20200902-招银国际-美的集团-000333.SZ-Outperformer_during_sector_turnaround_8页_1mb

Midea Group (000333 CH) Company Update Summary

Core Content Overview

Midea Group, a leading player in the China home appliance sector, demonstrated resilience in the second quarter of 2020 (2Q20), with its sales and net profit exceeding expectations. The firm has maintained a BUY rating and increased its target price (TP) to RMB 86.57, reflecting a 21% upside from the current price of RMB 71.70. This adjustment is based on a revised 20x FY21E P/E multiple, up from 17x FY20E, and is supported by a more favorable outlook for the second half of 2020 (2H20E) due to improved export orders and a less promotional environment.

Main Points

• Performance in 1H20E: Midea's sales and net profit declined by 10% / 8% YoY to RMB 136.1bn / 13.9bn, slightly beating Bloomberg's estimate by 2% / 9%. The decline in gross profit margin was attributed to changes in accounting standards and the relocation of installation fees to COGS.

• Sector Turnaround: Midea showed a significant recovery in 2Q20, with a 3% YoY sales growth, reversing the 23% drop in 1Q20. The AC and fridge segments performed well, with sales growth accelerating to 8% / 15%, while washing machines and small appliances showed narrowing declines.

• Domestic Recovery: The price war in the domestic market reversed, with AC ASP increasing due to Midea and Haier shifting focus to profitability. Favorable weather and new energy-saving standards contributed to higher ASP trends.

• Overseas Recovery: Midea's overseas sales growth rebounded to 15% YoY in Jul-Aug 2020, better than the initial guidance of 0%. The firm expects stable gross profit margins due to premium product sales and cost reductions.

• Guidance for FY20E: Midea is expected to have a flattish sales and net profit growth in FY20E, as it gains market share in both domestic and overseas markets, despite challenges from KUKA.

• Earnings Revision: CMBIS revised its earnings estimates for FY20E and FY21E, reflecting better export performance and weaker KUKA results. The firm's net profit and EPS are expected to grow, with a 2.2% improvement in diluted EPS compared to consensus estimates.

• Valuation: Midea's current valuation is 17x 21E P/E, lower than the average of 22x for China peers, but the PEG ratio is 1.9x, compared to 2.1x for peers. The TP of RMB 86.57 is based on a 20x FY21E P/E multiple, indicating potential re-rating.

Key Information

• Target Price: RMB 86.57 (up from RMB 72.80)
• Current Price: RMB 71.70
• Earnings Summary:
  • Revenue (FY20E): RMB 276,301 million
  • Net profit (FY20E): RMB 23,866 million
  • Diluted EPS (FY20E): RMB 3.493
• Gross Profit Margin: 25.6% in FY20E, down from 28.5% in FY18A
• EBIT Margin: 10.0% in FY20E, up from 9.9% in FY18A
• Net Profit Margin: 8.6% in FY20E, up from 8.7% in FY18A
• Shareholding Structure:
  • Midea Holding: 31.56%
  • Free float: 45.26%
• Stock Performance:
  • 1-month return: -1.7%
  • 3-month return: 19.5%
  • 6-month return: 33.0%
  • 12-month return: 33.6%

Peer Comparison

Financial Assumptions

• Sales Growth by Segment:
  • Heating, Ventilation & Air-Con.: 9.0%
  • Consumer Electronics: 14.0%
  • Robot and Automation System: 7.0%
  • Others: 12.0%
• Sales Growth by Region:
  • Domestic: 10.0%
  • Overseas: 12.5%
• Operating Expenses Breakdown:
  • S&D (ex-staff costs): 4.3%
  • Admin costs: 1.2%
  • R&D: 3.6%
  • Labor costs: 5.7%
• Gross Profit Margins by Segment:
  • Heating, Ventilation & Air-Con.: 25.3%
  • Consumer Electronics: 31.8%
  • Robot and Automation System: 19.5%
  • Others: 10.8%

Conclusion

Midea Group is positioned to benefit from a sector turnaround, with strong performance in AC and fridge segments and a recovery in overseas sales. The firm's ability to manage costs and focus on profitability is a key strength, and the upward revision in target price reflects confidence in its future growth potential. Despite challenges from KUKA, Midea is expected to maintain a competitive edge in the home appliance market, supported by its strategic focus and operational efficiency.