Midea, “rolling” from the B side to overseas

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Author | Tang Fei Editor | Lim Billy

Source: Value Planet Planet

If there is one word to describe the first half of the Midea Group, it must be “mixed”.

In the first half of this year, under the influence of factors such as the disturbance of the epidemic and the international situation, the general consumption environment was sluggish, and the tension in the upstream supply chain led to high fluctuations in the prices of bulk raw materials such as copper and aluminum, and the scale of domestic appliance exports and domestic sales declined.

As a leader in the home appliance industry, Midea Group experienced a significant slowdown in revenue growth in the first half of this year under the dual pressures of demand and cost. According to the latest financial report, Midea Group achieved operating income of 183.663 billion yuan in the first half of 2022, a year-on-year increase of 5.04%; in the same period, the net profit attributable to the parent was 15.995 billion yuan, a year-on-year increase of 6.57%. For comparison, the revenue and net profit growth rates of Midea Group in the same period last year were 25.14% and 7.76% respectively.

Reflected in the stock price, the share price of Midea Group has fallen from a high of 79.18 yuan per share in January to 53.46 yuan per share at the close on September 6, a drop of more than 32.4% in less than a year.

According to Jiemian News, Midea Group has started laying off staff since March this year, and the advancement time of each business group varies until the end of May. The layoffs have affected almost every business group. Insiders estimate that excluding factory employees, the overall layoff rate is around 20%.

Although Fang Hongbo, chairman of Midea Group, is pushing for the transformation and upgrading of Midea Group, it is not easy to achieve an “elephant turn” in the short term.

Although the B-end business, which is highly expected by Midea Group, has shown a certain improvement in the first half of the year, its proportion of revenue is still low, and it may be difficult to undertake the heavy task of “saving” Midea Group.

Semi-annual report is not good

As one of the domestic home appliance giants, Midea Group has been known for its “high growth” in the past.

Judging from the financial report data over the years, the performance growth rate of Midea Group has been relatively stable, especially in terms of net profit. From 2013 to 2020, the net profit growth rate of Midea Group has not been lower than 10% in the seven years. In 2014, the growth rate of net profit reached 97.5%.

In terms of revenue, although the growth rate is not as stable as the growth rate of net profit, the data performance is also very good. In 2021, Midea Group’s revenue will exceed 300 billion yuan, which is a significant increase of 183.1% in 9 years compared with 121.3 billion in 2013, which is about three times the growth rate of Gree Electric’s revenue in the same period.

However, since 2021, the high growth rate of Midea Group, which has been maintained for many years, has begun to decline.

In the one year from the second quarter of 2021 to the present, Midea Group’s revenue growth rates were 12.86%, 12.89%, 18.34%, 9.54% and 0.97%, and net profit growth rates were -6.33%, 4.4%, -1.66%, 10.97% and 3.24%, showing a downward trend of volatility.

With the obvious slowdown in performance growth, Midea Group’s share price also ushered in a sharp correction.

As of the close on September 6, the share price of Midea Group closed at 53.46 yuan per share, compared with the highest price of 104.7 yuan per share in February last year, a decline of nearly 48.94% in more than a year, and it is only one step away from halving. Evaporated 350 billion yuan.

An investor said: Midea, Haier, and Gree are similar, and their technical reserves are similar. In many cases, they rely on marketing strategies and advertisements to influence consumers’ decision-making; coupled with the impact of the environment in the past two years, consumers have become more and more tight-lipped. Money bags, the decline in the growth rate of Midea’s performance is inevitable, and the transmission of performance fluctuations to the stock market has formed a panic.

During the Mid-Autumn Festival holiday, Value Planet visited a Suning Tesco store near the West Sixth Ring Road, and there were not many customers in the entire store. An air-conditioning salesperson revealed that air-conditioning sales have obvious seasonality. The peak season generally lasts from April to September, but the overall sales this year are not as hot as in previous years. First, the epidemic situation is intermittent, the whole store is open for business hours, and there are fewer people entering the store; second, air conditioners are durable goods, and the manufacturer’s warranty is generally about 6-7 years. , so the demand for new ones is far less than that of digital products.

The good news is that Midea Group’s B-end business has performed well. According to the data, Midea Group’s B-end business mainly includes robots, new energy auto parts, building technology, and heat pump systems.

In the first half of the year, Midea Group’s Building Technology Division had revenue of 12.2 billion yuan, a year-on-year increase of 33.1%; Industrial Technology Division revenue of 12.1 billion yuan, a year-on-year increase of 13.3%; Robotics and Automation Division revenue of 12.2 billion yuan, of which KUKA China’s revenue increased by 36%; the digital innovation business revenue was 5.2 billion yuan, a year-on-year increase of 42.4%.

