key data currentir.ozner.net/cms/html/client/oznerwater/attachment/2015042803413… · we believe...

July 22, 2014

ACTION

Buy Ozner Water International Holding Limited

Return Potential: 35% Equity Research

Water purification leader with market growth upside; initiate at Buy

Source of opportunity

We initiate on Ozner with a Buy rating and a 12m target price of HK$4.30 as

we believe the company is poised to capture the growth opportunity in the

highly fragmented water purifier market, driven by China’s rising

environmental safety awareness. Ozner’s distinct lease and service business

model provides low-cost entry and quality service to consumers. Backed by

advanced technology, it ranks No.1 in the commercial segment and is well-

placed to further penetrate the household market by leveraging its strong

distributor network. We expect an increase in new purifier installation will

keep GPM at 66%+ and help achieve 31% earnings CAGR in 2014E-2016E.

Catalyst

(1) A new factory in Shaanxi is set to begin operations in August, and will

provide an additional 200k capacity to support Ozner’s expansion. We

expect a total of 1163k water purifiers to be installed by 2016 from the

current 463k. (2) We expect increase in marketing investments (especially in

internet, TV and print media) to improve brand image. (3) Ozner’s distinct

lease and service model should help drive a continuous increase in market

share. We estimate China urban household penetration of water purifiers

will rise from 26% in 2013 to 35% in 2016E and forecast Ozner’s household

market share in terms of retail sales will increase from 0.3% in 2013 to 0.7%

in 2016E on its advantages in product, technology and business model.

Valuation

We value Ozner using DCF to capture its future growth potential given

reasonable visibility of its cash flows. Our DCF-based 12m target price of

HK$4.3 implies 2014E/15E P/E (non-GAAP) of 30X/22X (broadly in line with

China small appliances and global water treatment peer average) vs. its

current CY2014E/15E P/E of 23X/17X. Our target price implies 35% upside.

Key risks

Increasing competition as more appliance brands and water purification

firms enter the market, execution risks, regulation.

INVESTMENT LIST MEMBERSHIP

Asia Pacific Buy List

Coverage View: Neutral

Weibo Hu +86(21)2401-8944 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with companies

covered in its research reports. As a result, 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. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Joshua Lu +852-2978-1024 [email protected] Goldman Sachs (Asia) L.L.C.

Lin Tang +86(21)2401-8929 [email protected] Beijing Gao Hua Securities Company Limited

The Goldman Sachs Group, Inc. Global Investment Research

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the

investment profile measures please refer to

the disclosure section of this document.

Ozner Water International Holding Limited (2014.HK)

Asia Pacific Consumer Peer Group Average

Key data Current

Price (HK$) 3.19

12 month price target (HK$) 4.30

Market cap (HK$ mn / US$ mn) 5,586.6 / 720.7

Foreign ownership (%) --

12/13 12/14E 12/15E 12/16E

EPS (Rmb) -- 0.09 0.13 0.18

EPS growth (%) -- -- 38.6 40.1

EPS (diluted) (Rmb) -- 0.09 0.13 0.18

EPS (basic pre-ex) (Rmb) -- 0.09 0.13 0.18

P/E (X) -- 27.1 19.6 14.0

P/B (X) -- 2.3 2.0 1.8

EV/EBITDA (X) -- 15.5 11.4 8.3

Dividend yield (%) -- 0.0 0.0 0.0

ROE (%) 59.5 14.4 11.0 13.7

CROCI (%) 29.1 26.6 24.4 23.8

Price performance chart

2.7

2.8

2.9

3.0

3.1

3.2

3.3

3.4

3.5

Apr-14 May-14 Jun-14

57

58

59

60

61

62

63

64

65

Ozner Water International Holding Limited (L) MSCI China (R)

Share price performance (%) 3 month 6 month 12 monthAbsolute -- -- --

Rel. to MSCI China -- -- --

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 7/21/2014 close.

July 22, 2014 Ozner Water International Holding Limited (2014.HK)

Goldman Sachs Global Investment Research 2

Ozner Water International Holding Limited: Summary Financials

Analyst Contributors

Weibo Hu

[email protected]

Joshua Lu

[email protected]

Lin Tang

[email protected]

Profit model (Rmb mn) 12/13 12/14E 12/15E 12/16E Balance sheet (Rmb mn) 12/13 12/14E 12/15E 12/16E

Total revenue 402.3 528.3 701.6 899.2 Cash & equivalents 154.3 861.1 513.4 498.0

Cost of goods sold (129.5) (177.6) (235.0) (298.5) Accounts receivable 50.6 52.7 55.0 53.1

SG&A (101.6) (115.9) (136.2) (174.3) Inventory 36.9 41.5 58.0 83.9

R&D -- -- -- -- Other current assets 116.5 116.5 116.5 116.5

Other operating profit/(expense) (6.5) (52.3) (66.8) (46.3) Total current assets 358.3 1,071.7 742.8 751.4

EBITDA 179.0 239.4 347.5 476.5 Net PP&E 817.3 1,311.8 1,874.4 2,305.4

Depreciation & amortization (14.3) (56.9) (84.0) (96.3) Net intangibles 94.9 101.7 108.1 114.3

EBIT 164.6 182.4 263.6 380.2 Total investments 0.0 0.0 0.0 0.0

Interest income 2.2 10.2 13.7 10.1 Other long-term assets 39.1 39.1 39.1 39.1

Interest expense (1.8) (6.4) (2.1) 0.0 Total assets 1,309.7 2,524.4 2,764.5 3,210.2

Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0

Others 18.6 10.0 0.0 0.0 Accounts payable 188.2 255.9 321.2 389.7

Pretax profits 183.6 196.2 275.2 390.3 Short-term debt 212.7 106.4 0.0 0.0

Income tax (30.7) (31.4) (46.8) (70.3) Other current liabilities 568.7 200.9 253.7 310.9

Minorities 0.0 0.0 0.0 0.0 Total current liabilities 969.6 563.2 574.9 700.5

Long-term debt 0.0 0.0 0.0 0.0

Net income pre-preferred dividends 152.9 164.8 228.4 320.1 Other long-term liabilities 6.6 6.6 6.6 6.6

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 6.6 6.6 6.6 6.6

Net income (pre-exceptionals) 152.9 164.8 228.4 320.1 Total liabilities 976.2 569.8 581.5 707.1

Post-tax exceptionals 0.0 0.0 0.0 0.0

Net income 152.9 164.8 228.4 320.1 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 333.5 1,954.6 2,183.0 2,503.0

EPS (basic, pre-except) (Rmb) -- 0.09 0.13 0.18 Minority interest 0.0 0.0 0.0 0.0

EPS (basic, post-except) (Rmb) -- 0.09 0.13 0.18

EPS (diluted, post-except) (Rmb) -- 0.09 0.13 0.18 Total liabilities & equity 1,309.7 2,524.4 2,764.5 3,210.2

DPS (Rmb) 0.00 0.00 0.00 0.00

Dividend payout ratio (%) NM 0.0 0.0 0.0 BVPS (Rmb) -- 1.12 1.25 1.43

Free cash flow yield (%) -- (5.3) (5.4) (0.3)

Growth & margins (%) 12/13 12/14E 12/15E 12/16E Ratios 12/13 12/14E 12/15E 12/16E

Sales growth 38.5 31.3 32.8 28.2 CROCI (%) 29.1 26.6 24.4 23.8

EBITDA growth 39.3 33.7 45.2 37.1 ROE (%) 59.5 14.4 11.0 13.7

EBIT growth 35.5 10.8 44.5 44.3 ROA (%) 14.1 8.6 8.6 10.7

Net income growth 50.4 7.8 38.6 40.1 ROACE (%) 75.7 20.3 15.2 17.0

EPS growth -- -- 38.6 40.1 Inventory days 106.6 80.5 77.2 86.7

Gross margin 67.8 66.4 66.5 66.8 Receivables days 40.0 35.7 28.0 21.9

EBITDA margin 44.5 45.3 49.5 53.0 Payable days 466.1 456.4 448.2 434.7

EBIT margin 40.9 34.5 37.6 42.3 Net debt/equity (%) 17.5 (38.6) (23.5) (19.9)

Interest cover - EBIT (X) NM NM NM NM

Cash flow statement (Rmb mn) 12/13 12/14E 12/15E 12/16E Valuation 12/13 12/14E 12/15E 12/16E

Net income pre-preferred dividends 152.9 164.8 228.4 320.1

D&A add-back 68.7 161.8 242.2 316.9 P/E (analyst) (X) -- 27.1 19.6 14.0

Minorities interests add-back 0.0 0.0 0.0 0.0 P/B (X) -- 2.3 2.0 1.8

Net (inc)/dec working capital 69.8 61.1 46.5 44.5 EV/EBITDA (X) -- 15.5 11.4 8.3

Other operating cash flow 15.0 40.2 52.7 57.2 EV/GCI (X) -- 2.2 1.6 1.2

Cash flow from operations 306.4 427.9 569.8 738.6 Dividend yield (%) -- 0.0 0.0 0.0

