HONG KONG, 7 March 2023. CSPI Ratings has affirmed the global scale long-term issuer credit rating (LTICR) of ‘A’ for Midea Group Company Limited (Midea), with a stable outlook.
Midea is China's largest home appliance manufacturer measured by revenue, with leading market shares in home air conditioners, washing machines, refrigerators and small home appliances. The Company mainly engages in three segments: 1) heating, ventilation and air conditioning (HVAC), 2) consumer appliances, robotics, 3) automation systems and other manufacturing.
Midea’s rating reflects its position as a global leader in home appliance industry, with competitive products and wide geographical exposure. The rating also reflects the Company’s outstanding leverage profile with strong cash flow generation. However, these strengths are partly offset by the intense competition from domestic and international competitors.
KEY RATING RATIONALES
Credit Strengths
Leading position in the home appliance market. Midea’s leading market position benefits from its excellent brand recognition in the domestic home appliance market, outstanding supply chain integration capabilities, and strong online and offline sales channels. The Company offers a diverse range of products and brands, as well as 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 have a leading market share and rank either first or second in terms of retail sales in China. In recent years, Midea has focused on upgrading its product mix and promoting its higher-end brands, such as COLMO, to meet consumers’ demand for smarter, more-ecofriendly and higher-quality products, which we believe will continue to strengthen the Company’s market position in the long run.
Long track records of above industry growth and stable margins. Midea reported 20% year-on-year (YoY) revenue growth in 2021 amid a steady economic recovery in China. This is materially higher than the domestic home appliance retail sales growth data, which were 3.4% in 2021, according to the China Household Electric Appliance Research Institute and the National Household Electrical Appliance Industry Information Center. Despite the fact that weak consumption and the real estate downcycle in 2022 have dampened the industry’s growth, we estimate that Midea managed to achieve low-single-digit revenue growth in 2022, supported by its increased diversification in business segments and in geographical operations. In addition, Midea has a track record of maintaining stable gross profit and EBITDA margins. Excluding one-off gains/losses and non-operating items, adjusted EBITDA margins ranged from 10-12% in 2017-2021. We forecast that Midea will maintain its adjusted EBITDA margins above 11% during 2022-2024, as the Company aims to improve its profitability by shifting its product mix to higher-end products and brands.
Leverage profile remains strong. Owing to Midea’s strong operating cash flow and prudent financial policies, the Company has been able to maintain a stable and low leverage level for the past few years despite undergoing some large acquisitions. The Company achieved a low debt-to-EBITDA ratio of 1.5x and a high FFO-to-debt ratio of 45% in 2021, implying a strong capability to service debt obligations. Going forward, we think that Midea’s robust cash flow will be sufficient to support its capacity expansion and potential acquisitions, if any, and maintain a strong leverage condition.
Credit Weaknesses
Intense competition from peers with niches. The home appliance industry is highly competitive, with both domestic and international players vying for market share, especially for those peers with niches and unique advantages over Midea. For instance, competitors such as Daikin and Dyson have established strong brand images and are well-positioned in specific product segments and regions. Furthermore, there are also competitors, particularly in China, that are willing to compete on pricing. The emergence of new competitors such as Xiaomi, which focuses on smart home appliances, further intensifies the competition in technology advancement.
Risks associated with acquisitions. Over the past few years, Midea has been active in mergers and acquisitions (M&As) as a means to expand its operating scale, improve its R&D capability, broaden its product offerings and explore new businesses. However, these M&As not only resulted in a substantial investment cash outflow, but also increased potential operating and financial risks as synergies from M&As are not guaranteed. Besides the risk of unsuccessful integration with negative financial outcomes, excessive M&A activities could also divert management’s attention from existing businesses, thus leading to adverse developments in these businesses.
RATING OUTLOOK
The stable outlook for Midea reflects CSPI Ratings’ expectation that the Company will be able to maintain its market position as the world’s leading appliance manufacturer, successfully venture into new businesses, and maintain a strong operational and financial position with the same level of profitability and positive cash flows.
We would consider downgrading Midea’s issuer credit rating if its credit profile deteriorates substantially, which could be caused by: 1) EBITDA margins declining to below 6% on a sustainable basis; 2) a rapid decrease in market share for key products due to intensifying competition; and/or 3) aggressive acquisitions that weaken its liquidity and leverage position.
We would consider upgrading Midea’s issuer credit rating if its credit profile improves substantially, which could be caused by: 1) EBITDA margins improving to above 12% and a reduction of its gross debt to capitalisation ratio to below 30% on a sustainable basis; 2) a strengthening of its product offering by having more financially successful premium priced products; and/or 3) further improvement in Company’s business diversity by increasing its presence in different markets and business segments.
Note: ratings mentioned above are unsolicited.
ANALYSTS CONTACT
Primary Analyst
Vincent Ha, CFA
+852 3615 8307
Secondary Analyst
Brian Lam
+852 3615 8339
Committee Chair
Ke Chen, PhD
+852 3615 8316
MEDIA CONTACT
RATING SERVICE CONTACT
Allen Wei
+852 3615 8324
allen.wei@cspi-ratings.com
Date of Relevant Rating Committee: 28 February 2023
Additional information is available on www.cspi-ratings.com
Related Criteria
General Corporate Rating Criteria (15 March 2018)
Corporate Financial Adjustments and Ratio Definitions (7 May 2018)
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