HONG KONG, 4 March 2021. Pengyuan International has assigned a first-time global scale long-term issuer credit rating (LTICR) of ‘A’ to Midea Group Co., Ltd. (Midea), with a stable outlook. The rating reflects Midea’s position as the world’s leading home appliance provider with strong product offerings, wide geographical exposure, exceptional leverage profile and long record of low volatility operations. These strengths, however, are partly offset by the intense competition from both its domestic and international rivals, with a lot of them having niche and unique advantages over Midea.
Midea mainly engages in the production and distribution of heating, ventilation and air-conditioning (HVAC); and other major appliances such as refrigerators and washing machines; and small appliances such as kettles and fans. It also provides different robotics and automation (R&A) systems that are used in various industries. The Company offers its products under various brand names: Midea, Little Swan, Toshiba, Clivet, Comfee, COLMO, Beverly, Eureka, Cuchen, Bugu, WAHIN, Caffitaly, MDV, Welling and GMCC and others. According to Euromonitor, Midea is the world’s largest air treatment brand and consumer appliances producer, in terms of volume. The Company has leading market share in multiple categories in China. Notably, based on its financial reports, Midea has outpaced Gree to become the world’s largest air-conditioner producer as of the first half of 2020. As of FY2019, the Company had 58% of revenue derived from the mainland China and the remaining balance came from the rest of the world.
Key Rating Drivers
Leading market position with a strong and diverse product portfolio. Midea is the largest major appliance company, not just in China but also worldwide. It reported a revenue of RMB279 billion in FY2019, nearly 40% higher than the next two home appliance focused companies in the world: Haier Smart Home and Gree Electric. Midea has a strong product portfolio that covers all types of major appliances with multiple price levels for different consumer segments, and offers a wide collection of small appliances, including electric fans, rice cookers and water purifiers. A lot of the major appliance products, such as air conditioners, laundry appliances and refrigerators rank either first or second place in retail sales market share in China. Notably, the Company has also strong online presence and has the highest online sales volume in China among household appliance manufacturers.
Long track records of above-industry growth with low volatility margins. The Company generated 7% year-on-year revenue growth after its major acquisitions occurred in FY2016 and FY2017, materially higher than the retail sales growth data of 1% and -2.2%, according to China Household Electric Appliance Research Institute and the National Household Electrical Appliance Industry Information Center in 2018 and 2019. Its market share of offline air-conditioners increased to 28.9% in 2019 from 24.6% in 2017. In addition, the Company has a track record of maintaining stable gross and EBITDA margins. Excluding one-time gains and losses and non-operating items, adjusted EBITDA margins remained in a tight range of 10.7-12.3% between FY2014 and FY2019. Undeterred by the coronavirus pandemic’s outbreak, the Company is showing exceptional stability. The Company is expected to maintain a flattish adjusted EBITDA margin of 11.2% in FY2020, extrapolating from the solid three quarters of financial performance in 2020.
Strong leverage profile, strong cash flow generating capability. In spite of all the debt issuance, shares repurchase, increasing dividend pay-outs and high-profile acquisitions over the last few years, Midea was generally expanding its net cash position and improving its leverage profile. The Company increased its total debt by 14% in FY2019 and another 31% in the six months of 2020. Its total financial assets increased by a larger amount and faster rate of 31% and 24% in FY2019 and the first six months in 2020. As a result, the Company’s net cash position has expanded since 2018 with a stronger net debt-to-EBITDA and FFO-to-net debt ratios, suggesting that it has a strong capability to service its debt obligations. Looking forward, we expect some significant events and projects that have occurred but yet to be officially released in the interim periods of 2020, including the acquisition of Hiconics, the construction of a research and development centre in Shanghai and the pending spin-off of Mei-Zhi Photoelectric Technology. These projects will not exert significant pressure on the Company’s financials due to their relatively small size. In our view, the Company’s leverage profile and its cash flow generating ability will continue to remain very healthy and strong.
Strong competitors with unique advantages. The global home appliance industry is crowded with strong domestic and international competitors, while these competitors might be smaller in size, a lot of them have their niche and unique advantages over Midea. For example, Daikin and Dyson have arguably stronger brand images in specific regions and have very distinctive market niches. These competitors have become an immense force that prevents Midea from expanding market share and entering overseas markets. In addition, some competitors have enough pricing power that can induce Midea into a pricing competition. As technology changes, new competitors from different industries, such as Xiaomi, might enter the market with cross-industry advantages, posing as a threat to the Company.
Increasing risk and reliance associated with acquisitions. Midea has been active in mergers and acquisitions over the last few years to improve its production efficiency, enhance its research and development capability, develop new segments, strengthen product offerings, and expand into new markets. These acquisitions have not only increased the Company’s investment cash outflow, but have also increased operating risks, as synergies generated from these mergers and acquisitions may not be as significant as the Company had expected. These acquisition targets may have a lower-than-expected sales performance and lose money, or a substantially high premium that may exert pressure on the Company’s creditworthiness.
The stable outlook for Midea reflects our expectation that the Company will be able to maintain its market position as the leading major appliance producer in the world, while maintaining the same level of profitability and generating positive cash flows.
We would consider upgrading Midea’s issuer credit rating if its credit profile improves substantially, which could be caused by: 1) an expansion in its EBITDA margin to above 14% on a sustainable basis; 2) strengthened product offering with more financially successful premium priced products; and 3) improved business diversity via increasing its international presence or finding financial success in non-home-appliance businesses.
We would consider downgrading Midea’s issuer credit rating if its credit profile deteriorates substantially, which could be caused by: 1) a contraction in its EBITDA margin to below 8% on a sustainable basis; 2) rapid decrease in market share for key products; and 3) weakening liquidity and leverage position due to aggressive acquisitions.
Note: ratings mentioned above are unsolicited
Jonathan Joseph Tai, CFA
+852 3615 8276
+852 3615 8339
Ke Chen, PhD
+852 3615 8316
+852 3615 8296
RATING SERVICES ENQUIRIES
+852 3615 8324
Date of Relevant Rating Committee: 25 February 2021
Additional information is available on www.pyrating.com
General Corporate Rating Criteria (15 March 2018)
Corporate Financial Adjustments and Ratio Definitions (7 May 2018)
Unsolicited ratings – non-participative rating – not disclosed
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