2Q22 results remained resilient despite the challenging environment
- Midea’s 2Q22 results indicate that it continued to deliver solid results despite the challenging environment.
- Despite concerns about the impact of weaker property sales, Midea’s sales are expected to remain stable because of its growing toB business and overseas expansion.
- We revised up our net profit forecasts for 2022F–2024F after factoring in higher profitability assumptions (a result of better control of expenses).
- We reiterate our ADD rating with a higher target price of Rmb76.0, based on 18x 2022 P/E. Our target P/E multiple is higher than the mean of 16x, but we believe the Company’s track record justifies a valuation premium.
Recap of 2Q22 results
Midea reported its 1H22 results, with revenue and net profit of Rmb182.7bn and Rmb16.0bn, respectively, up 5.1% and 6.6%, which implies that 2Q21 revenue and net profit yoy growth of 1.0% and 3.2% were slower than 10% and 11% yoy, respectively, in 1Q22. However, given the impact of COVID-19 control measures and increasing macro uncertainties, we believe that Midea’s 2Q results were decent. Midea had a gross profit margin of 23.12% in 1H22, down slightly from 23.23% in 1H21. Midea achieved a gross profit of 24.05% in 2Q22, up 0.62ppt, and improving from 22.2% in 1Q22. The improved profitability of HVAC was one of the reasons for the pick-up in the gross profit margin. In terms of yoy top-line growth, the robotics and HVAC segments outperformed, while consumer appliances reported slower-than-average yoy top-line growth in 1H22. Midea achieved a net profit margin of 8.7% in 1H22, improving from 8.0% in 2H21 and 8.6% in 1H21. Midea managed its SG&A expenses to minimize the impact of the drop in its gross margin. We reiterate the view that Midea’s margin recovery in 2Q22 is proof of the Company’s execution and strategy of maintaining profitability during the challenging environment.
toB business continued to do well
Midea’s toB business ramped up well in 2021 and continued to perform in 1H22. Revenue from its Industrial Technologies, Building Technologies, Robotics & Automation, and Digital Innovation divisions was Rmb41.7bn, up 17% yoy, accounting for 25% of total turnover (vs. 24% in 2021). In the toB business segment, Building Technologies, Industrial Technologies and Digital Innovation reported yoy revenue growth of 33%,13% and 42%, respectively, in 1H22. The yoy revenue growth of Robotics & Automation was impacted by the currency conversion impact (Kuka) and reported only 2% yoy growth in 1H22. We believe that Midea will capture the impact of softer raw material prices and translate this into profitability, in addition to its product mix shifts, effective cost control through digitalization, and cost savings from channel streamlining.
Adjusted net profit forecasts; reiterate ADD
We raised our net profit forecast for 2022E, 2023E and 2024E by 4.5%, 4.0% and 3.9%, respectively. The upward revision in forecasts for 2022 was mainly because of better-than-expected OPEX controls. We reiterate our ADD rating, with a higher target price of Rmb76.0, based on 18x 2022 P/E. Our target P/E multiple is higher than the mean of 16x, but we believe that given Midea’s good track record, a valuation premium is justified.
