Midea Remains Undervalued; Steady Fundamentals to Support Share Price

We keep narrow-moat Midea’s 000333 fair value estimate at CNY 86 after reviewing our earnings assumptions. While Midea’s share price has gained more than 30% since the end of October 2022 on the back of China’s reopening and an improved outlook for the real estate market, we think the shares remain undervalued currently, underpinned by the firm’s operating efficiency and leadership position. That said, given the recent strong share price performance, we will need to see further catalysts such as stronger sales growth and supportive policies from the government to help rerate the stock. Trading at around 12 times 2023 earnings, Midea’s current valuation is not excessive in our view versus its historical trading range of 7 times to 27 times since listing in 2013.

According to data provider, All View Cloud, retail sales of home appliances in China fell 7.4% year on year in 2022. In 2023, we expect to see positive sales growth in the mid-single-digit range given the recovery of consumer spending and the improving property market in China. However, we also see other headwinds such as slowing export sales amid global recession risks and more intense competition in the domestic market. We believe Midea will be able to overcome the challenges and we project the firm to deliver decent five-year net income CAGR of about 9%, with longer-term positive drivers such as growing market share in the premium segment, successful expansion of its overseas business, and expansion of the business-to-business operations.

Midea now owns 100% of Kuka (part of the business-to-business segment) after completing the acquisition of the remaining 5% share it didn’t own in November 2022. Although overall earnings contribution to Midea is still small, we believe the long-term potential for Kuka remains positive, on the back of rising labor costs and an aging workforce in China to drive automation demand.