[China] Robotics February 22, 2021

Midea Group Buy

(000333 CH) (Initiate)

Consumer electronics giant with strong robotics TP: CNY150

potential Upside: 53%

Mirae Asset Daewoo Co., Ltd.

YB Kwon, CFA [email protected] Jay Lee [email protected]

Valuation and recommendation Initiate coverage with Buy rating and TP of CNY150
 We project that Midea Group will display robust growth in the coming years, with EPS rising
19.1% in 2021 and 17.2% in 2022.
 Our target price is based on 40x 2021F EPS.

Investment points Subsidiary Kuka to further expand its presence in China

 Kuka, a subsidiary of Midea Group, is the world’s third-largest industrial robot maker.
 Despite intensifying competition from Japanese rivals (e.g., Fanuc), we expect Kuka to gradually
increase its share of the Chinese industrial robotics market going forward.
 From 2021 to 2023, we forecast Kuka’s robotics revenue (12% of total revenue) to expand at a
CAGR of 25%.
A leading consumer electronics company in China
 In China’s air conditioner market, Midea Group enjoys leading positions in both online (34.3%
market share; no. 1) and offline (34.7%; no. 2) channels. In refrigerators, the firm is the no. 2
player in both online (17.2%) and offline (12.6%) channels.
 We expect structural demand growth in China to continue for some time, supported by the
government’s home appliance subsidy program and the gradual arrival of a consumer
electronics replacement cycle.
Synergies from Midea Group’s acquisition of Kuka
 We believe that synergies stemming from the acquisition of Kuka will help Midea Group gain
favorable positioning in the service robotics market (which holds robust growth potential over
the long term).

Risk factors  A potential dip in capex in the event of slower economic growth
 A possible slowdown in overall consumption, which could weigh on electronics demand

Key data
600 Midea CSI 300 Current price (2/18/21, CNY) 98.3 Market cap (CNYbn) 689.8
Exchange Shenzhen Market cap (Wtr) 118.07
400 EPS growth (20F, %) 3.0 Shares outstanding (mn) 2,926.0
P/E (20F, x) 30.6 52-week low (CNY) 46.30
200
Market P/E (20F, x) 24.7 52-week high (CNY) 108.00
0 Dividend yield (%) 1.63
19.2 20.2 21.2

Share performance Earnings and valuation metrics

(%) 1M 6M 12M FY (Dec.) 2017 2018 2019 2020F 2021F 2022F
Absolute -2.6 41.2 80.5 Revenue (CNYbn) 241.9 261.8 279.4 286.5 326.0 365.5
Relative -3.1 28.7 39.5 OP (CNYbn) 19.3 23.7 28.0 26.9 32.6 38.6
OP margin (%) 8.0 9.0 10.0 9.4 10.0 10.6
NP (CNYbn) 17.3 20.2 24.2 22.4 26.9 31.6
EPS (CNY) 2.63 3.05 3.58 3.21 3.82 4.48
ROE (%) 22.8 23.1 24.2 19.7 21.1 21.6
P/E (x) 21.1 12.1 16.0 30.6 25.7 21.9
P/B (x) 4.4 2.6 3.6 5.7 5.1 4.4
Source: Company data, Mirae Asset Daewoo Research estimates
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US.
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
February 22, 2021 Global Robotics

China: Market conditions for consumer electronics to be favorable

Consumer electronics: Room for further penetration in lower-tier cities and rural
areas
We believe that the recent announcement of consumption-boosting measures by the Chinese
government will benefit consumer electronics names, including Midea Group. Indeed, we
expect the government’s subsidy program to help unleash pent-up demand and trigger a
significant replacement cycle in 2021 and beyond (for electronics purchased back in the early
2010s).

In particular, the air conditioner segment has strong growth prospects this year. For
refrigerators and washing machines, home appliance makers will likely focus on replacement
demand, rather than new demand, given the modest difference in penetration between rural
and urban areas. Meanwhile, the air conditioner market should see a rise in both new and
replacement demand, as the number of air conditioners installed in rural areas stands at only
71.3 per 100 households (vs. 148.3 in urban areas), pointing to high potential for further
growth.

Figure 90. China: Per-capita disposable income in 2013-19 Figure 91. China: No. of air conditioners installed per 100
(urban vs. rural) households (urban vs. rural)
(CNY) Urban per-capita disposable income
45,000 Rural per-capita disposable income 42,359
39,251
40,000 36,396
33,616
35,000 31,195
28,844
30,000 26,467
25,000

20,000 16,021
14,617
12,363 13,432
15,000 11,422
9,430 10,489
10,000

5,000

-
2013 2014 2015 2016 2017 2018 2019

Source: National Bureau of Statistics of China, Mirae Asset Daewoo Research Source: Eastmoney Securities, Mirae Asset Daewoo Research

Top-tier firms, particularly Midea Group, to continue to enjoy a leg up

Despite sluggishness in both the domestic and overseas consumer markets, Midea Group has
successfully managed its inventory as well as pandemic risks via: 1) aggressive online channel
utilization; and 2) a “T+3” model (i.e., manufacturing begins upon order placement, and the
product is shipped within three days). During the 2020 Singles' Day period, Midea Group
ranked first in home appliance revenue on both Tmall and JD.com.