Capital expenditures (447.5) (663.0) (811.2) (754.0)

Acquisitions 0.0 (5.0) 0.0 0.0

Divestitures 0.0 0.0 0.7 0.1

Others (67.0) 5.0 (0.7) (0.1)

Cash flow from investments (514.4) (663.0) (811.2) (754.0)

Dividends paid (common & pref) 0.0 0.0 0.0 0.0

Inc/(dec) in debt 193.3 (106.4) (106.4) 0.0

Common stock issuance (repurchase) 0.0 1,048.2 0.0 0.0

Other financing cash flows (0.2) 0.0 0.0 0.0

Cash flow from financing 193.1 941.9 (106.4) 0.0

Total cash flow (14.9) 706.8 (347.8) (15.4) Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



Table of contents

Buy Ozner for exposure to China’s growing environmental market 4

Leading environmental product brand for commercial & household 5

Significant market growth prospects and penetration potential 9

Water purification market 9

Air sanitization market 12

Poised to gain share in a fragmented market; business model, pricing and technology key strengths 13

Financials: 30% revenue CAGR and 31% earnings CAGR by 2016E 18

Valuation: DCF-based TP of HK$4.3 implies 35% upside potential 24

Key risks 26

Appendix 27

Disclosure Appendix 29

The prices in the body of this report are based on the market close of July 18, 2014, unless otherwise mentioned.

Exhibit 1: Valuation comp: Peers include small appliance brands and water treatment service providers

Note: Ozner, Pentair and AOSmith valuations are based on GSe while that of remaining peers (Not Covered by Goldman Sachs) are based on Bloomberg consensus estimates.

Source: Bloomberg, Goldman Sachs Global Investment Research, Gao Hua Securities Research.

Country Ticker Name Mkt Cap As of Trading PEG18-Jul Ccy CY14E CY15E 14E P/E CY14E CY15E CY14E CY15E CY14E CY15E

US$m L.C. (X) (X) 14-16 CAGR (X) (X) (X) (X) (X) (X)

CHINA 002032.SZ ZHEJIANG SUPOR-A 1,438 14.08 CNY 12.9 11.0 0.6 9.6 8.3 2.3 2.0 18% 19%CHINA 002242.SZ JOYOUNG CO -A 1,108 9.04 CNY 12.1 9.5 n.a 8.5 7.3 2.2 2.0 18% 20%CHINA 002508.SZ HANGZHOU ROBAM-A 1,396 27.08 CNY 16.0 12.2 0.6 13.6 10.5 3.6 2.9 21% 22%CHINA 002614.SZ XIAMEN COMFORT-A 1,010 17.41 CNY 27.6 19.6 n.a 21.0 15.5 n.a. n.a. 10% 12%CHINA 002035.SZ VATTI CORP LTD-A 601 10.40 CNY 12.0 9.5 0.4 8.5 6.7 2.2 1.8 21% 22%Small appliances Median 12.9 11.0 0.6 9.6 8.3 2.3 2.0 18% 20%

Average 16.1 12.4 0.5 12.3 9.7 2.6 2.2 18% 19%BRITAIN PNR PENTAIR PLC 13,854 71.57 USD 18.4 15.1 1.0 12.1 10.7 2.4 2.3 12% 15%SOUTH KOREA 021240.KS COWAY CO LTD 7,004 93,500.00 KRW 24.9 22.3 2.1 13.0 12.0 6.8 5.8 28% 27%UNITED STATES AOS SMITH (A.O.)CORP 4,255 46.59 USD 19.6 17.3 1.5 10.3 8.2 3.0 2.7 14% 15%JAPAN 6370.T KURITA WATER IND 2,862 2,434.00 JPY 26.4 23.3 3.1 7.3 6.4 1.3 1.3 5% 6%SINGAPORE HYF HYFLUX LTD 790 1.19 SGD 91.2 30.4 0.8 17.6 15.7 1.1 1.1 10% 4%JAPAN 6788.T NIHON TRIM CO 312 3,650.00 JPY 14.6 13.5 1.0 9.3 5.4 1.9 1.7 14% 14%CHINA 300272.SZ SHANGHAI CANAT-A 712 17.30 CNY 64.1 52.4 n.a 44.6 37.1 n.a. n.a. n.a. n.a.Water treatment Median 24.9 22.3 1.3 12.1 10.7 2.1 2.0 13% 14%

Average 37.0 24.9 1.6 16.3 13.6 2.8 2.5 14% 13%Overall Median 19.0 16.2 1.0 11.2 9.4 2.3 2.0 14% 15%

Average 28.3 19.7 1.2 14.6 12.0 2.7 2.4 16% 16%CHINA 2014.HK OZNER 927 3.41 HKD 22.7 16.7 0.7 16.1 11.8 3.1 2.7 14% 11%

P/E P/BEV/EBITDA ROE



Buy Ozner for exposure to China’s growing environmental market

Ozner is a leading water purification service provider in China’s fragmented market, with

1.1% market share (2012, in terms of retail sales, according to Frost & Sullivan). The

company has installed 463,000 water purifiers in 125 cities (as of end-2013). We expect a

total of 1163k units to be installed by 2016 with expansion into a total of 300 cities, as we

estimate China urban household penetration to increase from 26% in 2013 to 35% in 2016E.

Leading water purification service provider; large addressable market

Demand for purified drinking water in China has grown substantially as contamination has

increased safety awareness. According to Frost & Sullivan, the water purification market is

expected to reach Rmb125.1bn with 23.1% CAGR in 2013-2017; residential use comprises

81% (as of 2013) and is expected to grow at 21% CAGR in 2013-2017, while commercial is

expected to grow at 31.5% CAGR.

Compared to traditional boiled tap water and barreled water, water processed by purifiers

at end users is more reliable and convenient for drinking, though it is not widely available

in China yet. For households that pay attention to water quality, we assessed the costs of

buying branded barreled water for daily use, and find that Ozner’s water purifier’s total cost

in 5/10 years is similar to that of barreled water at medium usage levels (Exhibit 24). We

believe this reasonable pricing could help Ozner tap into the large addressable market in

China. Besides, daily usage of barreled water can only meet limited needs of drinking and

cooking, while water purifiers provide unlimited fresh water.

As the water purification market is highly fragmented in China and at an early stage, it

provides a great opportunity for leading firms to grow. In 2012, the top 10 water purifier

companies accounted for 10% of total market share (15% in commercial segment, Exhibits

17-18). We believe Ozner is well positioned to seize this huge potential market with its

patented technology ensuring high quality of water at a reasonable cost.

Distinct business model and extensive network to help gain market share

The company differentiates itself by adopting a lease and service model rather than a direct

sales model. This model allows consumers to experience the product and services at a

lower entry price with reliable service quality (Ozner’s own local service team provides

installation and maintenance services). It also attracts distributors as it allows them to

generate recurring cash flow and high margins, without taking any inventory risks.

Currently Ozner manages a sales network of 439 principal distributors and 1263 sub-

distributors (as of end-2013). The value-add to consumers and distributors could help

Ozner gain market share. Moreover, IPO proceeds should drive expansion as the model

requires a heavy initial investment.

DCF- based 12-m target price set at HK$4.3, implying 35% upside

We believe a long-term DCF valuation method is the most appropriate for Ozner, with a

cross-check based on peer multiples. The comparable universe for Ozner includes China

small appliance brands and global water treatment service providers.

We propose to use DCF as our primary valuation method for Ozner because of the

following:

Fairly reasonable visibility into cash flow generation as it receives annual service fees

for an installed water purifier over the machine’s lifetime, potentially extending to as

long as 10 years.

Growth phase: It is incurring significant capex investment to manufacture new water

purifiers and build up capacity for expansion. Thus near-term multiple valuation may

not capture future growth and cash flows.



Our 12-m DCF-based target price of HK$4.3 implies 30X 2014E P/E and 22X 2015E P/E (non-

GAAP), broadly in line with small appliances and water treatment peers’ CY2014E/15E

averages of 28X/ 20X. Ozner is currently trading at 23X and 17X and therefore we consider

it undervalued.

Key risks: Regulation, competition and execution

Regulatory risks: Changes in public health and safety laws, rules, regulations and

industrial standards may have a material adverse effect on Ozner’s business, financial

condition and operations.

Competition risks: Ozner faces increasing competition from domestic and foreign

companies, which may affect its market share and profit margin.

