Midea Group: Tightening on Consumer End, Expanding on Business End, Is Transformation Promising?

Midea Group (000333.SZ) released its interim report on August 30th Beijing time, with the following highlights:

1. Revenue is slightly better than expected: Midea Group achieved revenue of RMB 182.661 billion in the first half of the year, a year-on-year increase of 6.57%. Despite the impact of the economic slowdown and the pandemic on overall home appliance sales, Midea was able to achieve overall revenue growth by upgrading its product structure, especially with the rapid growth of high-end products.

2. Profits are also slightly better than expected: Midea's net profit attributable to shareholders in H1 2022 was RMB 15.995 billion, an increase of 5.09% YoY. The growth in net profit was mainly due to the higher gross profit that came from the sales of high-end products, despite the continued pressure on costs and a slight increase in three expenses.

3. Smart Home Benefits from Product Structure Upgrade: The smart home segment achieved revenue of RMB 125.9 billion in H1 2022, up 3.48% YoY. Despite the pandemic-related economic slowdown and weak consumer sentiment, the sales of high-end models such as new air-conditioning systems, washing-drying machines, smart refrigerators, dishwashers and integrated stovetops supported the growth of smart home businesses. Colmo, a high-end brand, achieved sales of over RMB 4 billion in H1 2022, an increase of 150% YoY. Toshiba's domestic channels achieved revenue of more than RMB 1.1 billion in the first half of the year, an increase of 110% YoY.

4. Overseas Heat Pump Demand Boosts Rapid Revenue Growth: Building Technologies achieved revenue of RMB 12.2 billion, an increase of 33.09% YoY. In the first half of the year, the sales of Midea's domestic elevators, escalators and lifts were affected by the sluggish property market and the pandemic. However, the export of Midea's heat pump products increased more than 200% YoY in the first half of the year, which successfully drove the rapid growth of building technology revenue.

5. Robot Supply Chain Affects Delivery, but Demand Remains Strong: The robotics and automation segment achieved revenue of RMB 12.2 billion, an increase of 2.15% YoY. The shortage of chips in the robotics industry, which was caused by the pandemic, the deteriorating relations between China and the United States, and the conflict between Russia and Ukraine, resulted in rising costs of raw materials and logistics disruptions, which affected Midea's normal production and delivery. However, demand is still much better than before, especially for six-axis robots and collaborative robots. Moreover, Midea's robotic products are expanding into the field of lithium batteries and photovoltaics, and the order performance is good.

Dolphin Analyst's Overall Viewpoint:

It is not easy for Midea's smart home business to achieve steady development by upgrading its product structure. In the future, the company will continue to upgrade its products to push for replacements, iteration, and steady growth. However, it will be difficult to satisfy investors in the secondary market without telling a story that can support a second growth curve. But what is reassuring is that the importance of Midea's B-side business has begun to emerge. In the first half of this year, the overall revenue of B-side businesses reached RMB 41.7 billion, accounting for about 23% of total revenue, with building technologies and digitalization achieving growth rates of more than 30%, and demand for robotic products remaining strong. With the resolution of supply chain issues, growth rates are expected to improve.

Looking ahead to the second half of the year, the scorching weather is stimulating air conditioner sales, including in China, the United States and Europe. In China, online air conditioner sales in July increased by about 25% compared to the same period last year, while offline sales narrowed their decline to about 6% year on year.

In addition, in the context of rapidly rising natural gas and electricity prices in Europe, coupled with subsidies, demand for heat pumps in the European market can still maintain high intensity before the winter.

The problem of the robot supply chain will also be alleviated, and production supply will also recover month-on-month. Revenue is expected to achieve stable growth. Whether it exceeds expectations depends mainly on the development of the B-end business.

In addition, the cost pressure of steel, aluminum and PET may be alleviated, and the cost pressure of copper may rebound, but overall cost pressures are likely to improve month-on-month, which is conducive to releasing more profits.

Dolphin Analyst will quickly introduce the business development of Midea Group before the beginning of the article:

With the slowdown in demand in the home appliance industry, replacement has gradually become the main demand. In this case, it is difficult for companies to maintain growth through sales alone. The remaining choice is to upgrade products, which is actually to maintain stable development through price increases. But if you want to achieve the second growth curve, you can only start from other aspects. Midea has chosen to increase its efforts to develop B-end businesses. Specifically, Midea Group began to reduce non-core businesses in the first half of the year. The adjustment of the home appliance business was also put on the agenda. This adjustment mainly targeted low-profit, low-market prospects and low-competition products. It can be understood as category optimization. At the same time, in the first half of the year, efforts were made to develop B-end businesses. Midea Group achieved control of Ke Lande Electronics in the first half of 2022, strengthening the technical accumulation of Midea's industrial technology sector.

In summary, the 2C and 2B businesses are equally important in the short term, and efforts will be made during this period to develop 2B businesses, and ultimately achieve corporate transformation. Based on the above background, Dolphin Analyst will split the interim report of Midea Group for 2022.