Table 25. 2020 Singles' Day: Home appliance revenue rankings

Rank Tmall JD.com
1 Midea Group Midea Group
2 Haier Haier
3 Gree Electric Gree Electric
4 Xiaomi Xiaomi
5 Siemens TCL
Source: Press reports, JD.com, Mirae Asset Daewoo Research

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February 22, 2021 Global Robotics

Midea Group has met diverse Chinese consumer needs via: 1) quality improvements
stemming from steady R&D efforts; and 2) product portfolio diversification based on overseas
M&As. The company’s 2019 R&D spending was equivalent to 6.86% of its total revenue,
1.52%p higher than the 2015 level. In addition, the company boasts the highest number of
patents among Chinese home appliance makers. Top-tier firms, including Midea Group, Gree
Electric, and Haier, will likely continue to gain market share, given the high technological
barriers and cost increases arising from the new minimum energy performance standards
(MEPS) for room air conditioners introduced in Jul. 2020.

Figure 92. No. of patents held by Chinese home appliance

Figure 93. Midea Group brands
makers

80,000

70,000 67,179

60,000

50,000
40,934
40,000

30,000

20,000 15,963
10,786
10,704
10,000 8,319 6,057 4,921
3,965 2,711
-

Source: Press reports, Mirae Asset Daewoo Research Source: Company materials, Mirae Asset Daewoo Research

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February 22, 2021 Global Robotics

Earnings and forecasts

Table 26. Midea Group: Annual earnings and forecasts

(CNYbn) 2016 2017 2018 2019 2020F 2021F 2022F 2023F 2024F 2025F
Revenue 159.8 241.9 261.8 279.4 286.5 326.0 365.5 397.0 426.3 458.1
(YoY) 15.5% 51.3% 8.2% 6.7% 2.6% 13.8% 12.1% 8.6% 7.4% 7.5%
HVAC 68.7 95.4 109.4 119.6 123.2 139.8 156.6 169.1 181.0 193.6
(YoY) 0.0% 38.7% 14.7% 9.3% 3.0% 13.5% 12.0% 8.0% 7.0% 7.0%
Consumer appliances 76.5 98.7 103.0 109.5 111.7 125.1 137.6 147.2 156.0 165.4
(YoY) 0.0% 29.0% 4.3% 6.3% 2.0% 12.0% 10.0% 7.0% 6.0% 6.0%
Robots/automation systems 0.0 27.0 25.7 25.2 24.7 32.1 40.1 48.1 55.4 63.7
(YoY) 0.0% 0.0% -5.0% -1.9% -2.0% 30.0% 25.0% 20.0% 15.0% 15.0%
Other operations 11.9 17.2 18.7 21.2 22.8 24.7 26.7 28.0 29.4 30.9
(YoY) 0.0% 0.0% 8.5% 13.2% 8.0% 8.0% 8.0% 5.0% 5.0% 5.0%

COGS 116.1 180.7 188.4 198.0 205.1 233.4 261.9 285.6 307.8 332.0
Raw materials/other 112.5 174.0 183.5 192.9 199.9 227.6 255.3 278.9 301.0 324.9
(% of revenue) 70.4% 71.9% 70.1% 69.0% 69.8% 69.8% 69.9% 70.2% 70.6% 70.9%
Depreciation/amortization 3.6 6.7 4.8 5.2 5.2 5.9 6.6 6.7 6.8 7.1
(% of revenue) 2.2% 2.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.7% 1.6% 1.6%

GP 43.8 61.2 73.5 81.3 81.5 92.6 103.6 111.4 118.5 126.2
(YoY) 24.4% 39.8% 20.0% 10.7% 0.2% 13.6% 11.9% 7.6% 6.4% 6.4%
Gross margin 27.4% 25.3% 28.1% 29.1% 28.4% 28.4% 28.3% 28.1% 27.8% 27.5%

