2Q23F: Results preview
- Total domestic industry sales volume of home air conditioners rebounded strongly by 25% yoy in 1H23, according to Chinaiol.com, due to hot weather conditions.
- Industry’s export volumes of refrigerators and washing machines also improved in 2Q23F qoq, based on Chinaiol.com data.
- At an investor call, Midea’s management said sales during the 6/18 shopping festival (30 May-18 Jun) rose 40% vs. last year’s festival, in line with their expectations.
- Hence, we expect Midea’s sales to increase by 8% yoy in 2Q23F and 7% yoy in FY23F. We forecast net profit to rise by 13% yoy in 2Q23F and 11% yoy in FY23F.
- Reiterate Add. Our DCF-based TP remains at Rmb80 (WACC: 8.3%, TG: 1%).
Sales of white goods likely improved qoq in 2Q23F
According to industry data provider, Chinaiol.com, industry sales volume of home air conditioners, including domestic sales and exports, grew by 12.7% yoy in 1H23, with domestic sales volume rising by 25% yoy. Industry sales volumes of refrigerators and washing machines grew by 3% and 12% yoy in 5M23, respectively, due mainly to improved export sales. Based on Chinaiol’s Jul white goods production scheduling report dated 29 Jun, industry production volume of home air conditioners, refrigerators and washing machines is estimated to grow by 16.3% yoy in Jul, of which home air conditioner production volume could grow by 29.4% yoy. We expect the demand for white goods in both domestic and export markets to see a yoy improvement in FY23F. In our investor call with Midea in Jun, management said the company’s sales at the 6/18 shopping festival (30 May-18 Jun) rose 40% yoy vs. last year’s festival, in line with their expectations. Management estimates sales of home appliances reached Rmb14bn-15bn in Jun. Hence, we expect Midea’s sales to increase by 8% yoy in 2Q23F and 7% yoy in FY23F, and for net profit to rise by 13% yoy in 2Q23F and 11% yoy in FY23F.
Home consumption policy positive for Midea
The government on 12 Jul 2023 issued a policy named “Notice of Several Measures to Promote Home Consumption” (details on page 3). We believe Midea’s home appliances business should benefit from improving domestic demand for smart homes and green energy products. The government will also promote the renovation of old buildings, which we believe could benefit Midea. Midea’s building technology business revenue registered a 34% CAGR during FY20-22, accounting for 7% of total revenue in FY22. Following the segment’s 41% yoy revenue increase in 1Q23, we expect c.30% yoy segment revenue growth in FY23F, driven by stimulus measures.
New production line for Kuka robot in China
Phase II of Midea’s Kuka Intelligent Manufacturing Technology Park in Foshan started operations in May 23. Its planned robot production capacity is 80k-100k units p.a. Management said the second phase has three advantages: 1) it requires only a few employees to conduct data monitoring; 2) the core components of robots will be manufactured locally; and 3) the industrial layout is focused on the production of heavy and light load robots. We expect Midea’s robotic automation output to rise by 20-30% yoy in 1H23F due to robust domestic demand.
Reiterate Add with an unchanged DCF-based TP of Rmb80
We reiterate Add, as we believe 1) offline channel recovery will help Midea improve its product mix in FY23F, and 2) revenue from its enterprise user business (ToB) will be in an upward trend in FY23F, driven by the country’s domestic substitution policy. We use DCF valuation with a WACC of 8.3% and a terminal growth rate of 1%. Key downside risks include lower-than-expected downstream demand and higher-than-expected cost pressures. A near-term re-rating catalyst is potential M&As to improve its brand profile.
2Q23F: Results preview
Industry data encouraging
According to industry data provider, Chinaiol.com, the industry’s production volume of home air conditioners grew by 14.2% yoy to 97.3m units in 1H23; meanwhile, the sales volume of home air conditioners grew by 12.7% yoy in 1H23 (+7% yoy in 1Q23). Of which, the domestic sales volume of home air conditioners increased by 24.8% yoy to 57.8m units in 1H23 (+19% yoy in 1Q23) and the export sales volume declined by 1% yoy to 40.5m in 1H23 (-5% yoy in 1Q23). The industry sales volume of refrigerators grew by 3% yoy in 5M23 (-6% yoy in 1Q23), of which domestic sales volume rose by 5% yoy in 5M23 (-3% yoy in 1Q23) and export sales volume rose by 2% yoy in 5M23 (-10% yoy in 1Q23). The industry sales volume of washing machines grew by 12% yoy in 5M23 (+6% yoy in 1Q23), of which domestic sales rose by 2% yoy in 5M23 (-2% yoy in 1Q23) and export sales rebounded by 28% yoy in 5M23 (+18% yoy in 1Q23).
