Midea "bet" right

Author | Huang Yu

Editor | Liu Baodan

Midea Group, which set the largest IPO in Hong Kong in nearly three years a month and a half ago, has delivered its first report card since becoming an "A+H" listed company.

On October 30, Midea Group released its third-quarter report for 2024, showing that in the first three quarters, it achieved operating revenue of approximately 319 billion yuan, a year-on-year increase of 9.57%; the net profit attributable to shareholders was approximately 31.7 billion yuan, a year-on-year increase of 14.37%. In the third quarter alone, operating revenue reached 101.7 billion yuan, a year-on-year increase of 8.05%; the net profit attributable to shareholders was 10.9 billion yuan, a year-on-year increase of 14.86%.

In terms of specific business segments, smart home remains the core of Midea Group, with revenue of approximately 215.4 billion yuan, a year-on-year increase of 10%.

In the to B business, regarded as the second growth curve, the fastest growth was seen in new energy and industrial technology, which grew by 19% year-on-year to 25.4 billion yuan, while smart building technology grew by 6% year-on-year to 22.4 billion yuan. Revenue from robotics and automation, however, declined by 9% year-on-year to 20.8 billion yuan.

In the current market environment, this overall performance can be considered quite good, showing steady progress compared to last year's growth rate. Financial report data indicates that in 2023, Midea Group's total revenue reached 373.7 billion yuan, a year-on-year increase of 8.18%, and the net profit attributable to shareholders increased by 13.95% year-on-year to 33.7 billion yuan.

At the end of 2021, affected by multiple cycles in the broader environment and various factors in Midea's own development, Midea Group made the judgment that "the next three years will be a winter." At the shareholders' meeting in May 2022, Midea's management stated that it would be reasonable for profit margins to return to 2019 levels in three years.

2019 was the year with the highest net profit margin for Midea Group since 2017, reaching 10.62%; the net profit attributable to shareholders in 2019 grew by 19.68% year-on-year to 24.211 billion yuan, after which the growth rate gradually slowed over the next three years. In 2022, Midea Group's net profit growth rate was the lowest since 2013, at approximately 3.43%.

2024 is an important year for Midea Group to enhance its profitability. From the perspective of net profit margin, in the first three quarters of this year, Midea Group's net profit margin was approximately 9.9%, showing some improvement compared to 9% in 2023.

Goldman Sachs recently pointed out in a report that Midea Group's revenue/profit is expected to grow at a compound annual growth rate of 8%/12% from 2023 to 2026, thanks to its three-pronged growth strategy.

First, Midea Group's domestic appliance business focuses more on profit margins and product structure upgrades; second, the export appliance business aims to expand market share; finally, the B-end business launches targeted strategies for different market segments.

Based on this, Goldman Sachs has given Midea Group a buy rating for A+H shares, with a 12-month target price of HKD 90 for H shares (corresponding to a 15% upside) and an upgraded target price of 89 yuan for A shares (corresponding to a 17% upside) On September 17, Midea Group was listed on the Hong Kong Stock Exchange, with an issue price of HKD 54.8 per share. On its first day of trading, the H-share price surged by 7.85%. In this round of significant increases in Chinese concept stocks, Midea's H-share price peaked above HKD 100 per share. As of the close on October 31, although the stock price had retreated to HKD 74.5 per share, it still represented a substantial increase compared to the issue price.

In recent years, influenced by factors such as increased market volatility, high-dividend companies have become favored by the capital market. With its continuous high dividends, Midea's status as a "white horse stock" has been further solidified, allowing investors to continue holding with confidence.

Of course, investors also need to consider the sustainability of Midea's future. As one of the three giants in the white goods industry, Midea, Gree, and Haier are often compared whenever financial reports are released.

From the performance in the first three quarters of this year, Midea Group remains firmly in the top position, with impressive revenue and profit growth. Data shows that in the first three quarters of this year, Haier Smart Home reported revenue of CNY 202.971 billion, a year-on-year increase of 2.2%; net profit attributable to shareholders was CNY 15.154 billion, a year-on-year increase of 15.3%.

Gree Electric, which has consistently been at the bottom among the three giants in recent years, achieved revenue of CNY 146.722 billion in the first three quarters, a year-on-year decrease of 5.34%, making it the only company with declining revenue. However, Gree Electric's profits remained robust, with a net profit attributable to shareholders of CNY 21.96 billion, a year-on-year increase of 9.3%.

The domestic home appliance industry has entered a phase of stock competition, and globalization has become a consensus among these appliance companies. "Global breakthrough" has also become one of Midea Group's core strategies at present.

Regarding its listing in Hong Kong this year, Midea Group stated that it was based on the need to deepen its global strategic layout.

Analysts at Guolian Securities pointed out that for Midea, the significance of the H listing goes beyond fundraising; it is an extension of the "global breakthrough" strategy since 2020, providing an operational platform for overseas equity incentives and mergers and acquisitions while improving overseas investment channels and capital structure.

According to the latest prospectus, Midea's Hong Kong IPO aims to raise funds for the continuous construction of global technology research and development, intelligent manufacturing systems, and upgrades in supply chain management, as well as to enhance global sales channels and networks and increase overseas sales of its own brands.

Financial reports show that as of the end of September this year, Midea Group's cash holdings increased significantly by 97% year-on-year to approximately CNY 160.88 billion, mainly due to the cash received from stock issuance and an increase in net cash flow from operating activities.

Midea has set a goal to achieve overseas sales revenue between USD 35 billion and USD 40 billion by 2027. Based on this year's trends, Midea is gradually moving closer to its target.

In terms of revenue contribution, overseas revenue has replaced domestic revenue as Midea's stronger growth driver. In the first half of this year, Midea's overseas revenue grew by 13.1% year-on-year to CNY 91.08 billion, while domestic revenue increased by 8.37% year-on-year to CNY 126.2 billion.

While further enhancing overseas revenue, Midea is also striving to improve its global brand value, which determines its ability to obtain more OBM revenue According to Wall Street Journal, Midea's overseas income comes more from OEM (Original Equipment Manufacturer), and it aims to increase the proportion of OBM (Own Brand Manufacturer) income, which has higher profit margins. From January to September this year, Midea Group's overseas OBM income grew by over 25% year-on-year.

Having weathered the winter, Midea Group is now 迎来了 another spring, but to achieve further breakthroughs in globalization, there are still many tough battles to fight