美的集团：China recovery to outweigh overseas pressure

Resilient 1Q20for Midea, reflected by 1) strong export orders, 2) relatively highsmall appliances and online mix, and 3) favorable input costs and FX rate.Exports may experience more pressure but China recovery should be healthy in2Q-4Q20E. Therefore, we maintain BUY but cut TP to RMB 72.80, based on 17xFY21E P/E (rolled over from 18x FY20E), vs China/ Int’l peers’ avg. of 16x/ 14x.n FY19net profit inline: Strong market share gains and GP marginexpansion. Midea’s FY19NP att. rose by 20% YoY, 2% above/ 1% belowBBG/ CMBIS est. Despite sales growth slowed to 7% YoY in 4Q19, NP att.accelerated to 24% YoY in 4Q19, aided by GP margin expansion on more A.C.sales (market shares +4ppt to 29% for offline/ +7ppt to 30% for online inFY19), more high-end product, favorable FX and lower raw material cost.n 1Q20result was resilient and slightly better than industry. Midea’s 1Q20NP att. fell by 23% YoY, fairly resilient and way better than its peers such asHaier SH’s -41%, Supor’s -41% and Gree’s -69%. The beat, in our view, wasdue to: 1) better product mix, with less impact on small appliances vs largeappliances (e.g. A.C. was hit hard) and 2) strong exports orders of 26% YoY.n Guiding for a 3-5% decline in sales/ NP att. in FY20E, driven by a gradualrecovery in China and potentially bumpy export sales. We find this targetachievable, because: 1) small appliances sales had already normalized in Apr2020and should do better as Midea plans to launch 28new products in Jun2020, 2) A.C. price war may continue in FY20E but only at the expense ofsmaller brands like AUX and others. Midea still managed to gain shares evenwith double digit decline in ASP in FY19, 3) export orders cut/ suspension maygo up in 2Q-3Q20E (~3% of FY20E sales as of Apr 2020) but should only belimited, given less than 20% sales exposure to US/ EU, and 4) GP marginshould be stable, which is well supported by falling costs and weakening CNYenvironment. However, the robotic and automation sales (mainly KUKA) maydecline in FY20E since capex on technology upgrades by customers werereduced due to the adverse macro environment.n Maintain BUY but trimmed TP to RMB 72.80(34% upside). We reiteratedBUY because: 1) negatives are all priced in and recovery onwards shall behealthy, and 2) 1Q outperformance to will sustain into 2Q thanks to productmix. We cut FY20E/ 21E NP by 18%/ 11% to factor in sales drop due to virusoutbreak and cut in overseas orders. Our new TP is based on 17x FY21E P/E(rolled over from 18x FY20E). The counter now trades at 16x/ 13x FY20E/21E P/E (vs China peers’ avg. of 16x) or 1.6x PEG (vs China peers’ 1.8x).