Execution risks: The company relies on third party distributors to source end users for

its water purification business. Failure to maintain the quality of products and services

may cause the company to lose end users and market share. It may not successfully

manage its current and future growth, as the lease and service business model is

capital intensive, especially in the early stages of business development.

Leading environmental product brand for commercial & household

Ozner is a leading water purifier, manufacturer and service provider with patented

technologies and a lease and service business model. It has two business segments:

Water purification business:

Ranked No.3 in whole industry and No.1 in commercial sub-sector in 2012 in terms of

retail sales market share (Source: Frost & Sullivan).

Provides corporate/household water purifier leasing services across 125 cities of China.

Uses proprietary ozone technology for high quality water purification.

Air sanitization business:

Design and installation of air sanitization systems through EPC arrangements

(engineering, procurement and construction).

Main clients are corporations in the electronics, food processing, medical and

healthcare industries.

Participated in 14 EPC projects in 2013.



Exhibit 2: Water purification revenue contribution

increased to over 75% in 2013 Ozner revenue contribution by business segments

Exhibit 3: Ozner has installed 463,000 water purifiers in

125 cities (as of end-2013) Water purification revenue regional breakdown (Rmb mn)

Source: Company data.


1) Water purification business

The company differentiates itself by adopting a lease and service model rather than directly

selling products like most other manufacturers. Ozner provides machine and servicing to

end users over the leasing contract period. This model allows consumers to experience the

products and services at a lower entry price, while providing Ozner a recurring cash flow

and helping secure long-term relationships with the end users.

The company relies on distributors to penetrate cities and consumers, but uses its own

local service teams for installation and maintenance services. Ozner receives initial

payment from distributors which includes prepayment of service fee, guaranteed deposit

and training fees, but shares a considerable amount of the recurring revenue with

distributors.

The business model requires heavy initial investment in exchange for recurring cash flows

in consequent years. Annual service fee in the first year of installation is higher than

subsequent years. As a result, gross margin is higher in the first year as the cost of goods

sold (COGS) is allocated during the water purifiers’ expected lifetime of around ten years.

Exhibit 4: Ozner lease and service business model

Note: End users may pay annual service fee directly to principal distributors. Initial payment may not always be before the annual service fee, i.e., in cases where distributors are given credit period of up to 90 days.


43.9%31.9%

22.0%

4.0%

0.8%

2.1%

49.6%

60.0%

61.3%

2.4% 7.3%14.7%

0%

20%

40%

60%

80%

100%

2011 2012 2013

Water purification -

household


corporate


other income

Air sanitization

services 16.2 59.1 87.1

14.0 49.2 79.2

16.9 65.9 105.0

6.1 21.4 34.1

0%

20%

40%

60%

80%

100%

2011 2012 2013

Others

South China

North China

East China

End usersEnd usersEnd usersEnd users

Ozner

End users

5) Delivery/Installation

6) Services/ maintenance

2) Annual service fee

1) Initial payment

4) Annual leasing fee

Principal distributors

Sub-distributor

3) sub-leasing fee



The company plans to strengthen its market leading position and further increase market

share through rapid expansion in its existing network and cooperation with more

distributors. In particular, it plans to increase production capacity in anticipation of an

increase in market demand, further increase penetration in the 125 cities it is currently

operating in, and expand to a total of 300 cities in the coming years.

Retaining old customers and gaining new ones are both critical for the business in our view.

The company is trying to implement innovative marketing initiatives through online social

media channels to promote its brand image and awareness of water quality. In addition to

that, it is also placing a new display screen in its water purifying machine that could be

used as a communication conduit with end users and also act as a potential medium for

advertisement. This could upgrade the function and value of company’s integrated

distributor, machine and end user database, and help it better manage and understand its

customer and distributor networks.

Exhibit 5: New generation of Ozner water purifier: Smart appliance with a large multi-function touch screen


Function menu



Exhibit 6: With its built-in wifi access, users can surf the

web using the touch screen… An example of Yahoo search

Exhibit 7: …and also watch online videos/recipes An example of watching videos on Youku



2) Air sanitization business

Ozner usually acts as a sub-contractor in EPC arrangements (engineering, procurement and

construction) for its air sanitization business. So far, the majority of air sanitizers have been

designed and installed for corporations in the electronics, food processing, medical and

healthcare industries. The completion period is typically in the range of 90-360 days, and

Ozner receives payment proportionally as the project progresses:

10% of the contract price as prepayment upon signing of definitive agreement;

10%-15% upon delivery of key materials to the client’s site;

10%–30% when the construction progress reaches 50%;

10%–30% upon completion of construction;

20%–55% upon inspection; and

5% after one-year warranty period.

Exhibit 8: Process of an air sanitization EPC arrangement


The company plans to focus on serving clients in the medical and healthcare industry and

plans to explore opportunities for providing air sanitization services to household

customers.

Contract bidding

System design

Component procurement

Installation and

inspection

Post-installation support and

services



Significant market growth prospects and penetration potential

Water purification market

1) Household penetration suggests abundant market potential

Current urban household penetration of water purifiers is 26% in China based on our

calculation using data from Frost & Sullivan (for household use of water purifiers) and

Euromonitor (for total number of households). We expect penetration to gradually increase

to 35% in 2016E, driven by rising awareness about water quality and product affordability.

Compared to major appliances’ household penetration rate of 53%-97% in 2012 (Exhibit 6),

we view our water purifier penetration forecast as reasonable. We expect water purifiers

will become a common home appliance in the future and expect development of their

home penetration to be similar to the path of other appliances, like air-conditioners.

We assess China’s residential demand for water purifiers from a household penetration

perspective (Exhibit 5). Penetration of all major home appliances has exceeded 50% in

China (as of 2012). Residential possession of air-conditioners, for example, surged from

9.6% in 2000 to 41% in 2006, and further increased to 53% in 2012 (Source: Euromonitor

International).

Ozner only accounts for 0.1% household market share in terms of units (as of end-2013).

With the upcoming rapid expansion by Ozner and its competitive advantages, we expect its

share to reach 0.5% in 2016.

Exhibit 9: With increasing home penetration of water purifiers, we expect Ozner’s

household market share in terms of units will increase from 0.1% in 2013 to 0.5% in 2016

Source: Euromonitor, Frost & Sullivan, Gao Hua Securities Research.

2011 2012 2013 2014E 2015E 2016EChina households (mn) 425 432 439 446 452 459China urban households (mn) 223 231 239 247 255 263

yoy growth 3.7% 3.6% 3.4% 3.3% 3.2%% of urban household 52% 53% 54% 55% 56% 57%

China households that use water purifiers (mn) 50.5 62 72 82 92yoy growth 22.9% 15.4% 14.0% 12.8%

Urban household penetration rate 21.9% 26.0% 29.0% 32.0% 35.0%

Ozner Annual New Installment Forecast (household) 6,000 27,000 59,000 88,500 115,050 149,565yoy growth 118.5% 50.0% 30.0% 30.0%

Number of Households that use Ozner purifiers 6,000 33,000 92,000 180,500 295,550 445,115yoy growth 178.8% 96.2% 63.7% 50.6%

Ozner household market share in terms of units 0.1% 0.1% 0.3% 0.4% 0.5%Market size of residential water purifiers (Rmb mn) 29,400 35,100 44,100 55,400 67,600 80,700 Rental income of household models (Rmb mn) 3 21 57 112 183 274Ozner household market share in terms of retail sales 0.0% 0.1% 0.3% 0.4% 0.5% 0.7%

Ozner Household New Installation as % of Total household m 100% 82% 64% 49% 39% 34%



Exhibit 10: Ownership of major appliances has exceeded 50% for Chinese households

(2012) % of households possessing respective appliances

Source: Euromonitor International.

Exhibit 11: Ownership of air-conditioners surged from

9.6% in 2000 to 41% in 2006, and then grew further to

53% in 2012

Exhibit 12: We expect water purifiers to have a 35%

urban household penetration rate by 2016

Source: Euromonitor International.

Source: Frost & Sullivan (2012-2013), Gao Hua Securities Research (2014E-2016E).

2) Key drivers of the water purification market

In recent years, contaminated water has caused considerable damage in China increasing

safety awareness. In fact, contamination risks exist at each stage of China’s water

treatment and distribution process (pollution in water resources, and secondary pollution

in aged water pipes/storage tanks etc.).

Among the common water treatment methods, water purifiers are more reliable and

convenient for point-of-use, though they are not widely available in China yet. Considering

the rising awareness of water safety and increasing affordability as technology evolves, we

expect water purification to rapidly replace boiled or barreled water.

The demand for purified drinking water in China has grown substantially as a result. The

water purification market is expected to reach Rmb125.1bn with 23.1% CAGR in 2013-2017.

