With 80 billion in hand, why did Midea go to Hong Kong?
As the world's largest home appliance company, Midea Group is going to be listed on the Hong Kong stock market.
Starting as a plastic and metal manufacturer in 1968, Midea Group has become a global home appliance giant spanning the fields of home appliances and industrial robots in 55 years, with revenue reaching 346 billion yuan in 2022, equivalent to 660,000 yuan per minute.
Midea Group's market value in A-shares once reached 754 billion yuan in 2021, and only liquor stocks, bank stocks and new energy giant CATL were at the forefront at that time.
According to the third quarter report of 2023 released on October 31, as of the end of September, Midea Group's book currency funds and wealth management products reached about 80 billion yuan. However, if the expected issuance does not exceed 10% of the company's total share capital after completion, as well as the current market value of 370 billion yuan, the financing amount can reach more than 30 billion yuan at most.
Behind this, why does Midea Group, which has become the world's largest home appliance company, want to be listed on the Hong Kong stock market? Why is the capital market responding meslally?
The "giant elephant" of household appliances is rushing to Hong Kong stocks
Since the news of Midea Group's intention to list in Hong Kong in September, Midea Group finally officially submitted its form on October 24. CICC and BofA Securities became the joint sponsors of Midea Group's listing in Hong Kong.
It is worth noting that the amount of funds raised in Hong Kong has not yet been determined, and needs to be adjusted according to market conditions, according to market sources quoted by the South China Morning Post, the amount of funds raised is more than US$1 billion.
The subsidiaries of Midea Group have also been busy spinning off and listing recently, and compared with the group-level listing in Hong Kong, there is quite a kind of "going their own way".
In fact, in July 2020, Midea Group announced that it planned to spin off its subsidiary, Meizhi Optoelectronics, to be listed on the GEM, but the application was withdrawn in the middle, and it was accepted by the Shenzhen Stock Exchange in April 2022 after the resubmission. After that, at the end of July 2022, Midea Group said that it would start preparations for the listing of its spin-off subsidiary Ander Zhilian on the Shenzhen Stock Exchange.
The above-mentioned Meizhi Optoelectronics' main business is lighting and intelligent front-loading products, while Ander Zhilian focuses on the logistics and distribution business of Midea products, and gradually expands to external logistics business, with revenue of 926 million yuan and 11.3 billion yuan respectively in 2021, of which the former plans to raise 500 million yuan.
Midea Group, which has frequent capital operations, seems to have reached a new critical point.
In 1968, He Xiangjian and 23 residents of Beijiao Town set up the "Beijiao Street Office Plastic Production Group" with a capital of 50 yuan per person, mainly producing plastic bottle caps, and He Xiangjian served as the team leader, and began a period of hard work.
By 1978, the Third Plenary Session of the 11th Central Committee was held, economic construction became the center, people's living standards began to improve, He Xiangjian also smelled business opportunities, trying to enter the field of household appliances that can improve people's living conditions, but the introduction cost and production line cost represented by TV are too high, so the fan category entered He Xiangjian's field of vision, and it has also become the first home appliance product produced by Midea from 1980 to directly face C-end customers.
After nearly 20 years, Midea's fans were sold from home to abroad, and the scale gradually expanded, and Fang Hongbo, chairman of Midea Group, also became a member of the company in 1992, but more importantly, He Xiangjian began to acquire Midea shares from Beijiao Town Economic Development Corporation around 1999, and completed the property rights reform in a moderate way, making Midea a private enterprise.
Until today, Midea has experienced a significant expansion of categories and a significant increase in revenue, and has also fallen into decline because of its overly aggressive strategy, experiencing a trough around 2012, cutting off more than 7,000 product models and more than 30 product platforms, so that Midea gradually got back on track.
Standing at the moment of its establishment 55 years ago, Midea Group has gone through a period of rapid growth with a compound annual growth rate of revenue and net profit of more than 30%, with a compound growth rate of revenue and net profit of less than 15% and 20% respectively in the past 10 years, and the year-on-year growth rate of revenue and net profit in 2022 will drop to 0.68% and 2.74%.
At the results conference in May 2023, Fang Hongbo, chairman of Midea Group, said, "The industry will face relatively big difficulties in the next three years, and it will be an unprecedented winter. ”
In this context, both going overseas and To B business have become ways for Midea to break through the situation, but to a certain extent, these two "tentacles" are also integrated with each other, that is, Midea Group's To C and To B businesses are facing the test of going overseas, and domestic and foreign businesses also need to use To B business to drive growth.
