美的集团:Prudent sales and rosy margins for 2H19E

1H19net profit up 17%, slight beat. Midea’s net profit rose 17% YoY to RMB 15.2bn, inline with CMBI and 2% above BBG’s est. Sales growth was 8%, inline. The beat was aided mainly by robust GP margin expansion, jumping by 2.3ppt to 29.5% in 1H19(vs 27.2% in 1H18), thanks to: 1) falling raw material costs (copper -6%, aluminum -5% and steel -8%, etc), Midea benefited more vs peers due to its high self-production rate, 2) favorable FX (CNY -5% YTD), and 3) Midea’s multi-brand strategy (launch of high-end positioned COLMO in Oct 2018and Midea PRO series in Mar 2019, internet brand BUGU/ 布谷in Mar 2019and brand targeting youth WAHIN/华凌 in 2019). However, due to greater A&P and R&D expenses, NP margin only increased by 0.8ppt to 9.9%.

Exceptional achievement (esp. on A.C.) in 1H19. Despite a ~4% drop in A.C industry sales, Midea’s A.C sales surged by ~12% YoY in 1H19(market share climbed to 27%/30% on offline/inline in 1H19, vs 25%/23% in 2018). We attribute such impressive results to its innovations (e.g. more products equipped with the “windless” technology, winning the 2019AWE Epland Gold Award). Washing machines/ Refrigerator/ small appliances sales growth were ~6%/~10%/~low-single digit in 1H19, vs industry growth of ~3%/ ~-1%/ ~5%.

Prudent sales and rosy margins for 2H19E. The Company targets a 5-10% sales growth in FY19E and expects a GP margin expansion plus a faster growth for net profit. A.C. sales growth slowed down to ~10% in Jul/Aug 2019, according to management. However, in our view, that should not be a worry as margin should continue to improve given softening raw material prices and highly healthy level of channel inventory, at ~5-6mn units (vs industry’s ~20- 30mn). Also, we see potential upsides from export business’s GP margin since CNY had already further depreciated vs USD in 2H19E. KUKA sales missed in 1H19but management suggested a better 2H19E, for both sales and EBITDA margin.

Maintain BUY and raised TP to RMB 64.96(20% upside). Our new TP is based on 16x FY20E P/E (rolled over from 18x FY19E). We lifted FY19E/20E/21E’s net profit by 1.9%/1.1%/0.2%, to factor in: 1) better A.C. sales, 2) declining raw material costs and currency rate and 3) greater R&D expenses. The counter now trades at 15x/ 13x FY19E/ 20E P/E with 2.6% forward yield.