COMPANY BACKGROUND Gross Profit 4,797 5,082 5,386 3,526 5,017 5,442
% Growth 9% 6% 6% -35% 42% 8%
Concepcion Industrial Corporation (CIC) is
Operating Profit 2,297 2,165 2,084 551 1,653 2,117
one of the Philippines’ most established % Growth 10% -6% -4% -74% 200% 28%
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 1,722 2,220
revenues through the manufacture and Tax Expense (723) (685) (649) (194) (583) (735)
sale of airconditioning and refrigeration Net Income 1,528 1,457 1,430 376 1,139 1,485
% Growth 9% -5% -2% -74% 203% 30%
products to the residential and commercial/
Net Income after Minority Interest 987 913 947 284 739 958
industrial markets. It operates subsidiaries,
EPS 2.4 2.3 2.3 0.7 1.8 2.4
namely Concepcion-Carrier Airconditioning % Growth 8% -7% 4% -70% 160% 30%
Company (CCAC, 60% owned,
airconditioning) and Concepcion Durables, BALANCE SHEET (IN PHPMIL)
Inc. (CDI, wholly owned, refrigeration). In 2017 2018 2019 2020 2021E 2022E
2013, CIC formed a join venture with GD Cash & Equivalents 2,240 1,325 1,606 2,487 2,269 2,855
Midea Holdings to establish Concepcion Trade Receivables 3,848 3,963 4,098 2,789 4,006 4,337
Inventories 2,289 2,839 2,333 1,810 2,614 2,827
Midea, Inc. (CMIP, 40% owned, consumer
Other Current Assets 141 776 1,177 1,066 1,100 1,109
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 81 119 139 208 312
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 12,887 14,132
Accounts Payable 3,600 3,332 3,598 2,455 3,546 3,834
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 4,760 5,049
Stock Holders' Equity 4,473 4,886 5,230 5,230 5,883 6,619
Minority Interest 1,769.8 1,855.9 2,037.4 2,076.0 2,243.5 2,464.2
29.6% Total Liabilities & Equity 10,347 10,968 12,138 10,976 12,887 14,132
BVPS 11.0 12.0 13.0 13.0 14.6 16.4

CASHFLOW STATEMENT (IN PHPMIL)

64.4%
2017 2018 2019 2020 2021E 2022E
Pretax Income 2,251 2,142 2,079 570 1,722 2,220
Depreciation & Amortization 74 108 124 153 155 156
Other Non-Cash Exp (Gains) 161 588 1,250 (20) (69) (104)
Interest Expense (Income) -4 -2 25 0 0 0
CCAC CDI Otis
Decrease (Increase) in Working Cap -728 -2,191 -173 787 -965 -264
Income Tax Paid -594 -728 -555 -194 -583 -735
Operating Cash Flow 1,160 -83 2,748 1,296 260 1,274
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 -318 -528
Others -1 -21 -80 0 0 0
Financing Cash Flow -653 -514 -1,842 -383 -318 -528
Change in Cash 217 -914 531 881 -218 586

COL Financial Group, Inc. 5

 E AR N I N G S AN ALY S I S I C I C : 4 Q 2 0 E AR N I N G S O U T PE R F O R M ESTIM ATES ON
S TRONG REF SA LES

FRI 05 MAR 2021

INVESTMENT THESIS: KEY RATIOS

2017 2018 2019 2020 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% 10.5% 12.4%
CIC is the number one seller and NPM (%) 11.0% 10.3% 9.5% 3.7% 7.8% 9.4%
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%.

COL Financial Group, Inc. 6

 E AR N I N G S AN ALY S I S I C I C : 4 Q 2 0 E AR N I N G S O U T PE R F O R M ESTIM ATES ON
S TRONG REF SA LES

FRI 05 MAR 2021

Valuation RELATIVE VALUATION

Methodology 2020E
P/E
2021E 2020E
EPS Growth
2021E
Concepcion Industrial Corporation 30.5 11.7 -70.0 160.2
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) 1,006
PV of Terminal Value 14,753
Enterprise Value 15,759
Less: Net Debt 2,487
Equity Value 18,247
Effective share in Equity 13,502
O/S 406
FV Estimate 33.40

COL Financial Group, Inc. 7

 E AR N I N G S AN ALY S I S I C I C : 4 Q 2 0 E AR N I N G S O U T PE R F O R M ESTIM ATES ON
S TRONG REF SA LES

FRI 05 MAR 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