• Govt stimulating white goods sector
• Robotics arm cutting jobs
• Awaiting details of measures

More Signs of Forthcoming Stimulus Measures

On 8 Jan 2019, Mr. Ning Jizhe, Vice Chairman of the National Development and Reform Commission (NDRC) mentioned that the Chinese authorities are considering unveiling policies to boost domestic consumption this year, including measures to support automobile and home appliance sales.

Following that, on 18 Jan 2019, three key agencies (NDRC, Ministry of Commerce and State Administration for Market Regulation) said at a joint conference that consumption of automobiles and home appliances will be boosted by localised policies – we believe there will be tweaks to various provinces or cities depending on their circumstances and there may not be a blanket approach which some view as a blunt policy tool.

Such measures should be welcomed by the market as lower property prices and other assets have weakened the wealth effect among Chinese consumers, driving down individual spending. Still, details of any stimulus measures have to be revealed to ascertain the impact on white goods makers.

Not So Rosy at KUKA

Midea will be a beneficiary of government stimulus measures, but we will also monitor the group’s robotics manufacturing operations. KUKA, the German industrial robot maker that Midea acquired previously, has recently warned that China’s cooling economy is affecting its business. It cited uncertainties in the Chinese automation market as a reason for possibly lower-than-anticipated sales and a slimmer profit margin in 2018.

Indeed, the current slowdown has caused KUKA to abandon its 2020 targets, according to the Wall Street Journal. The company is also launching a plan to cut some EUR300m in costs including job cuts by 2021 as a result of slower sales growth.

Slowdown in White Goods May Not be as Hard as Feared Earlier

Still, the Chinese robotics market remains a growth driver for KUKA, despite the economic slowdown, and is far from saturated. The prospects for the white goods sector also look brighter now given the government’s willingness to support consumption. As such, a slowdown in the sector may not be as hard as feared earlier.

We increase our P/E from 9x to 11x, slightly lower than the +1 s.d level over the past five years, as the group’s robotics ambitions may not materialise as fast as earlier anticipated. As such our fair value estimate increases from RMB36.28 to RMB43.27.

Source: OCBC Research - 22 Jan 2019