Source: Yaya Hong Kong Stock Circle Author: Kyle In the first half of this year, statistics show that at least 180 Hong Kong stock companies have implemented share buybacks, with a total amount of HKD 121 billion, setting a new high in the same period of history. Especially in the Internet companies, almost every shareholder return program has been significantly improved, which can be said to have opened a new era of Internet shareholder returns. Among these companies, Tencent, the "North Star" of Hong Kong stocks, is undoubtedly the most prominent. In the first half of this year, it contributed more than 40% of the repurchase volume of the Hong Kong stock market, firmly occupying the seat of the "repurchase king" of the Hong Kong stock market. In the second quarter, Tencent's single-quarter repurchase amount reached HKD 37.5 billion, which doubled from the first quarter's HKD 14.8 billion. The repurchase average price increased from HKD 290.6 to HKD 361.8, an increase of nearly 25%. It is worth mentioning that Tencent's repurchase amount this year will exceed HKD 100 billion, doubling from last year's HKD 49 billion. What is the concept of a one trillion repurchase plan? This amount is the sum of Tencent's total repurchase amount in the past ten years, which proves the management's confidence in future development and attaches importance to the demands of investors. Through various means such as repurchase cancellation, dividends, and physical distribution, Tencent has truly given back to shareholders in the capital market while achieving performance growth. One, the significance of a trillion repurchases is actively emerging. Looking back at the past two years, since Tencent's major shareholder Prosus began to reduce its holdings, the stock price has been somewhat suppressed. In particular, there have been regular trading behaviors in the market when Hong Kong stocks perform poorly. For example, Hong Kong-listed companies have a "silent period for repurchase" in the month before the financial report is released, during which repurchase is not allowed. This caused great upward pressure on the stock price whenever Tencent entered the repurchase silent period before last year. As can be seen from the following data, of the five silent periods before the end of 2023, only Tencent's stock price in October-November 2022 rose, and in other times it fell. However, since the end of last year, Tencent's stock price has risen during two consecutive silent periods. Especially after the launch of the trillion-dollar repurchase plan this year, the repurchase volume has far exceeded the number of shares sold by major shareholders. Therefore, whether it is on normal trading days that can be repurchased, or during silent periods, the impact brought by the sale of major shareholders can be ignored, and this point is being formed by market consensus. For example, during the repurchase silent period from January to March this year, which happened to be the worst half-year Hong Kong stock market, the Hang Seng Index fell to 14,800 points. Tencent's performance during this period was significantly better than before. Even though the short selling ratio once reached 20%, the stock price did not fall, and the final interval increase was 6%. After the release of the better-than-expected 2023 annual report and the restart of the repurchase at the end of March, Tencent's stock price performed even better in the second quarter, with an increase of nearly 25%. During the same period, the Hang Seng Index and the Shanghai and Shenzhen Composite Indexes fell significantly, with gains of only 8% and 4%, respectively, while Tencent significantly outperformed the Hong Kong stock market with a gain of 25%. Behind this phenomenon, there is no doubt that the trillion-dollar repurchase plan, which has doubled from last year's amount, has played an important role. More importantly, after the repurchased shares are cancelled, Tencent's share capital has been declining for three consecutive years. Since 2021, Tencent's total share capital has decreased from 9.608 billion shares to 9.355 billion shares. In the first quarter of this year, Tencent issued ordinary shares decreased by 1.1% compared to the previous quarter, and the repurchased shares have also been gradually cancelled since this year. This trend will continue to increase earnings per share and further enhance shareholder value. (Caption) Starting in 2022, Tencent has increased its repurchase efforts. With the repurchase cancellation, the company's total share capital has gradually decreased.

Author: Joshua

Midea Group, listed on the Shenzhen Stock Exchange, announced on September 9th that it plans to globally issue 0.492 billion H-shares, with a sale price of HKD 52.00 to HKD 54.80 per share, and plans to raise up to HKD 27 billion.

Obviously, the issue price of H shares this time is discounted compared to the A-share price, with a discount of over 20% when converted to Hong Kong dollars and Renminbi. As of September 13th, $Midea Group Co., Ltd (000333.SZ)$ the A-share price closed at 63.51 yuan. As of press time, $MIDEA GROUP (00300.HK)$ As of the time of writing, it has risen by 7.48%, reaching HKD 58.9, with a premium (H/A) of -15.57%.

Siasun Robot&Automation investors in Hong Kong can buy stocks at a cheaper price, which may be somewhat unpleasant for Midea's A-share shareholders.

However, part of the discount issuance is also due to the higher stock dividend tax in Hong Kong. After the stock price decreases, the dividend yield increases, and the after-tax dividends are similar to A shares. In this respect, it is also considered fair to A-share shareholders.

From the beginning of the year to now, Midea's A-share stock price has risen by 20%, bringing returns to investors far higher than other durable consumer goods companies and indices. In the context of deflation, Midea's low valuation and not low dividend, are enough to attract a large number of investors to follow suit.

The low valuation is due to the company's ability to achieve stable growth after diversifying into real estate, and the high level of dividends is due to the upward shift in profit center after the change in business model and optimization of product structure, creating more funds for shareholder returns.

