美的集团：1Q22beat and an excellent ToB game plan

1Q22was a beat, thanks to better GP margin. We highly appreciate Midea’s shift of focus to generate better than industry’s growth in the next 3years. Therefore, we maintain BUY but fine-tuned TP to RMB 67.79, based on 15x FY22E P/E (down from 22x), vs China/ Int’l peers’ avg. of 13x/ 14x.n FY21results inline and 1Q22results beat. For FY21, sales/ net profit grew by 20%/ 5% YoY, 4%/0% above BBG est., while 1Q22, sales/ net profit increased by 10%/ 11%, 0%/8% above BBG est.. For FY21, domestic/ overseas sales growth were 25%/ 14% YoY, and ToC/ ToB sales growth were 13%/ 39% YoY. Within ToB business, Industrial Technology/ Building Technologies/ Digital Innovation/ Robotic & Automation sales growth were 44%/ 55%/ 51%/ 23%. We find 1Q22results impressive, given the drag from pandemics, and the beat should be attributed to GPM improvement (+0.5ppt YoY to 22.2% in 1Q22), driven by ASP increases and better product mix. We are now more optimistic about GPM in FY22E, driven by more raw material hedging and CNY depreciation.n Aiming to “optimize sales and improve margins” in FY22E. We believe Midea maintains its guidance of “~10% sales and ~10% NP growth” in FY22E, supported by its robust ToB sales growth and its focus on “optimize sales and improve margins”. We think the actual drivers are: 1) premiumization, where COLMO sales could reach RMB 8.0bn (vs RMB 4.0bn in FY21with 300%+ YoY), 2) ramp up of overseas business, as more than 600Chinese management are deployed in various regions since last year and entered into more POSs and e-commerce platforms and 3) development of ToB business.n Beware of potential sector downturn and the shift to ToC businesses is important. Management is highly cautious about home appliances demand for the next 3years and believes its ToB business can become a new growth driver, which mainly consists of Building control, Auto parts supply chain, Energy control and Automation businesses. Sales accounted for 22% in FY21, and we expect to reach ~30% by FY25E, with a 17% sales CAGR during FY21-25E. For auto parts supply chain, Midea has edges in drive system, thermal management system and auxiliary driving system. It has secured orders from Volkswagen, and already touched base with Tesla. For KUKA business, orders are extremely robust, as Midea had entered BYD, CATL and Apple’s supply chain, and we expect it to deliver sales volume of 30K/ 50K- 60K in FY22E/ 23E (vs about 20K at the time of acquisition).n Maintain BUY but cut TP to RMB 67.79(16% upside). We reiterate BUY and cut FY22E/ 23E NP by 7%/ 6% to factor in a weaker GP margin. Our new TP is based on 15x FY22E P/E (down from 22x due to sector downturn). It is now trading at 13x 22E P/E (vs China/ overseas peers’ avg. of 13x/ 14x).