000333.SHE
Midea's H-share debut

The home appliance giant is planning a Hong Kong IPO, reportedly for its robotics business that it hopes will become a major new growth driver 

Key Takeaways:

  • Midea is planning a Hong Kong listing, as its core home appliance business remains largely unaffected so far by China’s property market slowdown 
  • The company’s core air conditioning business is expected to benefit from replacement cycles, while its industrial robotics could benefit from China’s shrinking labor force 

    

By Bai Xin Rui

It sounds like a sci-fi movie: The air conditioners versus the robots. But the story is quite real for home appliance giant Midea Group (000333.SZ), whose planned Hong Kong IPO could involve the company’s up-and-coming robotics business, according to market buzz.

Midea is already listed on China’s domestic A-share market, but has unveiled plans for a new Hong Kong listing that would be more focused on international investors. The company has yet to announce fundraising plans, or what assets would be included in the listing. But the IPO could raise up to $1 billion, based on the potential number of shares it plans to issue and their estimated value.  

Midea was founded in 1968 by He Xiangjian, who currently holds 32% of the company. It started off in simple fashion by producing basic products like glass bottles. But it saw a big opportunity with China’s home appliance boom in the 1980s, and moved into electric fans. From there it moved into air conditioning, and its name came to be nearly synonymous with the product. Midea is currently a global leader in air treatment products and the second-largest maker of air conditioners and refrigerators in China, according to research firm Euromonitor.  

The company first listed on the Shenzhen Stock Exchange in 1992, and the new Hong Kong listing would complement a 2018 IPO for sister company Midea Real Estate Holding (3990.HK).   

In 2016, Midea acquired Toshiba’s home appliance business, gaining access to more than 5,000 Toshiba patents. Most recently it expanded into industrial automation and logistics by acquiring Kuka, a leading German industrial robotics company. 

China’s ongoing debt crisis, especially among property developers, has led to a significant decline in the country’s real estate market, which is traditionally a big source of demand for home appliances. Midea has held up relatively well despite that, reporting its revenue grew 7.7% year-on-year in the first half of 2023 to 198 billion yuan ($27.5 billion). Its net profit also rose 14% to 18.2 billion yuan during the period. 

Heatwave-driven demand 

Midea’s strong focus on air conditioners, which accounted for 44% of its sales last year, has helped to fuel its recent growth despite the property slowdown. Last year’s strict pandemic controls led to delays for installations in both new and existing homes, resulting in a mini-boom from pent-up demand after China abandoned its “zero Covid” policy at the end of last year.  

At the same time, the El Niño phenomenon has caused more extreme weather in China this year, resulting in a record number of hot days, propelling air conditioner sales by 25.4% year-on-year to 22.1 million units in the first half of 2023. 

Midea was an obvious beneficiary of the surging sales due to its leading position in the industry. What’s more, the company was able to boost its gross profit margin by 2.3 percentage points in the second quarter, thanks to falling raw material and shipping costs.  

It’s also worth noting that China’s air conditioner market still has significant room for growth. The country averaged just 134 units per 100 households in 2022, or about half the 248 units per 100 households in Japan in 2014. Additional demand could also come from a decade-old government-led program to promote home appliance installations in rural areas. 

In addition to moving into other products, Midea has pursued overseas expansion in recent years to reduce its reliance on its home market. Revenue from overseas sales rose 3.5% year-on-year to 80.5 billion yuan in the first half of 2023, accounting for 40.7% of Midea’s revenue. The company’s strong overseas presence, with a current network of more than 100,000 outlets, could help to sustain the company if and when its China sales start to weaken. 

Undervalued shares 

China has called on companies to make industrial upgrades in recent years to keep its core manufacturing sector competitive as labor costs rise. Midea answered that call several years back with its acquisition of Germany’s Kuka, a prominent player in the automotive automation equipment sector, whose clients include the likes of Tesla (TSLA.US), BMW (BMW.BE), and Mercedes-Benz (MBG.DE). The acquisition has charged up Midea’s newer industrial robot business, whose revenue rose 24% to 15.2 billion yuan in the first half of the year. 

China holds the distinction of being the largest user of industrial robots worldwide, relying on automation as its working-age population starts to decline and salaries increase with rising living standards. The market for industrial robots in China reached 42.3 billion yuan in 2020, and is expected to more than double to 105 billion yuan by 2025, according to IFR. As that happens, Midea’s robotics division, led by Kuka, is expected to emerge as a major growth driver for the company in the future. 

Midea’s estimated profits are expected to grow by almost 10% annually from 2023 to 2025, while its forward price-earnings (P/E) ratio currently stands at about 12 times, according to Bloomberg data. That’s lower than its historical average of 13 times, and also trails domestic competitors Haier (6699.HK; 600690.SH) and Hisense Home Appliances (0921.HK; 000921.SH), which both trade at around 14 times. Midea also trails international home appliance brands like Carrier Global (CARR.US), with a forward P/E ratio of 20 times, Daikin (6367.T) at 24 times, and Panasonic (6752.T) at 14 times, showing its stock may be undervalued.  

At least part of the undervaluation could owe to a weak Chinese yuan stemming from Sino-U.S. trade tensions and a slowing Chinese economy, which has depressed stock markets on both the Chinese mainland and in Hong Kong. That suggests that things may need to stabilize before undervalued stocks like Midea can start to recover, and it could also make investors cautious on the upcoming Hong Kong listing for the company’s robotics business listing. 

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