HONG KONG, 8 March 2024. 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 a Chinese electrical appliance manufacturer offering a diverse range of products, including heating, ventilation, and air conditioning (HVAC) systems, consumer appliances, and robotics and automation systems. As China's largest home appliance manufacturer, the company has maintained its leading market shares in key product categories such as home air conditioners, washing machines, refrigerators, and small home appliances.
Midea’s rating reflects its established market leading position, improving business diversification and strong financial profile with low leverage and stable profitability. On the other hand, Midea’s rating is constrained by its high exposure to the highly competitive home appliance market in China.
KEY RATING RATIONALES
Credit Strengths
Leading position in the home appliance market. Benefiting from its excellent brand recognition and strong sales channels, Midea has been able to maintain a leading position in the domestic home appliance market. In recent years, Midea has focused on improving its product mix and promoting its higher-end brands, to meet consumers’ demand for smarter, more eco-friendly and higher-quality products, which we believe will continue to strengthen the company’s market position in the long run. In 2023, China’s home appliance demand recovered with the entire industry’s revenue reaching RMB 1.8 trillion, a year-on-year increase of 7%. While we expect the industry growth to slow in 2024 due to weaker demand amid a real estate downcycle, we anticipate that Midea to maintain its leading position in the domestic home appliance market. This is supported by the company's portfolio of multiple brands and continued investment in research and development.
Improving credit profile. Midea has been maintaining a low leverage and stable profitability for the past few years, thanks to its strong operating cash flow and prudent financial policies. We anticipate the company will further lower its debt-to-EBITDA ratio to 0.8x in 2023, thanks to the company’s strong capability to service its debt obligations. Additionally, Midea's gross margin improved to 25.84% in the first nine months of 2023, up from 23.61% during the same period in 2022, primarily due to lower material costs and administrative expenses. Our forecast suggests that Midea will maintain its adjusted EBITDA margins around 11% during the 2024-2026 period. In 2023, the company filed for a Hong Kong listing, targeting to raise more than US$1 billion in funds. We expect Midea's credit profile to further strengthen as a result of this equity financing. Going forward, we believe Midea possesses the capabilities to sustain its strong credit profile.
Increasing diversification. Midea has been actively working on enhancing its business and geographic diversification. The company has expanded its commercial and industrial solutions segment, which includes building technologies, industrial technologies, automation and robotics, and digital innovation. This segment's revenue contribution has increased from 19% in 2020 to 25% in the first half of 2023. In addition to diversifying its business operations, Midea has also accelerated its overseas expansion despite recent challenges. In the first half of 2023, the company's revenue from international markets reached RMB 81billion, accounting for 41% of its total revenue.
Credit Weaknesses
Intensive competition from peers with niches. The home appliance industry is highly competitive, with both domestic and international players fiercely competing for market share, especially those peers that have niche market and unique advantages. The fragmented and intensely competitive market structure might put pressure on Midea’s profit margin.
Risks associated with acquisitions. Over the past few years, Midea has been actively pursuing mergers and acquisitions (M&As) as a strategy to expand its operating scale, enhance its research and development capabilities and diversify its product offerings. However, this ambitious M&A approach might raise potential operational and financial risks for the company.
RATING OUTLOOK
The stable outlook for Midea reflects CSPI Ratings’ expectation that the company will be able to maintain its market position as a world’s leading appliance manufacturer, successfully venture into new businesses, and maintain strong operational and financial position with 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) There is a significant deterioration in the company’s profitability, on a prolonged basis; 2) 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 an upgrading Midea’s issuer credit rating if its credit profile improves substantially, which could be caused by: 1) There is a significant improvement in the company’s profitability, on a prolonged basis; 2) strengthening of its product offering by having more financially successful premium priced products; and/or 3) further improvement in the company’s business diversity by increasing its presence in different markets and business segments.
Note: ratings mentioned above are unsolicited.
ANALYSTS CONTACT
Primary Analyst
Winnie Guo
+852 3615 8344
Secondary Analyst
Vincent Ha, CFA
+852 3615 8307
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: 29 February 2024
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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