Resilient 1Q20 for Midea, reflected by 1) strong export orders, 2) relatively high small appliances and online mix, and 3) favorable input costs and FX rate. Exports may experience more pressure but China recovery should be healthy in 2Q-4Q20E. Therefore, we maintain BUY but cut TP to RMB 72.80, based on 17x FY21E P/E (rolled over from 18x FY20E), vs China/ Int’l peers’ avg. of 16x/ 14x.
- FY19 net profit inline: Strong market share gains and GP margin expansion. Midea’s FY19 NP att. rose by 20% YoY, 2% above/ 1% below BBG/ CMBIS est. Despite sales growth slowed to 7% YoY in 4Q19, NP att. accelerated to 24% YoY in 4Q19, aided by GP margin expansion on more A.C. sales (market shares +4ppt to 29% for offline/ +7ppt to 30% for online in FY19 ), more high-end product, favorable FX and lower raw material cost.
- 1Q20 result was resilient and slightly better than industry. Midea’s 1Q20 NP att. fell by 23% YoY, fairly resilient and way better than its peers such as Haier SH’s -41%, Supor’s -41% and Gree’s -69%. The beat, in our view, was due to: 1) better product mix, with less impact on small appliances vs large appliances (e.g. A.C. was hit hard) and 2) strong exports orders of 26% YoY.
- Guiding for a 3-5% decline in sales/ NP att. in FY20E, driven by a gradual recovery in China and potentially bumpy export sales. We find this target achievable, because: 1) small appliances sales had already normalized in Apr 2020 and should do better as Midea plans to launch 28 new products in Jun 2020, 2) A.C. price war may continue in FY20E but only at the expense of smaller brands like AUX and others. Midea still managed to gain shares even with double digit decline in ASP in FY19, 3) export orders cut/ suspension may go up in 2Q-3Q20E (~3% of FY20E sales as of Apr 2020) but should only be limited, given less than 20% sales exposure to US/ EU, and 4) GP margin should be stable, which is well supported by falling costs and weakening CNY environment. However, the robotic and automation sales (mainly KUKA) may decline in FY20E since capex on technology upgrades by customers were reduced due to the adverse macro environment.
- Maintain BUY but trimmed TP to RMB 72.80 (34% upside). We reiterated BUY because: 1) negatives are all priced in and recovery onwards shall be healthy, and 2) 1Q outperformance to will sustain into 2Q thanks to product mix. We cut FY20E/ 21E NP by 18%/ 11% to factor in sales drop due to virus outbreak and cut in overseas orders. Our new TP is based on 17x FY21E P/E (rolled over from 18x FY20E). The counter now trades at 16x/ 13x FY20E/ 21E P/E (vs China peers’ avg. of 16x) or 1.6x PEG (vs China peers’ 1.8x).