Operating expenses 28.7 43.2 51.1 54.5 54.6 60.0 65.0 69.3 73.5 77.5
(% of revenue) 18.0% 17.9% 19.5% 19.5% 19.0% 18.4% 17.8% 17.5% 17.2% 16.9%
SG&A 27.3 34.2 40.7 44.1 44.4 48.9 53.0 56.4 59.7 62.8
(% of revenue) 17.1% 14.2% 15.5% 15.8% 15.5% 15.0% 14.5% 14.2% 14.0% 13.7%
R&D 0.0 7.3 8.4 9.6 9.2 10.1 11.0 11.9 12.8 13.7
(% of revenue) 0.0% 3.0% 3.2% 3.4% 3.2% 3.1% 3.0% 3.0% 3.0% 3.0%
OP 15.0 19.3 23.7 28.0 26.9 32.6 38.6 42.1 45.1 48.6
(YoY) 16.0% 28.5% 22.6% 18.1% -3.9% 21.1% 18.6% 9.1% 6.9% 8.0%
(OP margin) 9.4% 8.0% 9.0% 10.0% 9.4% 10.0% 10.6% 10.6% 10.6% 10.6%
EBITDA (adj.) 18.6 26.0 28.5 33.1 32.1 38.4 45.2 48.9 51.9 55.7
(EBITDA margin) 11.6% 10.8% 10.9% 11.9% 11.2% 11.8% 12.4% 12.3% 12.2% 12.2%

Pretax profit 18.9 21.9 25.8 29.9 27.9 33.6 39.3 42.1 45.1 48.6
Tax 3.1 3.2 4.1 4.7 4.5 5.4 6.3 5.1 5.4 5.8
NP (GAAP) 15.9 18.6 21.7 25.3 23.4 28.2 33.0 37.1 39.6 42.8
Minority interests 1.2 1.3 1.4 1.1 1.1 1.3 1.5 1.7 1.8 1.9
NP attributable to owners of the parent 14.7 17.3 20.2 24.2 22.4 26.9 31.6 35.4 37.9 40.9
(YoY) 15.6% 17.7% 17.1% 19.7% -7.6% 20.3% 17.2% 12.2% 6.9% 8.0%
Fully diluted EPS (CNY) 2.27 2.63 3.05 3.58 3.21 3.82 4.48 5.03 5.38 5.80

Operating cash flow 28.3 26.6 29.4 41.8 29.5 34.8 40.1 42.0 44.5 47.8
Capex 2.3 3.2 5.6 3.5 4.0 4.0 4.0 5.0 5.0 5.0
Source: Company data, Mirae Asset Daewoo Research

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February 22, 2021 Global Robotics

Key valuation charts

Figure 94. Midea Group: Five-year P/E band chart Figure 95. Midea Group: Five-year P/E ±2 SD

(CNY) (x)
120 35
30x
30
100
25x
25 +2 SD
80
20x
20 +1 SD
60
15x Avg.
15
40 -1 SD
10x 10
-2 SD
20 5

0 0
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Figure 96. Midea Group: Five-year P/B band chart Figure 97. Midea Group: Five-year P/B ±2 SD

(CNY) (x)
120 7

100 6x 6

5 +2 SD
80 5x
+1 SD
4x 4
60 Avg.
3x 3
-1 SD
40
2x 2
-2 SD
20
1

0 0
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

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February 22, 2021 Global Robotics

Company overview

Established in 2000, Midea Group was listed on the Shenzhen Stock Exchange in 2014. In
2019, the company generated 43% of its revenue from the HVAC business, 39% from
consumer appliances, and 9% from robots/automation systems. (The company expanded into
robots/automation systems by acquiring Germany-based Kuka in 2018.) Of note, the
company’s overseas revenue contribution increased from 27% in 2010 to 42% in 2019.

Midea Group has aggressively sought to expand online sales channels amid the pandemic-
driven Chinese consumer market slump. In 1H20, the company’s online revenue contribution
increased to 49%, with air conditioners accounting for 37% of its total online revenue (the
highest level among local competitors).

Midea Group’s largest shareholder is Midea Holding Company (94.55% owned by Midea
Group founder He Xiangjian), which owns a 31.6% stake. CEO Fang Hongbo owns 1.96%.

Figure 98. Midea Group: Revenue breakdown by unit (2019) Figure 99. Midea Group: Revenue breakdown by region

120% China RoW

9%
100%
9%
27%
80% 42%
43%

60%

39% 40%
73%
58%
20%

0%
HVAC Consumer appliances Robots/automation systems Other 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Figure 100. Midea Group: Quarterly revenue Figure 101. Midea Group: Ownership breakdown

(CNYbn)
100 2017 2018 2019 2020
90
31.60%
80
48.23%
70
60
50
15.38%
40
30
20 1.96% 2.83%

10 Midea Holding Company Hong Kong Securities Clearing

China Securities Finance Corp. Fang Hongbo
-
1Q 2Q 3Q 4Q Other

Source: Bloomberg, Mirae Asset Daewoo Research Note: As of Apr. 30, 2020
Source: Company data, Mirae Asset Daewoo Research

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February 22, 2021 Global Robotics

Midea Group (000333 CH)

Income statement (summarized) Balance sheet (summarized)

