Both revenue and profit increased by double digits in the first quarter. In the first quarter of 2024, Midea Group's sales/net profit to mother increased 10.2%/10.9% year-on-year to 106.5 billion yuan/90 billion yuan (RMB, same below). In addition to factors such as raw material costs, the continuous optimization of the product structure, the development of high-end business, and the continuous increase in the share of overseas OBM business are beneficial to the gross profit margin. The gross margin for the first quarter increased 3.2 percentage points year-on-year to 27.3%, reaching the highest level since 2020. The net profit margin to mother reached 8.5%, in line with the same period last year.

Benefiting from product structure upgrades, the C-side business is growing faster. Revenue from the C-end business (smart home business) increased 11% year over year, and the driving effect of domestic and foreign sales was more balanced. Among them, domestic sales continue to benefit from product structure upgrades and the development of high-end brands, and average prices drive revenue more than sales. Export sales, on the other hand, benefited from the expansion of the OEM business and the rapid development of the OBM business in emerging markets (revenue from the private label business in Brazil, Egypt, Malaysia and the Middle East increased by more than 50% year over year). The B-side business (commercial and industrial solutions) increased 9% year-on-year, and new energy and industrial technology/intelligent building technology/robotics and automation contributed 7.7 billion/ 8.2 billion yuan, respectively.

The cost rate has increased significantly. Despite a year-on-year increase of more than 3 percentage points in gross margin, the company's period expense ratio increased 2.7 percentage points to 17.1%. Among them, sales/management/financial expenses increased by 1.2/0.2/1.3 percentage points, respectively, and R&D expenses remained flat. Marketing expenses continue to rise. Domestic sales are more dependent on marketing due to high-end brand operations in the development period, while export sales gradually achieve the goal of increasing the OBM business's contribution to overseas revenue by 50% as the company continues to increase investment in overseas localization operations and independent brand building. The financial costs aspect is mainly affected by foreign exchange. The increase in gross margin was offset by the increase in expense ratio, and the operating profit margin and net profit margin remained at 10.0%/8.5%, respectively, in line with the same period last year.

The buy rating was maintained, and the target price was raised to $93.24. Although overall spending power is still recovering, the company achieved double-digit revenue/profit growth. Considering the gradual implementation of the trade-in policy, combined with the company's increasing market share and competitiveness in key white electronics categories year by year, and the accelerated development of overseas OBM business, we expect Midea Group's revenue to maintain a nearly double digit growth rate in 2024. The profit side will grow faster than revenue, mainly driven by a faster increase in gross margin. We raised our target price to 93.24 yuan (previously 85.50 yuan), corresponding 15.4 times the 2024-25 average price-earnings ratio (previously 15.4 times 2024 price-earnings ratio) and 1.46 times PEG.