2Q20 was highly resilient for Midea and we are more positive on 2H20E given a less promotional environment and strong export orders outlook. Therefore, we maintain BUY and lifted TP to RMB 86.57, based on 20x FY21E P/E (up from 17x FY20E), vs China/ Int’l peers’ avg. of 22x/ 18x.
- 1H20E results slight beat. Midea sales/ net profit att. declined by 10%/ 8% YoY to RMB 136.1bn/ 13.9bn in 1H20, above BBG’s est. by 2%/ 9%. We attributed the beat to better-than-expected exports and cost control in 2Q20. 3.9ppt reduction of GP margin to 25.6% in 1H20 was due to: 1) change in accounting standard and 2) relocating of installation fees to COGS (from selling expenses). GP margin would have fallen by only 1ppt after adjustments.
- Rapid turnaround in 2Q20, where A.C. and fridge outperformed. Midea resumed a 3% YoY sale growth in 2Q20, from 23% drop in 1Q20. A healthy pick up in domestic and resilient overseas was also seen in 2Q20, where sales growth for both A.C./ fridge accelerated to 8%/ 15% in 2Q20 (vs -10%/ 3% in 1Q20) and sales decline for washing machines/ small appliances also narrowed to 8%/ 5% in 2Q20 (vs -15%/ -10% in 1Q20).
- A better domestic as price war reverses with decent weather. We reckon that ASP for A.C. had been climbing since Apr 2020 as Midea and Haier changed their focus from market shares to profitability (push for premium) while Gree is still being held back by its high channel inventory. Moreover, thanks to: 1) exceptionally hot weather during summer, 2) introduction of new energy-saving standard and 3) flexibly inventory level (powered by the efficient T+3 model), we believe ASP is likely to trend up from 2H20E onwards.
- Overseas to bottom out with an at least stable GP margin. According to the management, overseas sales growth rebounded to 15% YoY in Jul-Aug 2020, much better than guidance of 0% growth in FY20E. Also, we believe more premium product sales and easing of raw material costs can more than offset CNY appreciation and driving an at least stable GP margin in 2H20E.
- Guiding for a flattish sales/ NP att. growth in FY20E. We find this target reasonable as Midea is effectively gaining shares in both the recovering domestic and overseas markets, while the only let down is KUKA, as various clients are still conservative or reluctant to spend capex in near term.
Maintain BUY but raised TP to RMB 86.57 (21% upside). We reiterate BUY because of: 1) industry leading sales and inventory management, and 2) sector turnaround and potential re-rating. We fine-tuned FY20E/ 21E/ 22E NP by 1%/ 1%/ 2% to factor in better export and weaker KUKA. Our new TP is based on 20x FY21E P/E (up from 17x FY20E). The counter now trades at 17x 21E P/E (vs China peers’ avg. of 22x) or 1.9x PEG (vs China peers’ 2.1x).
