A solid 3Q19 for Midea, consists of 1) remarkable market shares gain in A.C., 2) consumer electronic segment recovery, and 3) favorable input costs and FX rate. Thanks to positive outlook in 2H19E, we maintain BUY and raised TP to RMB 75.33, based on 18x FY20E P/E (from 16x), or 1.3x PEG (vs peers’ avg. of 1.8x).
- 3Q19 net profit up 23%, solid beat. Midea’s net profit att. increased by 23% YoY, 10% above BBG’s est., backed by 6% YoY sales growth, noted that consolidation of Little Swan accounted for ~4% NP att. growth. GP margin expanded by 0.7ppt, in our view, helped by: 1) RMB depreciation, 2) softening raw material prices and 3) greater sales from high-end products series (e.g. COLMO, Midea PRO, etc.). Opex , as % of total sales also recorded a saving of 0.4ppt, thanks to the company’s rigid costs control strategy.
- A.C sales slowed down, consumer electronics quicken up, robotics and automation stabilized. Even though A.C. sales growth slowed down to just ~5% in 3Q19 (vs 12% in 1H19), it was still far better than the industry, where both volume and ASP had fallen by ~3% and ~5% (offline)/ ~10% (online), according to China IOL and A.V.C., implying solid market shares gain, thanks to successful new product launches in FY19E. Sales growth of consumer electronics in 3Q19 accelerated to ~10% (vs 6% in 1H19), driven mostly by strong recovery of washing machines, by ~12% (vs 6% in 1H19) and small appliances, by 13% (vs low single digit in 1H19), plus the improved exports sales (helped by favorable FX). Sales growth of robotic and automation was a small negative in 3Q19 (vs -4% in 1H19), on track to resume growth, while EBIT margin also rose to 4.3% (vs 3.1% last year), by effective costs control.
- Remains confident on sales growth and margin expansions in 2H19E. The Company maintained its targets of a 5-10% sales growth in FY19E, a mild GP margin expansion and a stable opex ratio. It also expect online sales to accounted for ~35% of total retail sales (CMBI est. ~38% of group sales), implying a 20%+ YoY E-commerce sales growth. Moreover, for offline, the company aims to open more home decoration (now at ~150), multi-category (targeting ~1,000, now at ~500) and flagship stores (targeting ~1,900).
- Maintain BUY and raised TP to RMB 75.33 (27% upside). We lifted FY19E/ 20E/ 21E’s net profit by 2.6%/ 3.1%/ 2.8%, to factor in: 1) favorable input costs and currency rate and 3) greater efficiency gain. Our new TP is based on 18x FY20E P/E (lifted from 16x FY20E, thanks to picked up in NP growth). The counter now trades at 16x/ 14x FY19E/ 20E P/E or 1.0x 3 years PEG.
