20180903-中国银河国际证券-美的集团-000333.SZ-Margin_expansion_in_1H18_6页_444kb

MIDEA GROUP [000333.CH]: Margin Expansion in 1H18 Summary

Core Content

Midea Group (000333.CH) reported strong interim results for 1H18, with revenue and net profit growing by 15.0% and 19.7% respectively. The performance was driven by strong results in the air conditioning segment. Despite the positive 1H18 results, investors are concerned about potential weakening in top-line growth for air conditioning and consumer appliances in 2H18, leading to a downward revision in EPS estimates for 2018 and 2019, and a reduction in the target price from RMB 63 to RMB 53.

Investment Highlights

• Upgrade Trend Intact: Midea's gross margin improved from 25.5% in 1H17 to 27.7% in 1H18, making it the only major appliance company to benefit from margin expansion amid rising raw material prices. The company expects further margin improvements in 2H18.
• Strong 1H but Deteriorating Momentum: Although 1H18 was strong, AC sales growth slowed in July due to high base effects and weather-related issues. All three major appliance companies (Midea, Gree, Qingdao Haier) have indicated improvement in August, but overall, weak July sales and Little Swan's flat Q3 2018 growth guidance may signal tougher comparisons ahead.
• Low Channel Inventory: Midea's AC inventory is well controlled, with 1-2 months of combined factory and channel inventory, or approximately 5 million units. Channel inventory levels across other segments are also near historical lows.
• Inexpensive Valuation: Midea is currently trading at 11.9x 2019E PER. The company is well positioned to weather a potential downturn in China's home appliance market, with ~35% of sales from international sources and lower average selling prices (ASPs) compared to Gree and Qingdao Haier. The new target price is based on a 15x 2019 EPS valuation, which is considered justifiable due to its diversified franchise, stable market share, and teens earnings growth.

Financial Overview

Revenue and Growth

• 2016: RMB 159,842 Mn
• 2017: RMB 241,919 Mn (+51% YoY)
• 2018E: RMB 267,911 Mn (+11% YoY)
• 2019E: RMB 284,075 Mn (+6% YoY)
• 2020E: RMB 300,786 Mn (+6% YoY)

Net Profit and Growth

• 2016: RMB 14,684 Mn
• 2017: RMB 17,284 Mn (+18% YoY)
• 2018E: RMB 21,117 Mn (+22% YoY)
• 2019E: RMB 23,392 Mn (+11% YoY)
• 2020E: RMB 26,094 Mn (+12% YoY)

EPS and PER

• 2016: RMB 2.28

• 2017: RMB 2.63

• 2018E: RMB 3.17

• 2019E: RMB 3.51

• 2020E: RMB 3.91

• 2016 PER: 18.3

• 2017 PER: 15.8

• 2018E PER: 13.1

• 2019E PER: 11.9

• 2020E PER: 10.6

Key Financial Metrics

1H18 Results Summary

• Revenue: RMB 143,736 Mn (+15.0% YoY)
• COGS: RMB (103,881 Mn) (+11.6% YoY)
• Gross Profit: RMB 39,854 Mn (+24.9% YoY)
• Gross Margin: 27.7%
• SG&A: RMB (24,975 Mn) (+24.9% YoY)
• Operating Profit: RMB 14,880 Mn (+24.8% YoY)
• OP Margin: 10.4%
• PBT: RMB 16,395 Mn (+20.5% YoY)
• Net Profit: RMB 13,780 Mn (+19.3% YoY)
• NPM: 9.6%

Margin and Ratio Trends

• Gross Margin: 27.7% (up from 25.5%)
• EBITDA Margin: 11.4%
• EBIT Margin: 9.7%
• Net Profit Margin: 8.2%

Valuation and Target Price

• Current Price: RMB 41.60 (as of Aug. 31, 2018)
• Target Price: RMB 52.60 (+26%)
• EPS Estimates:
  • 2018E: RMB 3.17 (down 3.7% from previous estimate)
  • 2019E: RMB 3.51 (down 10.4% from previous estimate)
• Valuation Justification: Based on 15x 2019 EPS, reflecting a diversified business model, stable market share, and moderate earnings growth expectations.

Analysts and Contact Information

• Jeff Dorr - Analyst
  • Phone: (852) 3698 6323
  • Email: jeffreydorr@chinastock.com.hk
• An Zhang - Analyst
  • Phone: (852) 3698 6293
  • Email: zhangan@chinastock.com.hk
• Johnson Cheung - Research Director
  • Phone: (852) 3698 6275
  • Email: johnsoncheung@chinastock.com.hk

Investment Rating

• BUY: Indicates that the share price is expected to increase by >20% within 12 months.
• HOLD: No clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to SELL.

Disclaimer and Disclosure

• This report is not intended for distribution in jurisdictions where it would be illegal.
• The report is issued by Galaxy International Securities and may include financial interests in the subject companies.
• The analysts may have financial interests or serve as officers of the companies discussed.
• The report is for institutional clients only and does not constitute an offer or solicitation to buy or sell securities.
• The analyst certifies that the views expressed accurately reflect their personal opinions and that they have not traded in the securities covered in the report within 30 days prior to the report's issue date.

Copyright

• No part of this material may be reproduced or redistributed without prior written consent from China Galaxy International Securities (Hong Kong) Co., Limited.