Midea Earnings: Boosted by Better-Than-Expected Margin; Shares Undervalued

Midea’s 000333 first-half 2023 net profit rose 14% year on year to CNY 18.2 billion, slightly ahead of our expectation due to the better-than-expected gross margin. We raise 2023-24 earnings estimates by 3%-4% to factor in the latest results, but our longer-term earnings are largely unchanged. We keep our CNY 86 fair value estimate, but we lower our Morningstar Uncertainty Rating to Medium from High to reflect Midea’s resilient business, which continued to deliver earnings growth during the coronavirus pandemic. Although the near-term share price performance may be capped by concerns about the lackluster property market and weak domestic economy, we believe Midea is undervalued. This is underpinned by the firm’s decent net income CAGR of 9.3% for 2022-27.

We continue to like Midea’s dominant position in the home appliances market. According to data provider AVC, Midea ranks first with respect to online and offline domestic market share for seven home appliance categories (including residential air conditioners) during first-half 2023. Furthermore, Midea’s premiumization strategy through the Colmo and Toshiba brands remains on track; retail sales of both brands overall increased by 22% year on year to more than CNY 5.8 billion. This reflects Midea’s competitive product portfolio and reaffirms our narrow moat rating.

Midea’s revenue increased by 8% year on year in first-half 2023, with the gross margin improving to 26% from 24% a year ago. We think this is attributable to higher selling prices as well as easing raw material costs and freight rates. Revenue for the business-to-business operations grew 19% and we think this will support Midea’s future growth given that China’s home appliances industry is maturing. The robotics and automation division’s revenue grew 25% year on year. We believe the outlook for this segment remains positive given China’s growing demand for automation solutions and industrial robots on the back of rising labor costs and an aging workforce.