Midea, with its brand portfolio, product range, scale and distribution network, is one of the most competitive manufacturers of home appliances in the world. We are positive on the Company, whose focus on a new premium brand launch, margin expansion and assimilation of the Kuka and Toshiba in the next few years, should sustain an earnings CAGR of 26% from 2017-2019. We initiate coverage on the company with a BUY rating, with a 12 month target price of RMB 67, which represents a 22% upside.
Premiumization to Expand Margins: Midea is one of the most competitive home appliance manufacturers in terms of product range, market share, distribution network and customer loyalty. Its brand portfolio also includes prestigious names such as Toshiba, Cuchen, and Electrolux. Midea is introducing a new domestic high-end brand in Aug/Sept. 2018 and it is expected to raise ASPs through price hikes and new model introduction.
Air Conditioner to Drive Earnings: Air conditioners account for 48% of the Company’s gross profit as a result of the exceptional growth last year. This year, demand remains strong, and we expect an ASP increase of RMB300-400 to drive revenue and margin growth.
International Business Upside. Exports account for 43% of Midea’s sales (36% ex-Robotics) and 30% of company gross profit. We believe the margin will improve in the medium term as Midea shifts its business model from OEM/ODM products to its own branded products, which currently comprise only 30% of international sales.
Robotics: 2018 earnings bump, long term profit engine. China’s low penetration of industrial robots and Midea’s new ownership of Kuka will sustain long term growth for Midea’s robotics segment. Thanks in part to lower PPA expenses, the robotics segment’s share of gross profits would increase to ~9% in 2018, up from 6% in 2017.
Valuation attractive in light of earnings growth. We are forecasting 26% earnings CAGR for 2017-2019, based on margin expansion from the new premium brand and exports. This places our estimates 22% above current street expectations. Our TP, at 16x 2019 earnings, is justifiable for a business with a secure franchise, and earnings growing above 20%. Risk factors include: (i) A slowdown in China real estate and air conditioner sales; (ii) Loss of market share as a result of price hikes; and (iii) RMB appreciation which would harm Midea’s exports.