Xinhua Far East Downgrades Qingdao Haier to A- Issuer Rating, Rating Outlook Remains Stable

Xinhua Far East Downgrades Qingdao Haier to A- Issuer Rating, Rating Outlook Remains Stable

March 09, 2006

    HONG KONG, March 9 /Xinhua-PRNewswire/ -- Xinhua Far
East China Ratings today downgraded the issuer credit
rating of Qingdao Haier Co. Ltd ("Haier" or
"the Company", SH A 600690) from A+ to A-
domestic currency issuer credit rating. The rating outlook
remains stable.

    This downgrade reflects Xinhua Far East's unchanged
negative view on China's consumer electrics sector along
with concerns about Haier's near-to-medium term profit
generating capacity.  In Xinhua Far East's view,
oversupply, low-to-negative growth in domestic demand,
rises in input prices and a situation in which profits are
skewed towards distribution channels are key issues that
preoccupy domestic home electrics makers.  As a brand
targeting at premium market domestically, Haier's profit
margin has been squeezed and it is expected to be further
affected by the current adverse market.  Although its
higher-end product mix, the potential to exploit the
Chinese rural market and higher exports could drive Haier's
growth in the future, Xinhua Far East doesn't expect these
factors to contribute greatly to Haier's profits.
Competition in the high-end space is increasingly
competitive, while the Chinese rural market is particularly
price sensitive, and export business is continuously
generating leaner margins.

    However, the Company does possess strong brand
recognition and is in a leading domestic market position. 
These factors, along with its extensive marketing network
and established international production and sales model,
lend support to its current A- credit rating.  The Company
also has a very low debt burden, ample financial
flexibility and it enjoys considerable support from the
Haier Group, the Company's controlling shareholder.

    Although the Company has maintained its leading market
share in the local refrigerator and air conditioner
markets, Haier's turnover growth slowed in 2005 due to low
to negative domestic demand growth in the two markets.  It
recorded turnover of RMB15.3 billion in 2004 and RMB13.3
billion in the first three quarters of 2005, representing
YoY growth of 30.9% and 8% respectively.

    The focus of the change in Haier's credit strength is
its declining profit earning ability.  Haier's gross margin
dropped to 11.6% in the first three quarters of 2005 from
13.1% in 2004, while its EBIT margin dropped to 2.7% from
4% in 2004.  Its gross margin in the refrigerator sector
fell to 12.34% in the first three quarters of 2005 from
16.52% in 2004, while its gross margin in the air
conditioner sector showed slight recovery to 11.35% from
11.19% in 2004.

    Xinhua Far East expects a higher-end product mix,
exploitation of the rural market and growing exports are
likely to drive its future growth and provide a cushion to
the anticipated drop in domestic demand in the urban
market.  However, Haier's ability to ask for premium prices
is expected to be limited, especially in the purely price
sensitive China rural market.  With consumer tastes
shifting toward preferences for foreign brands in the
high-end urban market, it will most likely be even tougher
in its target market. Besides, the price levels for major
inputs, like plastic and copper, is expected to remain
high. 

    As the Company competes head-to-head with major
competitors to expand its capacity, introduce more
attractive and environmental friendly higher-end products
and develop distribution channels in the rural market, the
Company will need to increase its capital and R&D
expenditure.  This will place pressures on its cash flow
moving forward, with disputes in international trade and
challenges in managing rural channels further increasing
its business risk and heightening cash flow volatility.

    Despite these challenges, Xinhua Far East believes the
Company's repayment ability will remain strong based on its
sufficient financial flexibility, well above-average
operational efficiency and reliable external support from
Haier Group.  Even taking into account recently-approved
huge capital expenditure, Xinhua Far East estimates that
Haier's ratios will most likely place it properly within
the A- rating category.  In Xinhua Far East's view, Haier's
credit will not be impaired even if Haier Group diminishes
its stake in the Company as indicated in its full-listing
proposal, or passes Haier's stake to Haier Electronics
Groups (HK 1169, Haier Group's controlling subsidiary). 

