Maintain Buy

Gross margin to contract due to intensifying competition; cut TP

• We adjusted down our 2021-23 EPS forecasts for Midea Group (Midea) by an average of 12%, reflecting margin compression.

• We cut our target price to CNY120 (from CNY150), which is based on a P/E of 30x our 2022F EPS.

• Market expectations appear to have been sufficiently adjusted downward, with the stock down 26% YTD. As such, we believe valuation has become attractive.


Key updates

Home appliances: Back on pre-pandemic growth trajectory

• For 2021, we forecast home appliance revenue to grow 13.3%, with HVAC and consumer appliance revenue rising 13.5% and 13.0%, respectively.

• Demand for home appliances should rise steadily on the back of government support and upcoming replacement cycles.

• We see Midea’s home appliance revenue expanding at a CAGR of 10.6% in 2021-23, supported by its strong market dominance and brand reputation.

Robotics: Yet to gain ground in China

• Midea’s robotics business (Kuka) has yet to gain meaningful share in the Chinese market.

• We expect 2021 order growth to be slower than that of rival Fanuc (+42% YoY for Midea vs. +99% YoY for Fanuc).

• In Europe and North America, the company appears to be losing share to Fanuc and ABB.

• We think it will take time for the company to see meaningful acquisition synergies in China.

Revising down earnings estimates on margin erosion

• Margin contraction seems inevitable, given increasing competition in the home appliance market. We expect the company to partially offset the impact through strong cost discipline.

• We revise down our 2021-23 gross margin and SG&A expense ratio estimates by 3.7%p and 2.4%p, respectively.


Risk factors

• 1) Increasing competition in the home appliance market; 2) softening home appliance demand due to sluggish consumer spending; and 3) decline in robotics demand due to dwindling capex

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