Cinda Securities pointed out in the research report that Midea Group is currently at a critical moment of transformation. The superposition of the steady growth driving force of the C-end business provides a solid foundation for Midea to transform its B-end business. B-end businesses such as robotics, new energy auto parts, building technology, and heat pump systems are all in the rapid development stage of the industry. As a global manufacturing leader, Midea is actively entering the new track and is expected to create another long-term growth curve for the group.

But is this really the case?

What is the support for the high growth rate of the B-end?

On December 31, 2021, Midea Group divided its business segments into five strategic business groups, namely smart home (home appliances), industrial technology (home appliances, automobiles, industrial control), building technology (building HVAC, elevators, overall scheme design) , Robotics and Automation, Digital Innovation. The latter four are all considered “To B business”.

In the context of the “cold winter” facing the C-end (mainly the household appliance sector), the remaining B-end business segments have become an important force supporting performance.

Separately, the revenue of the Industrial Technology Business Group, Building Technology Business Unit, Robotics and Automation Business Unit, and Digital Innovation Business during the reporting period were: 12.1 billion yuan, a year-on-year increase of 13.26%; 12.2 billion yuan, a year-on-year increase of 33.09%; 12.2 billion yuan RMB 5.2 billion, a year-on-year increase of 2.15%; 5.2 billion yuan, a year-on-year increase of 42.37%.

The biggest contributors are the Building Technology Division and the Robotics and Automation Division.

In early 2022, Midea Building Technology released the “iBUILDING Midea Building Digital Platform” at the “Cloud Building Zhiyu TRUE See the Future” conference to empower hardware products. Throughout the first half of the year, Midea Group designed, delivered and implemented a number of specialized solutions for key industries such as intelligent manufacturing, old and new infrastructure, office R&D, business services, and medical care.

In addition, according to the industry online monitoring data in the first half of 2022, Midea’s domestic market share of central air conditioners continues to maintain its No. 1 position.

In addition to the building technology business, Midea Group’s robotics and automation performance has also been remarkable in recent years.

In 2017, Midea spent 29.2 billion yuan to acquire about 95% of the German KUKA Group to increase its robotics and automation business. It is a pity that KUKA did not perform well in the early days. From 2017 to 2020, KUKA’s “robots and automation systems” sector suffered a total loss of 3.14 billion yuan.

After entering 2021, KUKA’s operating conditions began to bottom out. In the first half of 2021, KUKA’s sales revenue was 1.528 billion euros, a year-on-year increase of 30.9%, and KUKA China’s sales revenue was 262 million euros, a year-on-year increase of 97.2%.

In this year’s semi-annual report, Midea Group did not clearly indicate the detailed performance of KUKA, but only announced the cooperation of KUKA. In the first half of the year, KUKA and Ford Otosan signed a new framework agreement to supply more than 700 robots for Ford’s next-generation electric connected commercial vehicle project at the Kocaeli plant in Turkey; The chassis system of the new electric vehicle provides services such as designing and assembling production lines; providing automation solutions for packaging, transporting and loading flour for the French family flour mill Moulins Bourgeois; providing 144 KUKA KR AGILUS series robots for the Australian diagnostic company Ellume, etc. Wait.

In the first half of the year, KUKA China received orders of 2.55 billion euros, a year-on-year increase of 34.8%, and sales revenue was 1.74 billion euros, a year-on-year increase of 13.5%.

In fact, as early as December 2020, Midea established a new strategy of focusing on B and C. At the annual operation and management meeting at the beginning of this year, Chairman Fang Hongbo emphasized the decision of the senior management of the group through a speech to all the staff: insist on taking the B-end business as the second engine and create a new situation.

Therefore, although the growth rate is gratifying, at this stage, the B-end business accounts for about 24% of the total revenue of Midea Group, and the overall contribution needs to be improved.

Can the B-side save the United States?

It seems that Midea Group will still rely heavily on C-side revenue for a long time to come, so is the B-side really the “second engine” that everyone calls it?

In fact, with the gradual saturation of the C-end home appliance industry, it has become the general trend for home appliance companies to gradually transform to the B-end. In addition to Midea Group, Haier, Gree, Hisense, TCL and other home appliance companies are also making efforts to the B-end business.

A typical example is Gree Electric, whose industrial products business is growing steadily. A series of high-end industrial parts, including Linda compressor, Kaibang Motor, Xinyuan Electronics (capacitor), Gree Electric enameled wire, etc., are all working for Gree Electric. contribution to performance improvement. Haier Zhijia has also developed equipment parts before, mainly for the procurement, production and sales of upstream supporting components for home appliances.

Second-tier home appliance brands are also actively transforming into the B-end. The representative brand TCL began to extend to the TV upstream panel industry in 2009, and entered the semiconductor photovoltaic field in 2020.