    Qingdao Haier Co Ltd is one of the leading refrigerator
and air conditioner makers in China.  In 2004 and the first
three quarters of 2005, Haier recorded turnover of RMB15.3
billion and RMB13.3 billion respectively. Haier Group
reported RMB 101.63 billion in turnover, audited total
assets of RMB20.97 billion, RMB7.07 billion in equity and
cash equivalent of RMB3.68 billion in 2004.  By the end of
September 2005, Haier Group held 41.95% stake in Haier.

    Qingdao Haier Co. Ltd is a constituent of the Xinhua/
FTSE China 200 Index. As of market close on March 8, 2006,
its total market capitalization and investible
capitalization were RMB5.55 billion and RMB4.16 billion
respectively.   

    For the rating report summary, please visit
http://www.xinhuafinance.com/creditrating .

    About Xinhua FTSE China 200 Index

    Xinhua FTSE China 200 Index is the large cap index in
the Xinhua FTSE China A Share Index Series and includes the
top 200 companies in China by market cap.  It is designed as
a tradable index and is calculated in real-time every 15
seconds.  For daily data and further information, see
http://www.xinhuaftse.com .

    About Xinhua Far East China Ratings

    Xinhua Far East China Ratings (Xinhua Far East) is a
pioneering venture in China that aims to rank credit risks
among corporations in China.  It is a strategic alliance
between Xinhua Finance (TSE Mothers: 9399), and Shanghai
Far East Credit Rating Co., Ltd. Shanghai Far East became a
Xinhua Finance partner company in 2003 and the first China
member of The Association of Credit Rating Agencies in Asia
in December 2003.

    Capitalizing on the synergy between Xinhua Finance and
Shanghai Far East, Xinhua Far East's rating methodology and
process blend unique local market knowledge with
international rating standards.  Xinhua Far East is
committed to provide investors with independent, objective,
timely and forward-looking credit opinions on Chinese
companies.  It aims to help investors differentiate the
credit risks among the corporations in China, thereby,
cultivating their awareness and promoting information
disclosures and transparency in China market. 

    For more information, see
http://www.xfn.com/creditrating .

    About Xinhua Finance Limited

    Xinhua Finance Limited is China's unchallenged leader
in financial information and media, and is listed on the
Mothers board of the Tokyo Stock Exchange (symbol: 9399)
(OTC ADRs: XHFNY). Bridging China's financial markets and
the world, Xinhua Finance serves financial institutions,
corporations and re-distributors through four focused and
complementary service lines: Indices, Ratings, Financial
News and Investor Relations.  Founded in November 1999, the
Company is headquartered in Shanghai with 21 news bureaus
and offices in 18 locations across Asia, Australia, North
America and Europe.  

    For more information, please visit
http://www.xinhuafinance.com . 

    About Shanghai Far East Credit Rating Co., Ltd

    Shanghai Far East Credit Rating Co., Ltd. is the first
and leading professional credit rating company with
comprehensive business coverage in China.  It is an
independent agency established by the Shanghai Academy of
Social Sciences with the mission to develop internationally
accepted standards for capital market in China.  The company
is a pioneer in conducting bond-rating business in China. 
For years, it has been authorized by the Shanghai branch of
the PBOC to undertake loan certificate credit rating.

    Since establishment, it has rated over 1,000 corporate
long-term bonds and commercial papers, based on the
principles of objectivity, fairness and independence.  The
company has also maintained over 50% market share in the
loan certificate-rating sector in Shanghai for three
consecutive years.  With its strong local presence and
knowledge, it provides investors with unique and the most
insightful credit opinion. 

    For more information, see http://www.fareast-cr.com .

    For more Information, please contact: 

    Hong Kong
     Joy Tsang
     Corporate & Investor Communications Director
     Xinhua Finance
     Tel:   [phone], or
[phone]
     Email: [e-mail]

    US
     David Leeney
     Taylor Rafferty (IR/PR Contact in US)
     Tel:   [phone]
     Email: [e-mail]

SOURCE  Xinhua Far East China Ratings