20181224-高盛-China_Consumer_Durables__Midea_s_planned_acquisition_of_Little_Swan_approved_by_both_shareholder_meetings_6页_383kb

China Consumer Durables: Midea's Acquisition of Little Swan

Core Content Summary

Midea Group and Wuxi Little Swan have both approved the proposed acquisition of Little Swan by Midea through their Extraordinary General Meetings (EGMs) on December 21. The transaction is still pending approval from the China Securities Regulatory Commission (CSRC). If approved, Little Swan will become 100% owned by Midea, currently holding 52.67% of its shares, and will be delisted from the Shenzhen Stock Exchange.

Transaction Details

Pricing

Midea plans to issue new shares to acquire the remaining A/B shares of Little Swan. The share price for the new shares was set at Rmb42.04, based on the average share price of the preceding 20 trading days before Midea's share trading suspension on September 10.

• A-shares: Proposed at Rmb50.91, representing a 10% premium to the average share price.
• B-shares: Proposed at Rmb42.07, a 30% premium.

The conversion ratio is 1:1.2110 for A-shares and 1:1.0007 for B-shares. To acquire the remaining shares, Midea would need to issue 342,130,784 new shares, which is 5% of its total outstanding shares.

Alternative Cash Compensation Offer

For shareholders who oppose the share issuance offer, Midea has proposed a cash compensation offer at Rmb36.27 for A-shares, Rmb41.85 for B-shares, and Rmb28.29 for other shares. These prices represent a 10% discount to the share prices on September 7.

Dividend Arrangements

• Midea: Plans to increase its 2018 dividend payout ratio to above 45.71%, which was in 2017.
• Little Swan: Announced a special cash dividend of Rmb2.53 billion (Rmb4 per share) if the transaction is approved by CSRC.

Strategic Implications

The acquisition is seen as strategically beneficial for Midea, aligning its premiumization and overseas expansion goals. It could help unify the brand strategies of Midea and Little Swan, particularly with the Beverly and COLMO brands, and enhance competitiveness in the premium market and overseas.

• Premium Segment: Midea's COLMO brand may conflict with Little Swan's Beverly brand, but the acquisition could resolve this.
• Overseas Market: Midea and Little Swan both aim to expand internationally, and the acquisition would allow for a more cohesive brand strategy.

Investment Ratings and Price Targets

• Midea: Buy rated with a 12-month target price of Rmb50.0. This does not factor in the acquisition.
• Little Swan (A): Neutral rated with a 12-month target price of Rmb47.0. The target price is based on a 14X multiple on 2021E EPS, discounted using a 9% cost of equity.

Key Risks

For Midea

• Property market slowdown affecting AC sales
• Rising material costs impacting product margins
• Execution risk of premiumization strategy
• Increased competition in the low-to-mid end segment
• Failure to integrate KUKA and realize synergies

For Little Swan (A)

• Further property tightening policies could hinder growth
• Execution risk of premiumization strategy
• Rising competition in the low-to-mid end segment
• Rising commodity prices

Upside Risks for Little Swan (A)

• Better-than-expected premiumization strategy
• Rmb depreciation boosting export revenue, margins, and FX gains

Regulatory and Disclosure Information

• Goldman Sachs' Ownership: Owns 1% or more of Little Swan A and B shares.
• Investment Banking Relationships: Goldman Sachs expects to receive or seek compensation for investment banking services for Little Swan A, B, and Midea.
• Analyst Conflicts: Goldman Sachs policy prohibits analysts and their households from owning securities in their coverage areas.
• Ratings and Coverage Groups: The report includes detailed definitions of Buy, Neutral, Sell ratings and coverage groups, as well as the distribution of ratings across the Goldman Sachs coverage universe.

Additional Disclosures

The report contains various jurisdiction-specific disclosures, including:

• Australia: Research is for wholesale clients only.
• Brazil: Disclosure information is available at the provided URL.
• Canada: Goldman Sachs Canada Inc. is responsible for the report.
• Hong Kong, India, Japan, Korea, New Zealand, Singapore, UK, EU: Each has specific regulatory and distribution requirements.
• Global Product Distribution: Goldman Sachs distributes research through various entities globally, including Goldman Sachs International.

Conclusion

The proposed acquisition of Little Swan by Midea has received shareholder approval and is pending CSRC approval. It is viewed as a strategic move to align brand strategies, enhance market positioning, and support international expansion. The investment ratings and price targets reflect current market views and do not account for the transaction's impact. Key risks include market conditions, execution challenges, and integration issues.