Combing the data, it can be found that home appliance companies mainly penetrate into the B-side through mergers and acquisitions, active expansion, etc., and the selected directions are similar, basically aiming at the fields of intelligence, networking and automobile travel, which will inevitably lead to intensified competition.

Hongyu, an analyst in the home appliance industry, told Value Planet (ID: ValuePlanet) that there are certain internal reasons why home appliance companies choose to transform the B side. Generally speaking, companies will carry out reforms when they are at their peak. First, the success of the main business can be used to cover up the reform. Second, when the dividend is about to reach its peak, when the funds, resources and strength are the strongest, it can resist certain risks, thereby increasing the success rate and fault tolerance rate of the reform.

“The growth of Midea Group’s B-end business is not as good as that of C-end, and it may not bring a lot of cash flow for the time being. In the early stage, it needs a lot of capital to support acquisitions, mergers and acquisitions and other actions. In this way, Midea took the lead in shrinking the front line, choosing to be patient and waiting. It is not difficult to understand when the B-end business matures and then open up another battlefield.” Hongyu said.

If the “inward roll” does not move in China, Midea begins to roll outward. In the first half of this year, Midea Group’s revenue in overseas markets was 77.8 billion yuan, a year-on-year increase of 5.2%, slightly higher than the 5% increase in domestic sales revenue, contributing 42.6% of total revenue.

During the reporting period, Midea Group added nearly 2,600 active cooperative customers, added 20,000 overseas sales outlets, and began to experiment with the direct retail model in Brazil and the Philippines. In addition to offline, Midea has also increased investment in overseas e-commerce business, specially established overseas e-commerce companies and formed a special team for overseas e-commerce IT systems.

In order to increase its global influence, Midea Group has also sponsored well-known overseas football clubs and sports events, reaching over 800 million fans around the world in more than 20 home games, and reaching out to over 800 million fans around the world through social media, star and internet celebrity content. 300 million people worldwide. As of June 2022, the company has reached 1.2 billion people through overseas social media, and the number of user interactions has reached 17 million.

However, with the development of Chinese home appliances overseas for decades, the overseas competition is no less than that of domestic home appliance giants. Midea, Gree, Haier, Hisense and other home appliance giants have achieved good results on the export side, and they all have “one-stop production, research and sales”. localization capabilities. In the first half of 2022, the export revenue of Gree, Haier and Hisense were 13.736 billion yuan, 62.5 billion yuan and 14.322 billion yuan respectively, and all of them had good growth rates.

According to data from Changjiang Securities, the proportion of general trade in home appliances (except televisions) has reached 70%, of which ODMs (original design manufacturers) dominate; this means that starting from manufacturing and expanding upstream along the value chain, the model has basically gone At the end of the day, expanding to downstream brands is the new way out. Due to the slow technological iteration of traditional home appliance products, the value chain is not strictly “U”-shaped, but “V”-shaped. Therefore, if you want to increase revenue in the future, OBM (OEM operating its own brand) will have a more obvious impact on profitability.

At present, nearly 60% of Midea’s overseas business is still OEM, and OBM accounts for about 36%-37%.

According to past experience, OEM (original equipment manufacturer) will always have the lowest profit. The gross profit margin of pure OEM home appliance OEM is mostly between 10% and 20%, and it was as low as single digits in the early years. Although ODM has a boost to gross profit margins, it is generally not large. After all, compared with the upstream of the electronics and semiconductor industries, the integration of the home appliance supply chain is not difficult, and there are fewer core components with thresholds. Only when the OBM link is reached and the initiative of the brand and operation is mastered, it is possible to obtain higher profits.

For example, the gross profit margin of the ODM business of the listed company Xinbao Co., Ltd. is only 1-3 percentage points higher than that of the OEM; while the gross profit margin of the OBM-integrated brand companies is more than 30%. Although Midea has not announced the detailed profit rate of OBM, from the semi-annual report, the gross profit rate of Midea Group’s domestic business is 23.58%, while that of foreign countries is 22.5%, still a difference of 1 percentage point. And the year-on-year growth rate of foreign gross profit margin is only 0.92% lower than the domestic growth rate of 1.43%.

Compared with its peers, the gross profit margin of Midea Group’s overseas business is also not dominant. The gross profit margin of Midea’s overseas business was originally higher than that of Haier, but it has declined significantly in recent years, from 31% in 2019 to 23% in 2021. Haier’s gross profit margin has risen steadily, reaching 28% in 2020, successfully surpassing Midea.

To sum up, although Midea Group’s B-end business has a relatively high growth rate, it accounts for a relatively low proportion, and it is difficult to undertake the heavy task of “saving” the company from water and fire; and although the imagination of going overseas is greater, the overall profit margin needs to be improved.

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