Midea Earnings: No Major Surprises; Shares Remain Undervalued

Midea’s 000333 third-quarter net profit rose 12% year on year to CNY 9.5 billion, largely within our expectations. We maintain our fair value estimate at CNY 86. We think Midea’s ability to deliver earnings growth amid concerns about consumer spending and the lackluster real estate sector is impressive. We believe Midea is undervalued currently, underpinned by its operating efficiency and expanding market share. In the longer term, we expect growing market share in the premium segment, and the successful expansion of its business-to-business, or B2B, operations to drive share price performance.

We think the key highlights are the improving gross margin and the strong operating cash flow during the first nine months. Gross margin rose to 26% from 24% a year ago, likely due to lower raw material costs and a better product mix. Midea’s high-end brands, Colmo and Toshiba, continue to deliver robust revenue growth of 21% to more than CNY 8.6 billion. This shows the firm’s capability to enhance its sales mix with attractive products and reaffirms our narrow moat rating. Meanwhile, Midea’s operating cash flow grew 52% year on year to CNY 44.8 billion. We believe the firm’s strong financial strength will enable it to retain its leadership position by focusing on research and development to make its products competitive.

Midea’s cumulative nine months’ domestic and overseas year-on-year sales growth increased by 12% and 5%, respectively, a slight increase in momentum from the first-half’s growth. We think the depreciation of the Chinese yuan could improve the competitiveness of Midea’s products overseas. Revenue for B2B operations (new energy and industrial technology, intelligent building technologies, and robotics and automation) cumulatively grew more than 20% year on year. We think these will support Midea’s future growth. For example, the outlook for the robotics segment remains positive given China’s growing demand for automation solutions and industrial robots.