Midea: Strong Premiumization and Profitability; Transferring Coverage With Unchanged Valuation

We transfer coverage of Midea and maintain our fair value estimate at CNY 86 per share. We also keep our narrow Morningstar Economic Moat Rating, Exemplary Morningstar Capital Allocation Rating, and Medium Morningstar Uncertainty Rating on the company, given our unchanged view on its business outlook and investment capabilities. Midea reported upbeat first-quarter results, with about a 10% year-on-year growth in both revenue and operating profit. As the company’s premium brands Colmo and Toshiba deepen penetration in China, we expect them to ramp up revenue mixes and drive a 5.3% five-year revenue compound annual growth rate in 2023-28. An improving product mix, coupled with more efficient cost control of the Kuka robotics segment, should lift Midea’s operating margin to 10.8% in 2028 from 10.0% in 2023, in our view. While we raise our midcycle operating margin forecast to 10.8% from 8.4% previously, this is largely offset by slower inventory and receivable turnover projections, given rising competition and a slowdown in China’s home demand. We continue to view Midea’s shares as modestly undervalued, and its generous dividend payout ratio at around 60% should win more appeal, especially from long-term investors.