Residential use comprised 81% in 2013 with 21% expected CAGR in 2013-2017, while

commercial is expected to grow at 31.5% CAGR during the same period (Source: Frost &

Sullivan).

Air Conditioner Colour TV Set RefrigeratorWashing Machine

000 households

Occupants per Household

China 53.0 96.8 77.0 73.2 431,972.8 3.1 Japan 89.6 96.5 98.9 99.6 52,494.1 2.4 South Korea 53.5 98.5 99.7 99.0 17,934.7 2.8 USA 65.3 98.7 99.9 84.5 121,084.0 2.6 France 8.5 98.0 99.8 95.6 28,439.1 2.2 Germany 7.2 96.4 99.4 96.0 40,639.9 2.0 United Kingdom 9.3 99.1 99.6 97.3 27,264.2 2.3

9.6%

41%

53%

0%

10%

20%

30%

40%

50%

60%

100

150

200

250

300

350

400

450

500

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

201

4E

201

6E

China Urban Households (mn)

China Households (mn)

% of household possession of Air Conditioner

22%

26%

29%

32%

35%

20%

22%

24%

26%

28%

30%

32%

34%

36%

2012 2013 2014E 2015E 2016E

Water purifier urban household penetration rate



Exhibit 13: Use of purified water to grow at 34% CAGR in

2012-2017E for commercial premises as per Frost &

Sullivan Drinking water consumption at commercial premises in

terms of volume (billion liter)

Exhibit 14: Use of purified water to grow at 23% CAGR in

2012-2017E for residential premises as per Frost &

Sullivan Drinking water consumption at residential premises in terms

of volume (million household)

Source: Frost & Sullivan.


Exhibit 15: Water purifier market size to reach Rmb125bn

in 2017 Market size categorized by end user’s premises

Exhibit 16: Sales model to still dominate as the market

size grows Market size categorized by business model



3) Highly fragmented market suggests opportunity for leading firms

As the water purification market is highly fragmented and at an early stage, it provides a

great opportunity for leading firms to grow.

249.2208.9

138.5

43.883.6

104.6

4.3 21.493.1

0

50

100

150

200

250

300

350

400

2008 2012 2017E

Water processed by purifiers Barreled water Boiled tap water

CAGR34%

4.6%

-7.9%

262.5 251.9198.1

21.4 55.9

85.3

18.1

50.5141.7

0

50

100

150

200

250

300

350

400

450

500

2008 2012 2017E

Others Water processed by purifiers

Barreled water Boiled tap water

CAGR

23%

8.8%

-4.7%

13.7 18.2 23.7 29.4 35.144.1

55.467.6

80.794.5

1.72.6

45.5

7.4

10.3

14.1

18.8

24.3

30.6

0

20

40

60

80

100

120

140

20

08

20

09

20

10

20

11

20

12

20

13E

20

14E

20

15E

20

16E

20

17E

Water purifier market size by end user (Rmb bn)

Commercial

Residential2013-2017E total

market size

CAGR 23.1%

14.3 19.4 25.6 32.3 39.3 50.2

64.2 79.6

96.7

115.1

1.1 1.5

2.0 2.6

3.2

4.2

5.4

6.8

8.3

10.1

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

20

08

20

09

20

10

20

11

20

12

20

13E

20

14E

20

15E

20

16E

20

17E

Water purifier market size by business model (Rmb bn)

Lease and Service

model

Sales model

2013-2017E total

market size

CAGR 23.1%



Exhibit 17: Overall market: Top 10 players only comprise

10% market share Overall water purifier market in terms of 2012 retail sales

Exhibit 18: Commercial market: Top 10 players only

comprise 15% market share Commercial water purifier market, 2012 retail sales



Exhibit 19: Ozner ranked 3rd with 1.1% share in 2012

Top ten water purifier companies ranked by 2012 retail sales

Exhibit 20: Ozner ranked No.1 in the commercial segmentTop ten water purifier companies in the commercial segment

by 2012 retail sales



Air sanitization market

Air sanitization systems are widely adopted in industries where small airborne particles can

cause material adverse effects. Air sanitization projects are generally under EPC

arrangements (Engineering, procurement and construction).

Besides industry use, household demand for air sanitization is also rising with increasing

public concerns due to the worsening air quality in China.

Top 10 players

10%

Other

players

90%

Top 10 players

15%

Other

players

85%

RANK Company

2012 Retail sales

(Rmb mn)

2012 Market share

1 Midea Group 935 2.2%2 Qinyuan Group 700 1.6%3 Ozner Group 460 1.1%

4Shenzhen Litree Purifying Technology Co., Ltd.

395 0.9%

5Shenzhen Angel Drinking Water Equipment Co., Ltd.

375 0.9%

6 Hefei GeMei Group Co., Ltd. 320 0.8%7 Pentair Ltd. 275 0.6%8 Ecowater Systems Ltd. 265 0.6%

9A. O. Smith (Shanghai) Water Treatment Products Co., Ltd.

260 0.6%

10 Canature Group Co., Ltd. 240 0.6%Top 10 players 4,225.0 10.0%Other players 38,226.3

Total 42,451.3 100.0%

Rank Company

2012 Retail sales

(Rmb mn)

2012 Market Share

Business Model Type

1 Ozner Group 402 5.4%Lease and

service2 Midea Group 140 1.9% Sales 3 Qinyuan Group 105 1.4% Sales

4Hangzhou Juxing Environment Technology Co. Ltd.

100 1.4%Lease and

service

5Shenzhen Angel Drinking Water Equipment Co., Ltd.

78 1.1% Sales

6 Hefei GeMei Group Co., Ltd. 65 0.9% Sales

7Shenzhen Litree Purifying Technology Co., Ltd.

59 0.8% Sales

8Nanjing Aquacup Water Purification Technology Co., Ltd.

43 0.6% Sales

9 Pentair Ltd. 41 0.6% Sales 10 Ecowater Systems Ltd. 40 0.5% Sales

Top 10 players 1,073.0 14.6%Other players 6,309.8

Total 7,382.8 100.0%



The total construction settlement income of air sanitization engineering increased at 17.7%

CAGR in 2008-2012, and is expected to reach Rmb55.4bn in 2017 according to Frost &

Sullivan.

Exhibit 21: Air sanitization engineering is expected to grow at 15.3% CAGR to reach

Rmb55.4bn in 2017


Poised to gain share in a fragmented market; business model,

pricing and technology key strengths

Why adopt a lease and service business model

The company differentiates itself by adopting a lease and service model rather than directly

selling products like most other manufacturers. This model allows consumers to

experience the products and services at a lower entry price, while providing Ozner a

recurring cash flow and helping secure long-term relationships with end users.

Ozner started water purifier leasing business by catering to the commercial market. We

believe this may have been to avoid direct competition in household retail market with

barreled water machine giants like Gree, Haier, Midea, and Angel, who have mature

distribution systems and long term retail channel relationships.

Distinct strategic positioning and an effective product helped Ozner open up the market.

From a cost perspective, Ozner’s water purification services can help a factory of 300

employees save up to 60% and a family of three save approximately 30%, respectively, of

total drinking water costs over a five-year period compared to drinking barreled water,

according to Frost & Sullivan. As a result, Ozner became the No.1 player in the commercial

segment with 5.4% share in 2012. The success in commercial segment has created a strong

base for household market development, in our view.

Ozner’s business model also enhances after-sales service, which is a key determinant of

user experience. The company uses its own local service teams for installation and

maintenance services but relies on distributors to penetrate cities and consumers. Under

the lease and service model, Ozner maintains regular and close contact with end users,

ensures service quality, strengthens customer relationship and obtains valuable

information like water quality, usage rate, household habits etc.

14.1 16.6 19.222.7

27.131.3

36.141.6

4855.4

0

10

20

30

40

50

60

20

08

20

09

20

10

20

11

20

12

20

13E

20

14E

20

15E

20

16E

20

17E

Market size of air sanitization engineering (Rmb bn)

2013-2017E total

market size

CAGR 15.3%



Why this distinct business model is likely to help Ozner gain market share

We believe Ozner’s lease and service model creates considerable value for both end users

and business partners like distributors. With Ozner the only firm that has adopted this

business model among the top 10 firms in China, it could become a top choice for users

and distributors and gain market shares as a result, in our view.

For distributors:

Third party distributors are important strategic partners of Ozner, especially at the initial

stage of business development, for both end user sourcing and operating cash flow

generation. The company has built an extensive and well-managed third party distribution

network, and is growing its distributors rapidly, from 246/468 principal/sub distributors in

2011 to 439/1263 as of end-2013. Ozner’s model is attractive to distributors for the following

reasons:

A recurring revenue stream in the form of annual service fees;

No need to purchase or maintain inventory – lower initial capital investment;

Focus solely on sourcing and retain end users, as Ozner provides installation and

further services;

Protecting distributors’ interests by preventing price cannibalism and maintaining

pricing discipline among distributors through Ozner’s distributor management system;

Higher margin for distributors compared to direct sales appliance brands.