In a limited choice A-share market, Midea Group Co., Ltd. can be considered a good investment target.

One, diversification

Over the past twenty years, refrigerators have transitioned from direct cooling to air cooling, washing machines have transitioned from agitator to drum, and air conditioners have transitioned from fixed frequency to variable frequency. However, the core technology has remained almost unchanged.

In the days of prosperous real estate and people's well-nourished lives, the market demand for home appliances has shown a trend towards high-end and differentiated development. However, as the economic growth slows down and people begin to tighten their belts, consumer expectations for performance in the home appliance industry, where the technology has remained almost unchanged, tend to stabilize. Under the same functionality, consumers prioritize choosing cheaper options.

From online data, most of the brands with year-on-year growth in sales are concentrated in lower average price ranges.

Even though lower prices can lead to better performance in the current day, the domestic home appliance retail market has long been cold. In 2023, the sales revenue of the domestic home appliance retail market (excluding 3C) was only 849.8 billion yuan, which is still a significant gap of 41.2 billion yuan from the peak in 2019.

As the core business that accounts for 46.7% of the revenue, Midea's HVAC business also faces similar growth challenges. However, interestingly, when looking at the overall revenue, the company has achieved consistent and stable growth, and in recent years, its growth rate has been faster than its peers.

This growth is mainly achieved through the company's diversification and global development. From the table below, it can be seen that the company has been walking on two paths for a long time, with both domestic and international business advancing in parallel. It has diversified development and, when domestic sales encounter growth bottlenecks, it achieves growth through overseas sales, without relying excessively on either side.

With a solid monopoly in the domestic competition landscape and a promising overseas market, the company has achieved independent growth above the industry.

However, Midea is not without its flaws. Looking at it separately, the company's business is not simple. In addition to the long-standing to c business, there is also the to b business, which is considered the second growth curve, but the quality is mixed.

Second, achieving a new high in performance, but the focus is still on home appliances.

Recently, Midea announced its performance for the first half of the year. Against the backdrop of slow growth in the home appliance industry, both revenue and profit levels reached new highs. In H1 2024, the company achieved operating revenue of 217.27 billion yuan, a year-on-year increase of 10.3%, and a net profit attributable to the parent company of 20.8 billion yuan, a year-on-year increase of 14.1%.

The revenue growth rate in the first half of the year is consistent with the growth rate of air conditioning revenue, and it was once believed that the growth rate of the to b business, which is considered the second growth curve of the company, did not catch up with the air conditioning business, but also dragged down the profit. It seems a bit far-fetched to say that the to b business is the second growth curve.

The company's to b business includes three major areas: new energy and industrial technology, intelligent building technology, and robotics and automation.

Among them, the smart building will grow along with the company's increasing market share in the electrical appliance market. The new energy business is growing rapidly globally, and the company mainly provides thermal management systems and electric motor products for the domestic new energy vehicle terminal market, which is still rapidly developing. Both of these products are also used in air conditioners. With Midea's experience, expanding a production line can easily be done, and the synergistic effect is obvious.

In April of this year, the company also reached a cooperation agreement with NIO to discuss the business details based on the electric vehicle parts production base in Anqing.

The issues with smart buildings and the new energy business are not significant. The KUKA robot, which has a large gap with Midea's own system, is dragging down the performance of the B2B business.

To quickly enter unfamiliar fields, Midea chose to acquire KUKA, one of the four largest industrial robot companies in the world. The contribution of KUKA China to the overall revenue of KUKA Group increased from 17.3% in 2021 to 19.6% in 2023. The increase in the share of revenue in China has made KUKA increasingly dependent on the development of China's industry, especially automotive manufacturers.

After 2020, China's new energy vehicles showed a steep increase, reaching 157.5% in 2021. During the same period, the growth rate of robots was also very fast. However, by 2023, the industry growth rate has dropped significantly to 37.9%. In 2024, this growth rate further slowed down. In 2023, the domestic production capacity of new energy passenger vehicles reached 13.46 million units, and based on this estimation, the capacity utilization of new energy vehicles in 2023 is only 57.47%.

The shrinking downstream demand has directly led to minimal growth in the production and sales volume of China's overall industrial robot market for three consecutive years.

As the largest market, the stagnation of demand in China has lowered the global growth expectations for industrial robots.

This has put KUKA, which is on a path of globalization, in a difficult situation. In the first half of this year, the business unit mainly led by KUKA robots recorded a year-on-year growth rate of -9% due to the postponement of domestic automakers' capacity expansion plans and the adjustment of overseas automakers' product strategies. It is the only business segment within the Midea Group that has negative growth.

In 2016, Midea issued a acquisition to KUKA. In order to include KUKA in its pocket that year, Midea offered a premium rate of over 60%, acquiring KUKA, which had a stock price of less than 70 euros a year ago, at a PE ratio of 48 times and a sky-high price of 115 euros per share.

