Brief Growth Ideas: Midea (Part I): A Deep Dive into Midea’s Air Conditioner Business and more

In this briefing:

1. Midea (Part I): A Deep Dive into Midea’s Air Conditioner Business
2. ECM Weekly (9 Feb 2020) – Mr. DIY, Kingsoft Cloud, SBI Cards, CAMS, Equitas SFB, Akeso Bio
3. NIU Technologies Surges 11% as Market Begins to Appreciate EV Micromobility; Long Runway Ahead
4. RBI Policy Update: A Boost For Indian Financials
5. Softbank G: Elliott’s Activist Intervention Is Well-Timed Especially if the Sprint Merger Is Blocked

1. Midea (Part I): A Deep Dive into Midea’s Air Conditioner Business

This is the FIRST of a series of reports on Midea Corp. where we will be taking a closer look at the company’s core business segments. This insight will mainly focus on the company’s HVAC business which accounts for about 48% of consolidated revenues. Midea has been a dominant player in the Chinese air-conditioner market and is currently the leader in the AC market in China which was previously dominated by Gree Electric Appliances. Compared to Gree, Midea operates with a diversified product mix and has strong positions in the markets in which it operates.

Our analysis of the company’s air conditioner business reveals that the company’s sales have grown more quickly than its peers over the past 2-3 years. The company has been increasingly spending on sales and marketing while it offers heavy discounts and promotions on air conditioners in order to accelerate inventory turnover. When we spoke to Daikin and Renesas Electronics in November last year, they mentioned that market insiders believe Gree has close to 1.5 years of inventory build-up in the channel. Despite the company offering large discounts on its AC model, the HVAC segment’s gross margin has improved over the years and currently stands at about 31%. On the other hand, Gree’s GPM has declined to about 29% in 1HFY03/2019 from about 30% a year ago.

In addition to Midea’s strong position in China, we believe the company has large presence in other emerging Asian economies including India. The US, the second largest AC market in the world is dominated by several local and international players where we believe Midea does not have a very large market share. We view this as positive due to the ongoing trade war between the US and China which could affect the company’s HVAC business.

2. ECM Weekly (9 Feb 2020) – Mr. DIY, Kingsoft Cloud, SBI Cards, CAMS, Equitas SFB, Akeso Bio

3. NIU Technologies Surges 11% as Market Begins to Appreciate EV Micromobility; Long Runway Ahead

Since we wrote our initial insight on NIU Technologies back in January ( Micromobility Is the EV Megatrend That Consensus Hasn’t Realized and NIU Has the Advantage), NIU has grown strongly – generating over 20% return in less than a month. Most recently, the stock jumped 11% on the 6th of February despite fears surrounding the coronavirus outbreak in China.

We believe the market is finally beginning to appreciate one of our favorite structural megatrends – EV micromobility – given its ease of adoption (EV 2-wheelers don’t need extensive charging infrastructure) and just pure efficiency (EV 2-wheelers are the cheapest mode of motorized travel on a per km basis hands-down).

We reiterate our bullish position on NIU Technologies’ longterm outlook with a target price of US$14.7 – representing 45%+ upside from today’s prices.

4. RBI Policy Update: A Boost For Indian Financials

RBI announced its monetary policy updates yesterday (Feb 6, 2020). While it left the interest rates unchanged, it signaled accommodative stance with a focus on supporting growth conditional upon inflation remaining within target range.

Alongside the regular monetary policy announcements, RBI announced a few pertinent policy measures to support stressed sectors like real estate, auto and MSME, which in turn is likely to have strong positive cascading effects for Indian financials.

Key Takeaway: All in all, while RBI did not cut rates, it announced several measures to boost liquidity and credit growth in the economy. Also, the signalling from RBI in terms of growth being a key priority and its focus on reviving the economy, was a strong positive. Inflation, while a concern at this point, appears to be under check as most drivers of uptick in inflation have been seasonal and unlikely to persist. Overall, RBI’s policy measures bode well for reviving credit growth and liquidity availability with potential for positive knockdown effects for the overall economy. This should help Indian financials significantly across various metrics such as credit growth, NIM expansion and improvement in asset quality. We remain optimistic on the Indian financials sector, including select NBFCs and HFCs. For more details, please also refer to some of our recent coverage on Indian Financials:

LIC Housing Finance: Asset Quality Weakens But Green Shoots Emerging 

Bajaj Finance: The Stellar Growth Streak Continues! 

Ujjivan Small Finance Bank: Growth Momentum Continues; Ripe for Scaling Up

Edelweiss – A Turnaround Idea: Shifting from Fund-Based to Fee-Based Business Model 

5. Softbank G: Elliott’s Activist Intervention Is Well-Timed Especially if the Sprint Merger Is Blocked

Softbank shares are up 6% on news that Elliott Management has built up a $2.5bn (c. 3%) stake and is talking to management on enhancing value. That would reportedly entail a $20bn share buyback, greater visibility on Vision Fund investments and strengthening independent directors. And as we wrote a few days ago, that is relevant as shares are trading at a historically high discount to fair value. In the past, Softbank has been open to buying back stock at times like this but the WeWork debacle last year and hopes for a Vision Fund 2 had seemingly ruled that out. Elliott thinks Masa can do it by selling some of his Alibaba shares which makes sense to us but has been a red line in the past. All else remaining equal, Softbank could resist this kind of pressure but a failed Sprint/TMUS merger, weakness at WeWork and a need to fund Vision Fund 2 could force Softbank’s hand.  We think chances of a some sort of buyback have risen and a further reduction in the discount to fair value is possible.