We believe companies that currently operate under the conventional sales model are not

incentivized to change to the rental model, as it would require significant restructuring of

their operational processes and established sale channels.

For end users:

End users subscribe to service by paying annual fee with one year lease term at a time:

Lower initial investment to try out water purifiers;

Flexibility in cost management compared with purchasing water purifying machines;

Better user experiences - on-going service with stable quality:

Ozner maintains local service teams (525 technicians across the 125 cities in which

it operates).

Installation and replacement of filter core annually with no extra charge.

Ozner’s commitment to complete repair services within 24 hours of the receipt of a

service call.

Lower waste water due to its advanced proprietary technologies.

Ozner plans to increase its marketing investments with 5% of IPO proceeds ear-marked for

sales and marketing expenditure. We believe this should help improve Ozner’s brand

image, a positive for Ozner’s expansion.

Proprietary technologies produce high-quality purified water

Ozner manufactures high end water purifiers with its proprietary Ozone technology (100

patents) that provides better quality drinking water compared to domestic peers. According

to the company, its core water purification APO+ process (enhanced Absorption,

Purification and Ozone sterilization) significantly improved the efficiency of the prevailing

reverse osmosis technology for water purification. The self-developed technologies

incorporated in the second generation water purifying machines could help achieve a

purified water recovery ratio of 95% or above, as compared to 20% to 50% recovery ratio



achieved by other advanced models of water purifying machines using reverse osmosis

technology, according to Frost & Sullivan.

The company’s expenditure on Research & Development was c.Rmb2.3/4.2/5.7mn,

comprising 4.0%/2.1%/1.8% revenue in 2011/2012/2013. Ozner’s Chief Technology Officer,

Mr. Zhu Mingwei has nearly 20 years of experience in technology development and

operation management, and leads a team of 36 researchers.

Exhibit 22: Ozner stands out among competitors for its advanced technology and lease

and service model

Source: Company data, Frost & Sullivan (market share), Taobao.com/Tmall.com (price range, as of May 2014).

Reasonable pricing likely to facilitate market expansion

The price of a household water purifier varies from a few hundred RMB to over Rmb10,000.

In this section, we assess the affordability/economic incentive for quality conscious

consumers.

We assess the cost of buying branded barreled water for daily use (assuming 3 occupants

per household) with a three scenario analysis. Households that pay attention to water

quality purchase barreled water regularly for drinking, cooking and even food or face

washing.

According to yhd.com (a popular packaged food and FMCG e-tailer), the price of barreled

pure water ranges from Rmb5.8 to Rmb13.8 (per 4 litres) as of May 2014. Our sample of

brands and water does not include premium/mineral waters that may not be consumed

daily for mass market consumers. As a result, we set price scenarios at Rmb6/10/15 per 4L

barreled water.

Assuming 1/1.5/3 barrels of 4L water per week, a household’s annual water cost ranges

between Rmb312-2340 depending on the brand purchased. We find that Ozner’s water

purifier’s total cost in 5/10 years is similar to Scenario 2 with medium price (Rmb10 per 4L

barreled water) and usage (286ml per person per day). We believe this reasonable pricing

should encourage barreled water users to shift to water purifiers and potentially open up

the market in our view.

2012 Market share

Business model

Technology Technology level

Price range (Rmb)

Midea Group 2.2% Sales Ultra-filtration Membrane II Medium 2399-3498

Qinyuan Group 1.6% Sales PVC Ultra-filtration Membrane Medium 1480-9880

Ozner Group 1.1%Lease and service

Reverse Osmosis (RO) Membrane/Ozone

Advanced 1260-1750

Shenzhen Litree Purifying Technology Co., Ltd.

0.9% Sales Ultra-filtration Membrane II Medium 1299-2659

Shenzhen Angel Drinking Water Equipment Co., Ltd.

0.9% Sales Ultra-filtration Membrane Medium 1680-4998

Hefei GeMei Group Co., Ltd. 0.8% Sales Ultra-filtration Membrane Medium 1300-2780

Pentair Ltd. 0.6% Sales Ultra-filtration / RO Membrane Advanced 1280-6800

Ecowater Systems Ltd. 0.6% Sales Ultra-filtration / RO Membrane Advanced 3588-49148

A. O. Smith (Shanghai) Water Treatment Products Co., Ltd.

0.6% Sales Ultra-filtration / RO Membrane Advanced

Canature Group Co., Ltd. 0.6% Sales Ultra-filtration Membrane Medium 5500-9000



Our water usage scenarios imply only 190/286/571ml per person per day. We believe this

could only meet limited needs of drinking and cooking, while water purifiers provide

unlimited fresh water that could be an added factor in determining consumers’ purchase

decisions. Hence, we expect Ozner to gain market share on price and technology

advantages.

Exhibit 23: Assuming 1/1.5/3 barrels of 4L water per week, a household’s annual water cost ranges between Rmb312-

2340 depending on the brand purchased

Source: Gao Hua Securities Research (cost scenario of barreled water), yhd.com (barreled water prices).Note: Prices as of May 2014.

Exhibit 24: Water purifiers are cost efficient for households that value water quality (Rmb)

Source: Company data, Gao Hua Securities Research.

Assuming small appliances firms enter the water purifier business at their current margin

with the same level of COGS (for advanced purifiers) as Ozner (Rmb1600-2000 per unit),

Ozner’s retail price is much lower than small appliance peers’ implied retail prices.

Scenario 1 Scenario 2 Scenario 3

6 10 15

1 1.5 3

190 286 571

52 78 156

312 780 2340

Price range per 4L barreled water (Rmb)

Weekly usage (barrels)

Annual usage (barrels)

Annual cost (Rmb)

Average usage (ml) per person per dayBrand Type of water Volume

Price on yhd.com (Rmb)

Price per 4L

Ice Dew Pure water 3.8L 5.5 5.8

Quanyangquan Pure water 3.0L 6.0 8.0

Nongfu SpringNatural drinking

water4.0L 9.7 9.7

Watson's Distilled water 4.5L 13.3 11.8

Watson's Pure water 4.5L 15.5 13.8

Water purifierOzner Scenario 1 Scenario 2 Scenario 3

Total cost in 5 years 4400 1560 3900 11700Total cost in 10 years 7800 3120 7800 23400

Barreled water



Exhibit 25: We expect Ozner to gain market share from competitors given its price

advantage

Note: We assume an average distributor and retailer margin of 15%. Prices in Rmb.


How far can a leader go? A study of the No.1 firm in Korea, Coway

Korea has a mature, oligopolistic water purifier market with the top 3 companies

accounting for 70.8% market share in terms of retail sales in 2012, according to Coway

(021240.KS, Not Covered) Out of them, Coway is the No.1 company with a 50.1% market

share as of 2012. Since launching water purifier rental service in 1998, it has grown rapidly

and has been renting around 450-600k additional units per year in the past six years.

Coway has a similar rental and service business model to Ozner’s, and receives monthly

service fees. It trained 13663 women (called CODY or Coway Lady, by 2012) on required

professional services; these women visit customers every two months. Based on this

network as well as regular contacts, Coway expanded its environmental household

appliance offerings to bidets, air purifiers and water softeners, and even started renting

mattress in Oct 2011. Access to households and customer loyalty have opened a number of

business opportunities for Coway and strengthened its market position.

Coway’s development showcases the future consolidation potential in the Chinese water

purification market and other household good businesses, which we believe is a positive

indicator for leading firms like Ozner.

Exhibit 26: Coway has been renting around 450-600k

additional units per year in the past six years

Exhibit 27: Coway’s rental cancellation has been lower

than 1%



Company 2012 Gross margin

Joyoung 35.0% 3409 4262

Robam 53.6% 4771 5964

Canature 44.4% 3984 4980

Supor 29.1% 3124 3905

Xiamen Comfort

16.9% 2666 3332

Average 35.8% 3450 4313

1260 1750

Implied retail price range

Ozner first year retail leasing fee

464

548516

610 609

538

0

100

200

300

400

500

600

700

2008 2009 2010 2011 2012 2013

New rental account acquisition of Water Purifier

(1000 units)

0.82%

0.85%

0.92%

0.84%

0.76%

0.78%

0.80%

0.82%

0.84%

0.86%

0.88%

0.90%

0.92%

0.94%

2010 2011 2012 2013

Coway rental cancellation trend (per month)



Exhibit 28: Coway shares have shown strength

Source: Datastream, Bloomberg consensus.

