Core views

Gree Electric released its report for the third quarter of 2024. Dragged down by the overall weakness in domestic demand, the company's revenue side is under pressure, and profit performance is still relatively steady. Driven by national subsidies, air conditioning sales are expected to reach another peak in 2024, and it is still a high-quality industry with good growth in the white electronics sector. Gree has multiple advantages such as channel, brand, and industrial chain integration, and has a stable position in the first tier of share. In recent years, the market is paying more and more attention to high dividends and investor returns. Gree has the multiple advantages of high dividends+strong moat+undervaluation. It is recommended to focus on the company's investment value under a high margin of safety.

occurrences

Gree Electric released its report for the third quarter of 2024.

In the first three quarters of 2024, the company achieved total operating income of 146.722 billion yuan, -5.34% year-on-year, net profit to mother of 21.961 billion yuan, +9.30% year-on-year, after deducting non-net profit of 211,6.3 billion yuan, or +10.14% year-on-year.

Looking at a single quarter, 24Q3 achieved total operating income of 46.939 billion yuan, -15.84% year on year, net profit to mother of 7.825 billion yuan, +5.47% year over year, after deducting non-net profit of 72.9.9 billion yuan, or +2.09% year over year.

Brief review

1. The industry sentiment declined in Q3, and Gree's revenue was under pressure

On the market side, the growth rate of the air conditioning industry slowed in 24Q3 due to factors such as concentrated release of demand in the early stages and insufficient effective demand due to cooling consumption. At the company level, Gree's Q3 revenue declined by about double digits.

At the channel level, the company's contract debt balance at the end of 24Q3 was 10.876 billion yuan, down 3.23 billion yuan (-22.9%) from the end of Q2, a year-on-year decrease of 128.0.3 billion yuan (-54.1%); the balance of other current liabilities at the end of the third quarter was 61.752 billion yuan, down 0.473 billion yuan (-0.76%) from the end of Q2, a year-on-year decrease of 0.983 billion yuan (-1.57%). Net cash flow from operating activities was 7.59 billion yuan in the third quarter, down 0.473 billion yuan (-5.87%) from Q2 and 1.146 billion yuan (-13.1%) year on year.

Since September, national subsidies for home appliances have been implemented one after another, and leading companies with a good reputation have benefited. Gree is expected to take on trade-in dividends, optimize the product structure and broaden the channel layout while maintaining the leading competitiveness of individual products, and driving retail growth in a context where domestic demand continues to be stimulated. In Q3, Gree air conditioning sales online grew +3.1%, offline +17.9%. In October, the online growth rate of air conditioning sales was +99.8%, offline +141.2% 2. The sales expense ratio declined significantly, and overall profitability increased

Gross margin declined slightly. 2024Q3 achieved a gross profit margin of 29.67%, a year-on-year decrease of 0.46pct. Price competition increased mainly due to rising raw material costs compounded by falling market demand.

The decline in sales expense ratios led to an increase in overall net interest rates. The 24Q3 company achieved a sales expense ratio of 4.39% (-4.35 pct), a management expense ratio of 3.55% (+ 0.39 pct), R&D expenses of 3.88% (+0.87pct), and a financial expense ratio of -1.44% (+0.55pct). Relying on a significant decline in sales expenses, the company achieved a net profit margin of 15.61%, an increase of 2.75 pct over the previous year.

3. Maintain a steady dividend policy with high dividend allocation value

In 2024, the company's dividend was 2.38 yuan/share, totaling 13.142 billion yuan, with a dividend rate of 45.29%, corresponding to the current dividend rate of 5.39%. Home appliances Hakuba have continuous allocation value in the current investment environment where high dividends are emphasized. As of the end of the third quarter of 2024, Gree's cash on book was 111.4 billion, with abundant cash on the books, good operating cash flow, and guaranteed dividend sustainability.

Investment advice: As a leader in the air conditioning industry, Gree has a strong moat in terms of technology, channels, and marketing. Although there have been twists and turns in recent years, as channel reforms continue to advance, the company's inventory pressure has been drastically reduced, dealer confidence in picking up goods has been restored, and overall performance is expected to improve. We expect the company's revenue for 2024-2026 to be 199.5/210.2/220.4 billion yuan, profit of 31.5/33.8/36.1 billion yuan respectively, and 7.8X/7.2X/6.8X for PE, respectively, maintaining a “buy” rating.

Risk warning: 1. The macroeconomic growth rate falls short of expectations. Household appliances are durable consumer goods and are closely related to residents' income expectations. If macroeconomic growth slows down, or it will have a big impact on the company's product sales; 2. Raw material prices fall short of expectations: the company's raw material costs account for a large share of operating costs, and if bulk prices rise again, the company's profitability will weaken; 3. Overseas market risks: Uncertainty in the overseas environment has increased in recent years, and home appliance companies account for a high share of export sales. If external demand falls, performance will be impacted accordingly; 4. Market competition intensifies: competition in the home appliance industry is more intense in a weak market environment, and the company risks losing share and low price competition dragging down profits.