Company Overview: Mainly engaged in ice and air, with more net cash reflecting value and growth ① The company began producing refrigerators in 1983. It is a well-known domestic refrigerator brand. It was acquired by Changhong Group in 2005 and injected into the air conditioning and kitchen business in 2009 and 2015. Currently, the company's business is dominated by refrigerators and air conditioners, accounting for nearly 40% and 50% of revenue in 2022, respectively, of which 70% of revenue comes from domestic sales.

② The major financial characteristic of the company is that it has sufficient cash on hand. The company's net cash reached 87% of the market value on 24/3/12, making it cost-effective to hold. The company's net cash value reached 7.8 billion dollars. Compared to home appliance companies, we found that under the same purchase costs, Meiling's unit growth was the best. We believe that the value of Meiling is reflected not only in net cash, but also in the continuous growth of domestic sales profits and increased export sales.

Domestic demand: increasing profit margins is the core focus

① Refrigerator: Product upgrade has both beta and α, and the price increase logic is smooth. The market generally underestimates the importance and flexibility of refrigerators to Meiling, but we believe that in the face of the dividend period of accelerated penetration of refrigerators once every ten years, after 2021, Meiling will gradually meet upgrade needs by introducing new high-end products with a quality-price ratio and optimize the overall SKU structure. The share of high-end structures of Miling refrigerators in 2023 is already higher than the industry level. We expect the net interest rate of Miling's domestic refrigerators to be only 2% in 2023. Compared with the net interest rate of leading refrigerators above 5% +, Miling's structural improvements in 2024 are expected to further increase refrigerator profits.

② Air conditioning: The share of independent brands has increased, driving profit growth. There is objective beta pressure in the air conditioning industry in 2024. We believe that the highlight of the company's air conditioning business is the growth of its own brand driving profit margins. Changhong's high-quality and cost-effective air conditioning is in line with current rational consumption trends. Driven by declining channels and new products, the growth rate of own-brand air conditioners with higher net margins is higher than that of Xiaomi OEM, optimizing the air conditioner sales structure.

Export sales: China's high-quality production capacity is imported into emerging markets, and the company has great potential for growth ① Industry beta advantage: Meiling's overseas business scope is mainly in emerging markets and incremental markets such as Europe. Driven by the support of the Belt and Road policy, China's exports to developing regions are growing faster than developed countries; and leaders such as Midea have strengthened their overseas strategies to give manufacturers such as Miling more opportunities.

② The company attaches importance to overseas white power and brand development: the company established “Changhong Meiling International” in 2019/6. Similar to Hisense Group, the international marketing company unifies the overseas marketing service platform for white and black electricity. In 2021, Changmei International proposed to focus its work on strengthening white power and e-commerce. The main implementation measures include strengthening collaborative expansion of black and white electronic channels in various regions+strengthening independent brands through e-commerce. Meiling's net interest rate for export sales is higher than for domestic sales, and overseas expansion has led to an increase in net interest rates.

Corporate governance: continuous implementation, with long-term logic

Meiling is a local state-owned enterprise. Taking advantage of the wave of state-owned enterprise reform, it has increased internal efficiency and profits. ① Starting in 2020, the goal of strengthening profit through the “three main lines” was proposed, mainly to strengthen cash and profit management, and continue to be implemented in 2021-2023, which is expected to fix the company's long-standing profit fluctuations. ② Channel reform within the company to connect the full link with products and enhance product efficiency. The company completed large payments on the Gome channel in 2023Q3, and entered the market in 2024. ③ 2024 is the first year of the new leadership team, and profits are expected to be released at an accelerated pace.

Investment advice: Changhong Meiling is a scarce company with good balance sheets, clear profit margin improvement logic, and has proven itself many times over the past two years. We expect the company's 2023-2025 revenue of 259, 284, 31.4 billion yuan, YOY +28%, +10%, and net profit to mother of 7.4, 8.9, 1.02 billion yuan, YOY +203, +20%, +15%, and corresponding closing prices of 12, 10, and 9X PE, slightly below the 24-year average. First coverage, giving a “buy” rating.

Risk warning: There is a risk that competition for air conditioning will intensify, real estate sentiment will affect demand for white electricity, increase in raw materials and shipping costs, inaccurate data from three parties and erroneous calculations, and delays in the use of public data.