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Author: kimeng   |   Latest post: Fri, 22 Mar 2019, 9:05 AM

 

Midea Group (000333 CH): Global Ambitions to Slow for Now

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  • Acquiring low hanging fruit
  • Slower growth in near term
  • Positive long term prospects

Acquiring the Rest of Wuxi Little Swan

After being suspended from early Sep last year, the shares of Midea Group resumed trading in end Oct. The group had announced the acquisition of the 47% of Wuxi Little Swan (China’s first maker of full automatic washing machines) it did not own through a share-swap deal. The impact on earnings is not significant, as 2019 EPS is likely to be diluted by less than 3%, but the group stands to benefit in the long term from a more efficient corporate structure.

The Little Swan acquisition is expected to allow Midea to reduce the number of related party transactions it has with the group, and provide greater control over its R&D, sales and distribution.

Slowing Growth in Near Term

Over the longer term, the overall consumption upgrade trend in white goods and home appliances should continue in China, made possible by a rising middle class. In the meantime, however, earnings growth is likely to slow with slowing property sales and an overall economic slowdown. The group’s global ambitions may also have to slow as political tensions between US and China has increased scrutiny on M&A, especially in areas such as robotics.

Positive Long Term Prospects

Looking ahead, the street is projecting 19% earnings growth for 2018 and 13% growth for 2019, compared to our forecast of 19% for 2018 and 11% for 2019. Currently, the stock is trading at around 11x blended FY19/20F earnings, close to our FV estimate of RMB36.28, based on our sum-of-parts valuation.

As mentioned in our earlier report, escalating trade tensions between the US and China could affect sentiment on the stock, but at the same time this could present opportunities for longer-term investors to buy into a global giant that is in the making. Meanwhile, a worse-than-expected property slowdown in China as well as intense price competition amongst white goods makers are investment risks in the near term.

Source: OCBC Research - 2 Jan 2019

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