Following this line of thinking, in recent years, whether Midea Group has acquired Kelu Electronics, Dongling Technology, or Wandong Medical, it is to develop To B business in the fields of energy, industry, and medical care, while the acquisitions of Clivet, Toshiba, and Kuka are to expand overseas in the home appliance industry.
Up to now, He Xiangjian, the founder of Midea Group, directly and indirectly holds a total of 31.3% of the equity of Midea Group, which corresponds to a wealth of 116.3 billion yuan according to the market value of 371.7 billion yuan on October 31.
In addition, once the relevant capital operation is completed, Midea Group will follow Haier Smart Home and become the second white power giant listed on A+H, and the number of listings actually controlled by the He Xiangjian family will also increase from 9 to 11, of which the number of A-share listed companies will change from 7 to 9.
Why are Hong Kong stocks listed?
Behind the recent series of capital operations, the most concerned is the listing of Midea Group on the Hong Kong stock market as a whole.
Most of the questions in the market revolve around Midea's real intention to go public in Hong Kong - does such a "cash cow" with 80 billion yuan in hand and more than 10 billion yuan in dividends every year still need funds from the Hong Kong stock market?
According to the public information, the purpose of Midea Group's IPO fundraising includes global scientific and technological research and development, continuous construction of intelligent manufacturing system and upgrading of supply chain management, improvement of global sales channels and networks, and improvement of overseas sales of its own brand, as well as working capital and general corporate purposes.
However, behind the description of the use of funds such as scientific research investment and marketing channels, it is actually a reflection of the relative abundance of funds at the overall level but the relative lack of overseas funds in the process of Midea Group's expansion into overseas markets.
From 2018 to 2022, Midea Group's foreign currency monetary assets (including foreign currency funds, foreign currency accounts receivable, and other foreign currency receivables) totaled between 20.8 billion yuan and 27.5 billion yuan, and foreign currency monetary liabilities (including long-term and short-term loans, accounts payable, other payables, bonds payable, etc.) were between 45.8 billion yuan and 49.3 billion yuan, and foreign currency monetary assets were always lower than liabilities.
Judging from the data of the semi-annual report, regardless of assets or liabilities, Midea Group's foreign currency monetary projects have increased significantly at the end of June 2022 and the end of June 2023, from the previous 20 billion and 40 billion levels that have lasted for many years to 50 billion and 60 billion respectively, which also means that Midea Group's capital demand in overseas markets has increased significantly in the past two years.
However, Midea Group still has nearly 60% of its revenue coming from the domestic market, and it faces foreign exchange restrictions if it wants to transfer domestic funds to overseas accounts, so it has become a more direct way to directly raise overseas funds through Hong Kong stock listing.
As for where the money in overseas markets is spent, Zhongtai Securities Research Report believes that H-share listing can help potential overseas mergers and acquisitions and capital expenditure under the globalization strategy, and on the other hand, 2B business development will also increase the intensity of capital expenditure.
In addition, with reference to Haier Smart Home, which has achieved A+H share listing, relying on the A+H listing platform, A and H employee stock ownership plans have been set up respectively, and the two have differentiated settings in terms of participants. Midea already has a good restricted stock incentive and employee stock ownership mechanism, considering that there are a large number of foreign employees under the global layout, relying on the H-share platform may make the incentive plan more attractive.
In addition to the lack of money in overseas markets, Midea Group's current shareholding ratio in Shanghai-Shenzhen-Hong Kong Stock Connect (accounting for free float shares, the same below) has reached 29.62%, which means that the southbound capital shareholding is close to the upper limit, compared with only 13.95% of Gree Electric Appliances and 17.24% of Haier Smart Home.
Whether it is short of money overseas or favored by overseas funds, the deeper consideration of Midea Group's going to Hong Kong stocks is that the overseas market is becoming more and more important to Midea Group.
According to the "2022 Annual Report on China's Home Appliance Industry", the domestic retail sales of household appliances in 2022 will be 730.72 billion yuan, a year-on-year decrease of 9.5%, and the revenue growth rate of Midea Group will also hit a new low in nearly six years in 2022.
In comparison, Haier Smart Home's large-scale acquisitions in recent years have brought relatively obvious performance assistance - the revenue from overseas markets exceeded 40% in 2014, and reached 51.89% in the first half of 2023, and the growth rate of overseas markets has always been greater than that of the domestic market since 2019.
However, Midea Group's revenue from overseas markets in 2022 has reached 40% since 2016, and the proportion has not increased significantly in recent years, and the revenue growth rate of overseas markets in 2022 is 3.63%, which is also significantly lower than Haier Smart Home's 9.91%, and there is still a lot of room for exploration in overseas markets.