However, this acquisition took 6 and a half years and is expected to cost 31.5 billion. Even for Midea with abundant cash flow, it can be considered a bold gamble. As of 2023, KUKA Group's revenue is 31.1 billion yuan, and after nearly seven years, the acquisition cost has not been recovered.

Haier, a competitor in the industry, acquired GEA and doubled its revenue in 5 years. With the promotion of GEA, the United States has become Haier's largest overseas market. Xiaomi, a half-opponent, has taken a big step into the appliance and automotive industry. Now, not only Xiaomi-branded appliances are selling well both domestically and internationally, but the su7 model is also highly sought after. Under the development of various synergistic businesses, Xiaomi Group has unlocked a new high in quarterly performance.

These two examples prove that Midea's gamble has lost. KUKA is still not earning enough to cover the purchase price, and the growth rate has declined. Moreover, KUKA is still operating under the KUKA brand after the acquisition, which has little effect on the improvement of Midea's brand image.

Acquiring this art is obviously not that simple, but fortunately, the impact of this business is not significant, accounting for less than ten percentage points of total revenue. Moreover, the progress of the group's overseas appliance business is still smooth, which is enough to offset the shadow brought by the failed acquisition case.

According to a Frost & Sullivan report, in 2023, Midea is the world's number one household air conditioner manufacturer in terms of sales volume and retail sales. According to Industry Online, in 2024 Q2, Midea's air conditioner/refrigerator/washing machine sales increased by +12% / +9% / +2% YoY, while exports increased by +49% / +12% / +3% YoY. Both in terms of industry position and growth prospects, the overseas market is more promising.

From a strategic perspective, the company has a larger scale of layout in emerging countries, with over 9,000 retailers joining the overseas sales platform in Southeast Asia. In the early stages, the company mainly focused on sales network layout in countries such as Brazil, Egypt, and India.

Selling proprietary brands in emerging markets is relatively easy, as these markets not only have a fast growth rate, but also lack strong local brands. Mature companies are better able to quickly seize market share using capital. The domination of Japanese car brands in the Southeast Asian market is a good example.

In addition, direct brand overseas expansion can also help build consumer awareness. Midea, which used to focus primarily on OEM manufacturing, has undergone a transformation. In 2023, OBM revenue from major brands such as Toshiba, Midea, and Comfee accounted for over 40% of overseas smart home revenue. Although ODM/OEM businesses still account for about 60% of the market share during the same period, OBM has played a positive role in improving the company's gross margin.

In developed markets, with North America as the representative, Midea has entered the market with its "small appliances". In 2023, Midea's market share for its proprietary window air conditioners and microwaves on Amazon was approximately 28% and 44%, respectively.

Facing the top global home appliance brands with strong competitive barriers in sales channels, production base distribution, and product technology, Midea, which focuses on "small appliances" in mature markets, currently has a small market share. However, there is still an opportunity to break through through effective means such as external mergers and acquisitions. Although the difficulty is not small, overseas markets are always flourishing blue oceans, leaving room for imagination.

Third, steadfast internationalization.

Steadfast overseas development has also become one of the catalysts for Midea's listing on the Hong Kong Stock Exchange. This is because listing in Hong Kong provides more opportunities to attract international capital, thereby helping Midea enhance its international influence.

However, the discount issuance has caused some concerns among existing A-share investors. But in the context of deflation, the company's profitability and risk resistance are enough to offset many concerns.

The company's long-term development path is clear. The revenue side focuses more on overseas export business, utilizing supply chain advantages to enjoy double-digit growth in overseas markets, compensating for weak demand in the domestic market.

On the profit side, under the cost reduction and efficiency improvement of scale effects, the company has improved its unit profitability, with a high single-digit net profit margin and a growth rate that exceeds the revenue growth rate.

The asset-liability ratio is relatively stable, with a small proportion of financing liabilities such as borrowings; operating cash flow is good, and net asset return rate is excellent.

Although the H-share issuance price is 70%-80% of the A-share market price, as of 2023, Midea's net asset return rate has reached 22.23%, and there are not many companies in the entire A-share market with ROE exceeding 15%, which is enough to prove that the company has a good industry moat and long-term profit-making ability. For A-share investors who have excess funds, Midea is one of the few targets in the market with investment value.

IV. Conclusion

The relationship between household appliances and real estate is not a bundle of all losses. Excellent companies generally have strict requirements on industry costs and efficiency. During the boom of the real estate economy, they build brands and channels, and strengthen their own strength to avoid sinking with the slowdown of the real estate economy. This development thinking often determines that the company's long-term performance will not be too bad.

Midea's performance has always maintained growth, and the latest profit growth rate even surpasses the revenue, which is enough to demonstrate the company's determination to pursue efficiency, indirectly ensuring the stability of dividends.

More resilient profit growth and high dividend yield are the reasons why Midea's stock price outperforms the market. Currently, Midea's A/H shares have a 12-month expected P/E ratio of 10 times/9 times. It is expected to achieve stable development in the future, with an estimated compound annual profit growth rate of 9% for 2024-2026 and an average dividend yield of 5%. In the structural downturn of the stock market, this risk-reward is quite considerable.

Editor/Rocky