(CNYbn) 2019 2020F 2021F 2022F (CNYbn) 2019 2020F 2021F 2022F
Revenue 279.4 286.5 326.0 365.5 Current assets 216.5 228.0 251.3 280.6
COGS 198.0 205.1 233.4 261.9 Cash & equivalents 31.9 28.3 29.1 34.6
Operating expenses 54.5 54.6 60.0 65.0 Receivables 31.0 32.1 36.5 40.9
SG&A 44.1 44.4 48.9 53.0 Inventory 32.4 34.4 39.1 43.9
R&D 9.6 9.2 10.1 11.0 Other current assets 121.1 133.2 146.5 161.2
EBIT 28.0 26.9 32.6 38.6 Non-current assets 85.5 90.2 94.8 99.4
Non-operating income 1.9 1.0 1.0 0.7 PP&E 26.6 25.4 23.6 21.0
Net financial income 2.9 1.5 1.5 1.5 Other long-term assets 58.9 64.8 71.2 78.4
Net other income (1.0) (0.5) (0.5) (0.8) Total assets 302.0 318.2 346.1 379.9
Pretax profit 29.9 27.9 33.6 39.3 Current liabilities 144.3 146.2 158.1 169.9
Income tax 4.7 4.5 5.4 6.3 Payables 84.0 86.0 97.8 109.7
Minority interests 1.1 1.1 1.3 1.5 Short-term debt 31.1 31.1 31.1 31.1
NP attributable to owners 24.2 22.4 26.9 31.6 Other current liabilities 29.2 29.2 29.2 29.2
Non-current liabilities 50.1 52.2 52.0 53.7
Long-term debt 41.3 41.3 41.3 41.3
Other non-current liabilities 8.8 10.9 10.7 12.4
Growth & margins (%) Total liabilities 194.5 198.4 210.1 223.6
Revenue growth 6.7 2.6 13.8 12.1 Equity attributable to owners 101.7 112.9 127.8 146.7
EBIT growth 18.1 -3.9 21.1 18.6 Paid-in capital 22.7 22.7 22.7 22.7
NP growth 19.7 -7.6 20.3 17.2 Retained earnings 79.2 90.4 105.3 124.2
EPS growth 17.2 -10.3 19.1 17.2 Other capital and adj. (0.1) (0.1) (0.1) (0.1)
EBIT margin 10.0 9.4 10.0 10.6 Minority interests 5.8 6.9 8.1 9.6
Net margin 8.7 7.8 8.3 8.6 Shareholders' equity 107.5 119.8 136.0 156.3

Cash flow statement (summarized) Key metrics

(CNYbn) 2019 2020F 2021F 2022F 2019 2020F 2021F 2022F
Operating cash flow 41.8 29.5 34.8 40.1 P/E (x) 16.0 30.6 25.7 21.9
NPAT-MI 24.2 22.4 26.9 31.6 P/B (x) 3.6 5.7 5.1 4.4
Depreciation & amortization 5.2 5.2 5.9 6.6 EV/EBITDA (x) 13.6 22.8 19.1 16.1
Chg. in working capital/other 12.4 2.0 2.0 2.0 EPS (CNY) 3.58 3.21 3.82 4.48
Cash flow from inv. activities (27.1) (19.0) (19.0) (19.0) BPS (CNY) 15.87 17.17 19.31 22.20
Capex (net) (3.5) (4.0) (4.0) (4.0) DPS (CNY) 1.60 1.60 1.70 1.80
Other (23.7) (15.0) (15.0) (15.0) Payout ratio (%) 44.7 49.9 44.5 40.2
Cash flow from fin. activities (2.4) (14.2) (15.0) (15.7) Dividend yield (%) 2.8 1.6 1.7 1.8
Dividends (8.6) (11.2) (12.0) (12.7) Accounts receivable turnover (x) 9.0 8.9 8.9 8.9
Increase/decrease in equity 2.8 0.0 0.0 0.0 Inventory turnover (x) 8.6 8.3 8.3 8.3
Increase/decrease in debt 3.4 (3.0) (3.0) (3.0) Accounts payable turnover (x) 3.3 3.3 3.3 3.3
Net increase in cash 12.5 (3.6) 0.8 5.5 ROA (%) 8.6 7.2 8.1 8.7
Beginning cash 19.5 31.9 28.3 29.1 ROE (%) 24.2 19.7 21.1 21.6
Ending cash 41.8 29.5 34.8 40.1 ROIC (%) 16.4 14.4 15.8 17.3
Liabilities/equity ratio (%) 180.9 165.7 154.5 143.0
Current ratio (%) 150.0 155.9 159.0 165.1
Net debt/equity ratio (%) 37.7 36.8 31.8 24.2
Source: Company data, Mirae Asset Daewoo Research

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