The market feedback was negative
Although there are a series of benefits, Midea Group's listing in Hong Kong does not seem to be "welcomed" by the capital market.
In August, Midea Group announced that it was conducting preliminary demonstrations on the overseas issuance of securities (H shares) and listing, and the stock price fell continuously for the next two trading days. On October 24, Midea Group officially released the news of submitting its statement to the Hong Kong Stock Exchange, and the market responded with a decline of 1.43% the next day, and it still maintains a slight fluctuation.
Why did Midea Group, which has a market value of more than 370 billion yuan, go public in Hong Kong and fail to make more splashes in the market?
In fact, if you look at the current rolling P/E ratio of the Hang Seng Index, it is only 8.23, compared to the average P/E ratio of the Hang Seng Index over the past 20 years of 12.25 and 10.49 over the past 10 years. As can be seen from the chart below, the current P/E ratio of the Hang Seng Index is not only below the average, but also almost at the lowest level in the past 20 years.
Listing at a node with a higher overall price-earnings ratio in the capital market can undoubtedly obtain a higher valuation and more financing, but on the contrary, it is not an ideal listing node.
From this point of view, Midea Group still chooses this way, which to some extent shows that it has a high demand for funds at this stage, and has no patience to wait for a more suitable time.
In addition, even if, as mentioned above, Midea Group is more favored by foreign investors, it is difficult to break through the situation of low valuation in the Hong Kong stock market.
Taking Hisense Home Appliances and Haier Smart Home, which are also listed in A+H, as an example, as of October 31, 2023, the price of Hisense Home Appliances Hong Kong stocks is 21.5 Hong Kong dollars / share, about RMB 20.1 / share, and its price in the A-share market on the same day is 23.8 yuan, 18.41% higher than Hong Kong stocks, Haier Smart Home is in a similar situation, and the price of A shares is also 6 percentage points higher than the converted RMB price of Hong Kong stocks.
In this context, Midea Group's listing in Hong Kong is likely to face a similar situation, which may further dilute the rights and interests of existing shareholders.
At the same time, although Midea Group is already the world's largest home appliance company from the perspective of sales and sales, there is still some room for profitability.
In the 2023 Fortune Global 500 list, there are 6 home appliance companies on the list, namely South Korea's Samsung Electronics (25) and LG Electronics (205), Japan's Sony (104) and Panasonic (218), and China's Midea Group (279) and Haier Smart Home (419).
It is worth noting that Wind data shows that the gross profit margin of these six companies, the Chinese and American groups, is the last, only 24.12%, while the gross profit margin of the other five ranges from 24.24% to 41.08%.
Behind this, Samsung has a leading semiconductor business as the support of the overall gross profit margin, Sony has more advantageous audio-visual technology, and Panasonic's air conditioners, washing machines and other products occupy a place in the high-end field.
For example, the washing and drying set on Jingdong, Panasonic's hot-selling models can be sold at a price of 7,000 yuan to 10,000 yuan, and Midea's hot-selling models are between 2,000 yuan and 4,000 yuan.
The reason for this is that in 2022, the revenue under the OBM (own brand) business model of Midea Group will account for more than 40% of overseas smart home revenue for the first time, which means that 60% of overseas home appliance revenue still exists in the form of OEM as the representative of OEM, and Haier Smart Home, which has a higher gross profit margin, will account for 100% of its own brand revenue in overseas revenue in 2022. More foundry business obviously has an impact on Midea Group's overall gross profit margin.
However, Midea Group's advantages are also obvious - even if the gross profit margin is the lowest, its expense ratio has been controlled between 13% and 19% since 2020, which is the lowest among the six, especially since 2020, and has decreased significantly, while the average expense ratio of the other five companies since 2017 is between 17% and 31%.
Behind this, Midea Group launched digital transformation in 2012 and upgraded its strategy to "comprehensive digitalization" in 2020, which has achieved 100% digitalization of business operations and 70% digitalization of decision-making behaviors.
In this way, Midea Group, which has a limited premium, has relied on excellent operational efficiency to rank in the top three of the six companies in terms of overall net profit margin since 2017, second only to Samsung or Samsung and Sony.
Relying on this higher operational efficiency, if you compare with the ROE indicator that Buffett values most, in recent years, Midea Group's ROE (diluted/deducted) has been the highest or second highest among the above six appliance giants.
In the context of both opportunities and challenges, if Midea Group can be successfully listed on the Hong Kong stock market, it will also have more ammunition, food and grass to cope with the increasingly fierce industry competition around the world.
Author | Lin Xiaxi
Edit | Liu Xiaoying
Operations | Liu Shan