HONG KONG, 11 March 2022. Pengyuan International has affirmed Midea Group Company Limited’s (Midea) global scale long-term issuer credit rating (LTICR) at ‘A’, with a stable outlook. The rating reflects Midea’s position as a world’s leading home appliance provider with strong product offerings, wide geographical exposure, exceptional leverage profile and established record of low-volatility operations. These strengths, however, are partly offset by the intense competition from both its domestic and international rivals.

Midea mainly engages in the production and distribution of 1) heating, ventilation and air conditioning (HVAC), 2) consumer appliances primarily including refrigerators, laundry appliances, kitchen appliances and small domestic appliances, and 3) different robotics and automation systems that are used in various industries. The Company offers its products in different segments under numerous brands such as Midea, Little Swan, Toshiba, COLMO, Eureka, Welling, Clivet, and KUKA. According to Euromonitor, Midea is the world’s largest air treatment, air coolers and cooling fans brand, as well as the world’s largest small cooking appliances and rice cookers brand based on retail sales volume in 2020. The Company has leading market share in multiple categories in China. As of 2020, Midea had 57% of revenue derived from the mainland China and the remaining balance came from the rest of the world.

KEY RATING RATIONALES

Credit Strengths

Leading market position with a strong and diverse product portfolio. Midea is China’s and the world’s leading major appliance producer in terms of sales. The Company reported a revenue of RMB286 billion in 2020, 36% higher than that of the second largest Chinese major appliance company. Midea has a strong product portfolio that covers all major types of home appliances with multiple price points for different consumer segments. The Company also 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 the first or the second place in retail sales market share in China. Notably, Midea also has strong online presence and has the highest online sales in China among household appliance manufacturers.

Long track record of above-industry growth with low-volatility margins. Midea reported 2-8% year-on-year revenue growth in 2018-20 after major acquisitions occurred in 2016 and 2017. This was materially higher than the domestic home appliance retail sales growth, which was 1%, -2.2% and -9.2% in 2018, 2019 and 2020, respectively, according to China Household Electric Appliance Research Institute and the National Household Electrical Appliance Industry Information Center. Meanwhile, offline market share of the Company’s air conditioner increased to 33.8% in 2020 from 24.6% in 2017. In addition, Midea has a track record of maintaining stable gross and EBITDA margins. When excluding one-off gains/losses and non-operating items, adjusted EBITDA margins were in a range of 11-13% in 2015-20. Even under the impact of the coronavirus pandemic, the Company showed exceptional stability, as Midea, by our estimate, managed to maintain an adjusted EBITDA margin of 11% in 2021.

Healthy leverage profile and strong cash flow generation capability. Although Midea’s gross debt level has been increasing in recent years, partly to support the Company’s acquisitions. After reaching its peak in 2018, its adjusted debt level has been declining since then. This is an accomplishment especially considering that Midea has been increasing dividend pay-outs and repurchasing shares, and is achieved with the Company’s strong cash generation capability. To elaborate, Midea increased its total debt by 21% in 2019 and 29% in 2020, but its excess cash increased by a larger amount and faster rate of 116% and 83% in 2019 and 2020, respectively, buoyed by an increase of 22% and 10% in funds from operation (FFO) in 2019 and 2020, respectively. As a result, the Company’s achieved a low debt-to-EBITDA ratio of 0.5x and a high FFO-to-debt ratio of 144% in 2020, implying a strong capability to service debt obligations. Going forward, we think that Midea’s robust cash flow will be sufficient to support its inorganic growth plans, if any, and maintain a healthy leverage condition.

Credit Weaknesses

Intensive market competition. The home appliance industry is thronged with numerous domestic and international competitors. While these peers might not be as scalable as Midea, some of them have niches over the Company. For instance, Daikin has a strong air conditioning brand image in certain regions, while Dyson has distinctive niche in the high-end home appliance market. These competitors are well-positioned and hence can defend their market share in certain product segments and regions. In addition, there are also competitors, particularly in China, that are willing to compete on pricing. In addition, new competitors such as Xiaomi are emerging and compete from the perspective of technology advancement, which includes the development of smart home appliances.

Acquisition risks. Midea has been active in mergers and acquisitions (M&As) over the last few years to enlarge its operating scale and efficiency, enhance research and development (R&D) capability, increase product offerings, and venture into new businesses and new markets. Apart from enhancing the Company’s investment cash outflow, these M&As may also increase 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 on existing businesses, thus leading to adverse development in these businesses.

RATINGS OUTLOOK

The stable outlook for Midea reflects our expectation that the Company will be able to maintain its market position as a leading major appliance producer in the world, 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) EBITDA margins decline to below 8% on a sustainable basis; 2) rapid decrease in the 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 enhancement to above 14% on a sustainable 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.

Date of Relevant Rating Committee: 28 February 2022

Additional information is available on www.pyrating.com

Related Criteria

General Corporate Rating Criteria (15 March 2018)

Corporate Financial Adjustments and Ratio Definitions (7 May 2018)

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