Financials: 30% revenue CAGR and 31% earnings CAGR by 2016E

We expect revenue CAGR of 30% and non-GAAP earnings CAGR of 31% (excluding option

expenses) in 2014E-2016E. We expect increase in the number of newly installed water

purifiers to be the key driver of revenue growth. We expect newly installed models in 2014-

2016 to grow at 22% CAGR and the number of cumulative models to reach 1163k in 2016.

We note that its revenue is recognized in terms of the proportional rental income, which

means contract sales are partly deferred to the next year. With the first year fees higher

than subsequent years and COGS allocated evenly over the machine’s lifetime, gross

margin of water purifiers will trend down as the proportion of new models out of total

models declines. This business model requires heavy initial investment by Ozner. Despite

this, the company has a stable recurring cash flow that could accumulate to considerable

scale as the number of total installed models increases.

With the company’s main focus on the development of household business, we expect

corporate water purification revenue to grow at 26% CAGR in 2013-2016E, lower than the

total corporate market CAGR of 33% according to Frost & Sullivan. We expect the air

sanitization business to continue to operate at the current scale and capacity levels (around

14 contracts per year according to our estimate).

3.5

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1/2

/200

7

7/2

/200

7

1/2

/200

8

7/2

/200

8

1/2

/200

9

7/2

/200

9

1/2

/201

0

7/2

/201

0

1/2

/201

1

7/2

/201

1

1/2

/201

2

7/2

/201

2

1/2

/201

3

7/2

/201

3

1/2

/201

4

7/2

/201

4

12-m forward EV/GCI

12m fwd EV/GCI

AVG

+1SD

-1SD

Share price (KRW)

Average EV/GCI at 1.7X

+1SD EV/GCI at 2.2X

-1SD EV/GCI at 1.3X

Private Equity firm MBK

Partners took over 28.4%

shares from the parent (a

Korea conglomerate in debt

trouble then) on 16 Aug

2012 with 33% premium to

prior day's close



Exhibit 29: Ozner’s contract sales are recognized proportionally in the current year Ozner water business revenue recognition (Rmb mn)

Source: Company data (Contract sales and Rental income), Gao Hua Securities Research.

Exhibit 30: Ozner shares considerable recurring revenue with distributors


53.3

123.8 185.3 71.6

120.2

157.0

-

50

100

150

200

250

300

350

400

2011 2012 2013

Contract salesRental income recognized in the Next year

Rental income recognized in Current year

53.3

123.8

185.3

71.6

120.2

-

50

100

150

200

250

300

350

2011 2012 2013

Rental income (recognized revenue in current

year)

Rental income defered from Previous year

Rental income recognized in Current year

2013 2014

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

RMB 900

RMB300

Assuming contract sales of Rmb1200 per model:Revenue in Current YearRevenue Deferred to Next Year

Distributors pay to Ozner(Rmb) First year Subsequent yearsCorporate model

Hub model 5180 2880Other corporate models 1010-2380 400-1090

Household model 1010-1280 400-580

End users pay to distributors(Rmb) First year Subsequent yearsCorporate model

Hub model 6280-7880 3680-4680Other corporate models 1160-3280 1160-1480

Household model 1680 680



Exhibit 31: The business model requires heavy initial investment in exchange for recurring

cash flows in consequent years. Gross margin is higher in the first year. An illustration of cash flow and accounting gross profit of Ozner’s water purification business

Source: Gao Hua Securities Research.

1st Year GPM 87%2nd Year GPM 60%Annual COGS 160

An example of household model cash flow

Accounting gross profit

Initial investment

Annual service fees

-1600

1200

400 400 400 400 400 400 400 400 400

-1600

-800

0

800

1600

2400

3200

Year

1

Year

2

Year

3

Year

4

Year

5

Year

6

Year

7

Year

8

Year

9

Year

10

Product cash flow

Cumulative cash flow

1040

240 240 240 240 240 240 240 240 240

-1600

-800

0

800

1600

2400

3200

Year

1

Year

2

Year

3

Year

4

Year

5

Year

6

Year

7

Year

8

Year

9

Year

10

Accounting gross profit

Cumulative gross profit



Exhibit 32: We expect Ozner’s newly installed water

purifiers (household and corporate) to be

188.5k/230k/282k in 2014E-2016E

Exhibit 33: We expect 30% revenue CAGR in 2014E-2016E

Note: 2012 corporate new models do not include 63k from acquisition of Park Wealth. However, it is included in total corporate models.



Exhibit 34: We expect water purification services

(especially household) business to become the key

contributor of Ozner’s revenue

Exhibit 35: The water purification business has higher

margins compared to the overall business



101 112 95

100 115

132

6 27 59

89 115

150

0

100

200

300

400

500

600

700

800

2011 2012 2013 2014E 2015E 2016E

Total household models Total corporate models

New model - corporate New model - household

0

100

200

300

400

500

600

700

800

900

1,000

2011 2012 2013 2014E 2015E 2016E

Revenue (Rmb mn) and growth

Air sanitization services Water purification - corporate

Water purification - household Water purification - other income

43.9%

31.9%22.0% 19.7% 15.4% 12.0%

4.0%

0.8%

2.1% 2.3%2.5%

2.6%

49.6%

60.0%

61.3%56.8%

56.0%54.9%

2.4%7.3%

14.7%21.2%

26.1% 30.5%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014E 2015E 2016E

Revenue breakdown


household


corporate


other income

Air sanitization

services

56.7%

64.5%67.8% 66.4% 66.5% 66.8%

81.8% 80.5% 78.7%75.3% 73.3% 72.1%

24.7% 30.5%

28.9%30.0%

29.0% 28.0%

-

100

200

300

400

500

600

700

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014E 2015E 2016E

Gross profit (Rmb mn) Consolidated gross margin

GPM of Water purification services GPM of Air sanitization services



Exhibit 36: CROCI likely to decline due to rapid

investment in expansion

Exhibit 37: Heavy capex likely to lift GCI and result in the

decline of CROCI; we expect Sales/GCI and DACF margin

to stabilize over the next few years



Exhibit 38: We expect net income (non-GAAP) to grow at

31% CAGR in 2014E-2016E

Exhibit 39: Relatively high net margin at 30%-40% since

2012



10%

15%

20%

25%

30%

35%

40%

20

11

20

12

20

13

20

14

E

20

15

E

20

16

E

CROCI

Rapid increase in newly installed models

0.5 0.5

0.4

0.3 0.3 0.3

-

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

0.5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2011 2012 2013 2014E 2015E 2016E

Sales/GCI (RHS) DACF/Sales

23

102

153 165

228

320

23

102

153

203

276

348

0

50

100

150

200

250

300

350

400

2011 2012 2013 2014E 2015E 2016E

Net income (Rmb mn)

Net income

Net income (excl. option expense)

10%

15%

20%

25%

30%

35%

40%

45%

2011 2012 2013 2014E 2015E 2016E

Net margins EBIT margin

Option expense



Exhibit 40: Key drivers and financials

Note: 2012 corporate new models include 63k from the acquisition of Park Wealth.


2011 2012 2013 2014E 2015E 2016E

New water purifiers installed (units) 107,000 202,000 154,000 188,500 230,050 281,815Corporate 101,000 175,000 95,000 100,000 115,000 132,250Household 6,000 27,000 59,000 88,500 115,050 149,565

yoy growth Total New Models 89% -24% 22% 22% 23%Corporate 73% -46% 5% 15% 15%Household 350% 119% 50% 30% 30%

Air sanitization Contracts entered into in the fiscal year 16 14 14 14 14 14

Total water purifiers installed (units) 107,000 309,000 463,000 651,500 881,550 1,163,365Corporate 101,000 276,000 371,000 471,000 586,000 718,250Household 6,000 33,000 92,000 180,500 295,550 445,115

yoy growth Total Models 189% 50% 41% 35% 32%Corporate 173% 34% 27% 24% 23%Household 450% 179% 96% 64% 51%

Corporate model Contract sales per 1st year model (Rmb) 900 1,050 1,150 1,250 1,250Rental income from the 2nd year 500 600 600 650 650

Household model Contract sales per 1st year model 1,200 1,200 1,300 1,400 1,450Rental income from the 2nd year 350 350 360 380 400

Market share of water purification business (retail sales) 1.1% 1.2% 1.2% 1.4% 1.5%

Revenue Total revenue (Rmb mn) 102.29 290.40 402.33 528.30 701.59 899.25 Water purification services 57.38 197.79 313.96 424.35 593.41 791.07

Water purification - corporate 50.78 174.29 246.54 299.94 392.75 493.53 Water purification - household 2.50 21.18 58.95 112.05 183.38 274.50 Water purification - other income 4.09 2.32 8.47 12.36 17.28 23.04