The following is the main text:

1. Insufficient demand, the salt of the epidemic, and the upgraded structure of smart home products cannot support the second growth curve

In the first half of 2022, with insufficient demand, the epidemic also caused a lack of offline consumption scenes and caused everyone to worry about the future economy, suppressing consumer willingness and ultimately leading to a significant decline in appliance sales in the first half of the year. However, it is worth noting that in most categories, Midea still maintains a high market share. Of course, we can also see from this that the growth rate of market share is slowing down, and it is becoming more and more difficult to maintain growth by snatching shares from others. So, while sales of appliances were not going well, Midea actively upgraded its product structure, pushed for new sales, and developed its smart home business to maintain steady growth.

A) COLMO, a high-end brand: Midea continued to expand its high-end brand, COLMO, in the first half of the year, developing new dry-cleaning and 2.0 steam care technologies, and launching a dry-cleaning care kit, ultimately achieving a revenue of 4 billion yuan in the first half of the year, with growth of 150%.

B) Household appliances: In March 2022, Xu Minfeng became the general manager of the Household Appliances Division and began to upgrade its products. Instead of simply pursuing scale, he focused more on profitability. During this period, Midea continuously raised its prices through capacity upgrades. Midea also launched several products, such as the smart instant hot water dispenser, the ultrathin pancake maker, and technology such as wind control technology and the PTC engine for variable temperatures, to increase sales.

C) Refrigeration and air: 1) The refrigerator segment launched rapid purification technology, intelligent sensing and humidity control technology, and intelligent human perception atmosphere lights to upgrade its products in the first half of the year. 2) The sales volume of products with drying functions continued to grow, and the penetration rate of drying machines increased, becoming a new growth point for the washing machine business. 3) The penetration rate of fresh-air air conditioners further increased in the first half of the year, and their price is more than 1.5 times higher than that of regular air conditioners. Midea currently accounts for approximately 60-70% of the retail sales of fresh-air air conditioners, which supports the steady development of the company's air conditioning business.

II. The importance of Midea's B2B business:

1. Compressors and high-voltage inverters boost the development of industrial technology: The industrial technology segment achieved revenue of 12.1 billion yuan in the first half of 2022, a year-on-year increase of 13.26%. This was mainly due to the continued steady development of compressors and increased market share. In the first half of 2022, Midea's global market share of household air conditioner compressors increased to 44%, and its share of refrigerator compressors reached 14%. Additionally, high-voltage inverters benefited from domestic substitution and achieved relatively rapid growth. Furthermore, five of Midea's independently developed EPS motors have begun mass production, making a significant contribution to revenue.

2. Steady development of central air conditioning, hot pump products are selling well in Europe: Midea released several upgraded technologies and solutions in the first half of the year focusing on central air conditioning, building automation, and elevators. For example, it launched the end-to-end SMART IN ONE solution and the IBUILDING Midea building digitization platform. Eventually, revenue from the building technology segment reached 12.2 billion yuan in the first half of the year, a year-on-year increase of 33.09%. Among these, commercial central air conditioners continued to maintain their position as the market leader. In addition, more contributions come from the export of heat pump products. In the first half of the year, the export volume of heat pump products increased by more than 200% year-on-year.

3. Overwhelming orders, delayed production and delivery

The epidemic in the first half of the year once again promoted the process of replacing human labor with machines. Therefore, the industrial robot sector has developed very well in the first half of the year. KUKA robots have a high demand, and the supply falls short of demand. It takes 12 months from ordering to delivery. In addition, KUKA robots actively expand into the fields of battery manufacturing and 3C manufacturing. Finally, the revenue of the robot automation sector in the first half of the year reached 12.2 billion yuan, a year-on-year increase of 2.15%. If it were not for the problems in the supply chain, the production cannot meet the demand, and product delivery is forced to be postponed. Actually, revenue can be higher.

In the first half of the year, Midea reached a sales contract with Ford, providing more than 700 sets of robots for Ford's new factory, which are used to produce car bodies. Besides, Midea also provides production robots for Swedish automobile group's Southern California factory. In addition, KUKA robots actively expand into the field of new energy vehicle manufacturing and have received more than 20,000 robot orders in the first half of the year.

3. Increased gross profit, controllable costs

High-end product sales were good in the first half of the year, which had an effect on increasing gross profit. Furthermore, the price of copper and aluminum was still high in Q1, but it began to decline in Q2, which eased the cost pressure. Finally, the gross profit increased by 1.2%, reaching 24.43%.

Although domestic sales expenses have declined somewhat, Midea has accelerated overseas layout, adding 20,000 new overseas sales outlets. Moreover, it has begun to try out direct sales and retail models in Brazil and the Philippines, intensified overseas promotion and advertising, and eventually achieved a sales expense ratio of 8.05%, which is basically the same as last year, slightly better than expected.

The proportion of management expenses and research and development expenses has slightly increased in the first half of the year. The main reason for the increase in management expenses is equity incentives, and the increase in research and development expenses is due to the technical development and reserve of B-end business.

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