On 29 Jun, Chinaiol published July White Goods Production Scheduling report, in which it said it expects the industry production volume of home air conditioners, refrigerators and washing machines to grow by 16.3% yoy to 28.5m in July, of which home air conditioners’ production could reach 16.1m units in July, up by 29.4% yoy, and refrigerator production could reach 7m units in July, up by 8% yoy; while the production of washing machines is expected to drop by 3.1% yoy in July to 5.4m units.
Based on the above industry data, we can see the domestic demand for home air conditioners recovered strongly qoq in 2Q23, compared with that in 1Q23, and the exports of home air conditioners turned better qoq in 2Q23. We believe the domestic demand for home air conditioners picked up in 1H23, mainly due to hot weather conditions and delays in installation of air conditioners during last year’s Covid-19 impact. The export demand for refrigerators and washing machines also improved in 2Q23, mainly due to a low base in FY22 and overseas channel inventory improvement, in our view.
We believe Midea, as one of the largest white goods producers in China in terms of sales value, will benefit from the recovery in the demand for home appliances in the domestic and export markets. Besides, in the last investor call with Midea’s management in Jun, management said its sales at the 6/18 shopping festival (30 May-18 Jun) rose by 40% yoy, in line with their expectations; also, they estimate overall sales of home appliances reached Rmb14bn-15bn in June 2023.
Therefore, we forecast Midea’s revenue and net profit to grow by 8% and 13% yoy, respectively, in 2Q23F, and 7% and 11% yoy, respectively, in FY23F. We also expect Midea’s net profit margin to expand by 0.3% pt yoy to 8.8% in FY23F, mainly due to lower key raw material prices, such as for aluminum, rebar and plastics.
Valuation
We reiterate our Add rating on Midea, as we believe: 1) offline channel recovery could help Midea improve its product mix in FY23F; and 2) revenue from its enterprise user business (ToB) could be in an upward trend in FY23F, driven by the country’s domestic substitution policy. Midea is currently trading at 11.7x 12M forward P/E, 0.3 s.d. below its historical average of 12.7x since listing in 2013.
Key downside risks are 1) lower-than-expected downstream demand leading to slower-than-expected revenue growth, 2) slower-than-expected recovery in export sales, and 3) unfavourable forex fluctuations, as 41% of Midea’s FY22 revenue was derived from overseas markets. A near-term re-rating catalyst is potential M&As to improve the brand profile.
Government policy to promote home consumption
On 12 Jul 2023, 13 government departments, including the Ministry of Commerce, jointly issued an 11-point plan to promote household spending in China. This encompasses various industries, such as home appliances, furniture, home textiles, and home decoration (source: Ministry of Commerce website).
This plan is divided into four sections: 1) improving upstream supply quality, 2) actively creating consumption themes, 3) effectively improving consumption conditions, and 4) optimising the consumption environment. Below is our summary of the 11 points which the government has come up with to promote domestic consumption of household consumer goods and services. More details can be found in this link Notice of 13 Departments including the Ministry of Commerce on Several Measures to Promote Home Consumption (please note the link redirects to a Ministry of Commerce website which is in Mandarin).
Improving upstream supply quality
1) Improve green supply chain
The government intends to support enterprises carrying out and introduce policy measures for green manufacturing, among other things.
2) Innovate and cultivate intelligent consumption
Among other things, the government intends to support enterprises using technologies, such as cloud computing and artificial intelligence, to accelerate the research and development of home products, such as smart home appliances, smart security, smart lighting, smart sleep, smart healthcare, and smart video
entertainment.
3) Improve home appliances for the elderly
This includes the promotion and development of universal standards for home products and appliances designed for use by the elderly, in view of the country’s ageing population.
Actively creating consumption themes
4) Promote development of innovative business models
This includes accelerating digital and intelligent transformation and upgrading, as well as integrating online and offline development, and cultivating a group of leading enterprises in the home furnishing industry with efficient industrial chain supply chain collaboration.
5) Support renovation of old houses
Encouraging the renewal of old urban residential districts through local government support for residents wishing to carry out renovation and upgrades of old houses.
6) Carry out consumption promotion activities
This includes targeted policies and measures to improve the quality and affordability of green smart home products.
Effectively improving consumption conditions
7) Develop community convenient services
The government intends to promote the development of self-contained communities whereby residents’ day-to-day needs, such as grocery stores, hairdressers, and recycling points, are within easy reach (15 minutes) of their homes.
8) Improve the recycling network for waste materials
To coordinate existing funding channels and strengthen support for key projects in the construction of a waste material recycling system.
9) Promote rural household consumption
Among other things, this involves the development of county-level e-commerce platforms, as well as optimising county-level distribution networks and channels, to penetrate rural markets.
Focus on optimising the consumption environment
10) Standardisation of the market
This includes improving the credit evaluation system and cracking down on counterfeit and sub-quality products, as well as fraud perpetrated against consumers.
11) Strengthen policy support.
Among others, the government intends to encourage financial institutions to strengthen their credit support for household consumption under the premise of legal compliance and controllable risks.