Air sanitization services 44.91 92.60 88.37 103.95 108.18 108.18

yoy growth Total revenue yoy growth 184% 39% 31% 33% 28%

water purification services 245% 59% 35% 40% 33%air sanitization services 106% -5% 18% 4% 0%

% of revenue Water purification services 56.1% 68.1% 78.0% 80.3% 84.6% 88.0%

Water purification - corporate 49.6% 60.0% 61.3% 56.8% 56.0% 54.9%Water purification - household 2.4% 7.3% 14.7% 21.2% 26.1% 30.5%Water purification - other income 4.0% 0.8% 2.1% 2.3% 2.5% 2.6%

Air sanitization services 43.9% 31.9% 22.0% 19.7% 15.4% 12.0%

Consolidated gross margin 56.7% 64.5% 67.8% 66.4% 66.5% 66.8%GPM of Water purification services 81.8% 80.5% 78.7% 75.3% 73.3% 72.1%GPM of Air sanitization services 24.7% 30.5% 28.9% 30.0% 29.0% 28.0%

Total operating expense 34.37 65.85 108.16 168.26 203.01 220.54 Total operating expense ratio 33.6% 22.7% 26.9% 31.8% 28.9% 24.5%



Valuation: DCF-based TP of HK$4.3 implies 35% upside potential

We value Ozner using discounted cash flow (DCF) as the primary valuation methodology

due to the following reasons:

Fairly reasonable visibility into cash flow generation as it receives annual service fees

for an installed water purifier over the machine’s lifetime, potentially extending to as

long as 10 years.

Growth phase: It is incurring significant capex investment to manufacture new water

purifiers and build up capacity for expansion. Thus near-term multiple valuation may

not capture future growth and cash flows.

Our 12-month DCF based TP at HK$4.3 assumes 4.2mn total installed water purifiers by

2029. We assume a terminal growth rate of 2.5% and use a weighted-average cost of

capital (WACC) of 10.4% based on the following:

Cost of equity of 11% considering 6.5% equity market premium and 4.5% risk free rate.

Our beta of 1.0X takes into account Ozner’s appliance and water treatment peers (from

Bloomberg).

Cost of debt of 6% with a long-run debt-to-capital ratio of 10%.

Exhibit 41: Process of WACC calculation Exhibit 42: Our valuation is sensitive to DCF assumptions



WACC calculation

Equity component

Equity market premium 6.5%

Risk free rate 4.5%

Beta 1.00 Cost of equity 11.0%

Debt componentCost of debt 6.0%Tax rate 25.0%After-tax cost of debt 4.5%

Long run capital structureEquity 90%Debt 10%

WACC 10.4%

HK$4.28 9.4% 9.9% 10.4% 10.9% 11.4%1.5% 4.8 4.4 4.0 3.7 3.42.0% 4.9 4.5 4.1 3.8 3.52.5% 5.2 4.7 4.3 3.9 3.63.0% 5.4 4.9 4.4 4.1 3.73.5% 5.7 5.1 4.6 4.2 3.9

Terminal growth

rate

WACC



Exhibit 43: Our DCF valuation derives a target price of HK$4.3


Relative valuation challenging due to lack of directly comparable peers

There are no direct comparables for Ozner in China given its specialized industry and

business model (leasing rather than sales). The closest comparables for Ozner are small

appliance brands with a focus on high-growth, and water treatment service providers that

are mostly listed abroad.

This broad group of comparables is trading at 28X CY2014E P/E, 20X CY2015E P/E on

average, broadly in-line with our 12m TP-implied level for Ozner (30X 2014E non-GAAP P/E

and 22X 2015E P/E).

2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E(CNY mn)Sales 102 290 402 528 702 899 1,124 1,359 1,593 1,845 2,026 2,158 2,326 2,494 2,625 2,753 2,912 2,993 3,024EBIT 24 122 165 182 264 380 482 591 674 760 823 851 911 972 1,020 1,065 1,135 1,173 1,184

Tax (6) (22) (31) (31) (47) (70) (99) (133) (172) (195) (213) (223) (241) (260) (276) (292) (315) (329) (338)Depreciation & amortisation 7 33 69 162 242 317 403 493 592 699 777 851 924 988 1,034 1,079 1,119 1,128 1,124Change in net working capital 42 (6) 70 61 47 44 44 31 25 19 14 9 10 9 8 11 9 6 11Capital expenditures & acquisition (185) (284) (447) (663) (811) (754) (863) (911) (992) (1,080) (948) (972) (976) (1,016) (946) (1,073) (1,193) (979) (919)Free cash flow to the firm (118) (158) (175) (289) (306) (83) (33) 72 127 203 452 517 628 693 840 790 755 999 1,061% chg -34% -11% -65% -6% 73% 60% 318% 77% 60% 123% 14% 21% 10% 21% -6% -4% 32% 6%

Discount period 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 14.0 15.0Discount factor 0.91 0.82 0.74 0.67 0.61 0.55 0.50 0.45 0.41 0.37 0.34 0.31 0.28 0.25 0.23PV of cash flows (277) (68) (24) 48 77 112 227 235 259 259 284 242 210 252 242

Sales Growth 183.9% 38.5% 31.3% 32.8% 28.2% 25.0% 20.9% 17.2% 15.8% 9.8% 6.5% 7.8% 7.2% 5.3% 4.9% 5.7% 2.8% 1.0%EBIT Margin 23.1% 41.9% 40.9% 34.5% 37.6% 42.3% 42.9% 43.5% 42.3% 41.2% 40.6% 39.5% 39.2% 39.0% 38.9% 38.7% 39.0% 39.2% 39.2%EBITDA Margin 24.5% 44.2% 44.5% 45.3% 49.5% 53.0% 24.1% 20.6% 15.9% 12.1% 10.0% 7.4% 6.4% 5.4% 4.9% 4.2% 4.2% 4.3% 4.0%Net Margin 22.4% 35.0% 38.0% 31.2% 32.6% 35.6% 35.1% 34.6% 32.5% 31.7% 31.5% 31.0% 31.1% 31.3% 31.6% 31.9% 32.4% 33.0% 33.5%

Capex to sales 180.6% 97.9% 111.2% 125.5% 115.6% 83.8% 76.8% 67.0% 62.3% 58.6% 46.8% 45.0% 42.0% 40.7% 36.0% 39.0% 41.0% 32.7% 30.4%Depreciation as % of Sales 7.0% 11.5% 17.1% 30.6% 34.5% 35.2% 35.8% 36.3% 37.1% 37.9% 38.3% 39.5% 39.7% 39.6% 39.4% 39.2% 38.4% 37.7% 37.2%Change in net working capital as % of sales 41.3% -2.2% 17.4% 11.6% 6.6% 4.9% 3.9% 2.3% 1.6% 1.0% 0.7% 0.4% 0.4% 0.4% 0.3% 0.4% 0.3% 0.2% 0.4%Working capital as % of sales -51.6% -22.8% -25.0% -30.6% -29.7% -28.1% -26.4% -24.1% -22.2% -20.2% -19.0% -18.3% -17.4% -16.6% -16.1% -15.7% -15.2% -15.0% -15.2%CROCI 13.1% 37.2% 27.6% 25.9% 24.2% 23.5% 22.8% 22.1% 21.1% 20.5% 19.5% 18.8% 18.7% 18.7% 18.5% 18.6% 18.9% 18.8% 18.8%

DCF Valuation (CNY mn)Total PV of CFs 2,079Terminal growth rate 2.5%Terminal value 13,860PV of terminal value 3,164

Firm value 5,243Net debt (755)Minority interest 0

Implied value/ Equity value (CNY bn) 6.0Implied value/ Equity value (HKD bn) 7.5

Number of shares 1,751Implied equity value per share (CNY) 3.4Target price (HKD) 4.3



Exhibit 44: Valuation sheet: Comparable universe includes small appliance brands, water treatment service providers

Source: Bloomberg.

Key risks

Industry risks:

Changes in public health and safety laws, rules, regulations and industrial standards

may have a material adverse effect on Ozner’s business, financial condition and results

of operations:

Consumer preferences and industry technology may evolve changing end users view

on the company’s products and business model.

The water purification and air sanitization industries in China may not grow as quickly

as expected if the environmental condition improves or disposable income levels are

worse-than-expected, which could adversely affect the company’s revenue and

business prospects.

Price fluctuation of raw materials: Copper, ABS (Acrylonitrile Butadiene Styrene),

Polyamide and stainless steel are the key raw materials for water purifying machines.

In 2013, these four components accounted for 91% of the total cost of raw materials.

Competition risks:

China’s water purification market has significant potential and growth prospects in our

view. Many international players as well as domestic appliance firms have started

entering this market. With the increase in the number of market participants, Ozner

faces rising competition and potential price wars, which could affect its market share

and profit margin.

Execution risks:

Ozner may face difficulties in maintaining its existing end user base and in developing

new end users for its water purification business as rapid expansion requires a

corresponding increase in service levels/engineer team strength in order to maintain

response speed in the cities in which Ozner operates as well as cover the new cities it

enters into. Failure to maintain the quality of products and services may cause the

company to lose end users and market share.

The company relies on its third party distributors to source end users for water

purification business, especially for the corporate business.

Country Ticker Name Mkt Cap As of Trading PEG18-Jul Ccy CY14E CY15E 14E P/E CY14E CY15E CY14E CY15E CY14E CY15E

US$m L.C. (X) (X) 14-16 CAGR (X) (X) (X) (X) (X) (X)

CHINA 002032.SZ ZHEJIANG SUPOR-A 1,438 14.08 CNY 12.9 11.0 0.6 9.6 8.3 2.3 2.0 18% 19%CHINA 002242.SZ JOYOUNG CO -A 1,108 9.04 CNY 12.1 9.5 n.a 8.5 7.3 2.2 2.0 18% 20%CHINA 002508.SZ HANGZHOU ROBAM-A 1,396 27.08 CNY 16.0 12.2 0.6 13.6 10.5 3.6 2.9 21% 22%CHINA 002614.SZ XIAMEN COMFORT-A 1,010 17.41 CNY 27.6 19.6 n.a 21.0 15.5 n.a. n.a. 10% 12%CHINA 002035.SZ VATTI CORP LTD-A 601 10.40 CNY 12.0 9.5 0.4 8.5 6.7 2.2 1.8 21% 22%Small appliances Median 12.9 11.0 0.6 9.6 8.3 2.3 2.0 18% 20%

Average 16.1 12.4 0.5 12.3 9.7 2.6 2.2 18% 19%BRITAIN PNR PENTAIR PLC 13,854 71.57 USD 18.4 15.1 1.0 12.1 10.7 2.4 2.3 12% 15%SOUTH KOREA 021240.KS COWAY CO LTD 7,004 93,500.00 KRW 24.9 22.3 2.1 13.0 12.0 6.8 5.8 28% 27%UNITED STATES AOS SMITH (A.O.)CORP 4,255 46.59 USD 19.6 17.3 1.5 10.3 8.2 3.0 2.7 14% 15%JAPAN 6370.T KURITA WATER IND 2,862 2,434.00 JPY 26.4 23.3 3.1 7.3 6.4 1.3 1.3 5% 6%SINGAPORE HYF HYFLUX LTD 790 1.19 SGD 91.2 30.4 0.8 17.6 15.7 1.1 1.1 10% 4%JAPAN 6788.T NIHON TRIM CO 312 3,650.00 JPY 14.6 13.5 1.0 9.3 5.4 1.9 1.7 14% 14%CHINA 300272.SZ SHANGHAI CANAT-A 712 17.30 CNY 64.1 52.4 n.a 44.6 37.1 n.a. n.a. n.a. n.a.Water treatment Median 24.9 22.3 1.3 12.1 10.7 2.1 2.0 13% 14%

Average 37.0 24.9 1.6 16.3 13.6 2.8 2.5 14% 13%Overall Median 19.0 16.2 1.0 11.2 9.4 2.3 2.0 14% 15%

Average 28.3 19.7 1.2 14.6 12.0 2.7 2.4 16% 16%CHINA 2014.HK OZNER 927 3.41 HKD 22.7 16.7 0.7 16.1 11.8 3.1 2.7 14% 11%

P/E P/BEV/EBITDA ROE



The lease and service business model is capital intensive, especially in the early stages

of business development. As a result, failure to obtain sufficient capital could affect its

ability to manage growth.

The company plans to expand its manufacturing capacity. Return on investment/assets

could be affected if its marketing and sales ability does not keep pace with its

production level.

Ozner receives higher service fee in the first year but incurs the same level of COGS

during the water purifiers’ lifetime. If the company slows down its new model

installation, and as the number of total model grows, overall gross margin could show

a declining trend. But we estimate the decline to be limited (Exhibit 28).

Appendix

Exhibit 45: IPO valuation and share issue


Exhibit 46: Post-IPO shareholding structure


IPO Price (HK$) 2.7Implied 2014 P/E, non-GAAP 18.6Implied 2014 P/E, GAAP 23.0IPO valuation (HK$ bn) 4.7IPO valuation (Rmb bn) 3.8

Shares issued (mn) 422.0Over-allotment (15%) 63.3Total shares issued 485.3Total common shares 1751.3

Proceeds (HK$ mn) 1,310.3Proceeds (Rmb mn) 1,048.2

No. of sharesPost-IPO Shareholding

Baida Holdings Limited 341,820,000 19.52%Lion Rise Holdings Limited 54,058,200 3.09%Glorious Shine Holdings Limited 50,640,000 2.89%Baoye International Limited 69,883,200 3.99%Giant Century International Limited 41,778,000 2.39%

SAIF Partners SAIF Partners IV L.P. 334,857,000 19.12%Ares Ares FW Holdings, L.P . 233,956,800 13.36%

Goldman Sachs Watercube Holdings, L.L.C. 139,006,800 7.94%114,869,000 6.56%370,431,000 21.15%

1,751,300,000 100%

Mr. Xiao (25.5%)

Mr. Wang (6.38%)

OZ Cap (Cornerstone investor)Other public shareholders

Total

Shareholder



Exhibit 47: Planned use of proceeds


Manufacturing

purifying

machines,

50%Manufacturing

facilities, 20%

Loan

repayment,

15%

Marketing &

sales, 5%

Working

capital &

general

purposes,

10%



Disclosure Appendix

Reg AC

I, Weibo Hu, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or

companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific

recommendations or views expressed in this report.

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Disclosures

Coverage group(s) of stocks by primary analyst(s)

Weibo Hu: Asia Pacific Media, Hong Kong/China Consumer. Joshua Lu: Asia Pacific Consumer and Retail, Asia Pacific Media, Hong Kong/China

Consumer.

Asia Pacific Consumer and Retail: Ace Hardware Indonesia, Amorepacific, Biostime International Holdings Limited, China Foods, China Modern Dairy

Holdings, China Resources Enterprise, China Yurun Food Group, CJ CheilJedang, E-Mart, Greatview Aseptic Packaging Company, GS Retail Co.,

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Mengniu Dairy, Mitra Adiperkasa, Orion, PT Gudang Garam Tbk, PT Indofood CBP Sukses Makmur, PT Indofood Sukses Makmur Tbk, PT Kalbe

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Islands) Holdings, Tsingtao Brewery (A), Tsingtao Brewery (H), Uni-President China Holdings Ltd., Want Want China Holdings, Yue Yuen Industrial.

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Dish TV India, Info Edge India Ltd, Jumei International Holding Limited, Just Dial Ltd, Makemytrip Ltd, NAVER Corporation, NCSOFT, New Oriental

Education & Technology Group Inc. (ADR), Nord Anglia Education, Inc., Qihoo 360 Technology Co. Ltd., Qunar.com, SINA Corporation, Sohu.com,

SouFun Holdings Limited, Sun TV Network, TAL Education Group, Tarena International, Inc., Television Broadcasts, Tencent Holdings, Vipshop

Holdings Limited, Weibo Corporation, Xueda Education Group, Youku Tudou Inc., Zee Entertainment Enterprises.

Hong Kong/China Consumer: Anta Sports Products, Belle International Holdings, Better Life Commercial Chain Share Co., Bosideng International

Holdings, Chow Sang Sang Holdings International Ltd., Chow Tai Fook Jewellery Group, Daphne International Holdings, Esprit Holdings, Fujian New

Hua Du Supercenter Co., Golden Eagle Retail Group, Gome Electrical Appliances Holding, Hengdeli Holdings Ltd., Intime Retail (Group) Company

Limited, Lao Feng Xiang Co., Li & Fung, Li Ning Company, Lifestyle International Holdings, Luk Fook Holdings International Ltd., Maoye International

Holdings, Ozner Water International Holding Limited, Sa Sa International Holdings Limited, Samsonite International SA, Suning Commerce Group Co

Ltd., Yonghui Superstores, Zhejiang Ming Jewelry Co., Zhongbai Holdings Group Co..

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The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies

covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.

Goldman Sachs has received compensation for investment banking services in the past 12 months: Ozner Water International Holding Limited

(HK$3.19)

Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Ozner Water International

Holding Limited (HK$3.19)

Goldman Sachs had an investment banking services client relationship during the past 12 months with: Ozner Water International Holding Limited

(HK$3.19)

Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: Ozner Water International Holding Limited

(HK$3.19)

A director and/or employee of Goldman Sachs is a director: Ozner Water International Holding Limited (HK$3.19)

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information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

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