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tencent news "periscope"

author: feng biao

editor｜liu peng

on september 17, home appliance giant midea group officially landed on the hong kong stock exchange, becoming another company to be listed on both a and h shares simultaneously. the price range of the h shares issued this time was set at hk$54.8 per share, raising more than hk$30 billion, setting a record for hong kong stock ipo fundraising this year and even in the past three years.

on september 17, midea's opening price rose by more than 8%, and its hong kong stock market capitalization once exceeded hk$29 billion, with a total market value of more than hk$440 billion (about rmb 400 billion). gree electric appliances, which is often used as a reference, had a market value of rmb 220.9 billion as of the latest closing price.

12 years ago, the two giants of home appliance, midea and gree, both welcomed new leaders: fang hongbo and dong mingzhu, who led the two companies to diversification and single category respectively. 12 years later, the market uses price to decide the winner, and midea leads the global home appliance industry by a market value that is nearly doubled.

even in the air conditioner category where gree is well-known and competitive, midea has shown a trend of overtaking. according to data from aowei cloud network, the online retail sales market share of midea and gree air conditioners is 24.15%, ranking first in the industry. xiaomi ranks third in market share, just behind gree.

in addition, after the home appliance industry entered the era of stock renewal, midea group is still expanding its incremental space. today, midea is not only a supplier of home appliances on the counters of shopping malls, but also the boss behind many new energy vehicles, manufacturing plants, and shopping mall elevators. the products sold include industrial robots worth millions of yuan and electric kettles worth tens of yuan. the super-wide product line seems to make people feel that after taking over the top position of midea, fang hongbo is "opposing" fang hongbo ten years ago.

in recent years, midea group has entered the global market from the domestic market, and its performance scale and market value have far surpassed several other competitors.

but there are also hidden worries behind the glory. midea's merger and expansion process has also brought about the growth of debt. although it has hundreds of billions of cash, midea can hardly be said to be "not short of money". at present, with the help of listing on the hong kong stock market, midea may be able to achieve multiple goals at one stroke.

performance grew against the trend, with hundreds of billions of cash in hand

starting out as a township enterprise producing electric fans in the 1980s, it took midea nearly 30 years to achieve revenue of over 100 billion yuan in 2010. midea's founder he xiangjian then made a bold statement that he would "recreate midea in five years."

subsequently, it took midea 7 years to grow from 100 billion to 200 billion. although it took two years longer than he xiangjian expected, it only took midea 4 years to grow from 200 billion to 300 billion - in 2021, its revenue reached 343.4 billion yuan, a year-on-year increase of 20% despite the impact of the epidemic that year.

in recent years, consumption in the home appliance sector has been relatively weak. according to the statistics bureau, in the first half of this year, the total retail sales of household appliances and audio-visual equipment increased by only 3.1%, and in june alone, it fell by 7.6% year-on-year. specifically in the field of home appliances, data from aowei cloud network shows that in the first half of 2024, the scale of the domestic white goods retail market reached 231.9 billion yuan, a year-on-year decline of 7%.

however, in recent years, midea group's revenue has continued to rise against the trend. on the eve of its listing on the hong kong stock market, midea group handed in a brilliant semi-annual report: revenue increased by 10.30% year-on-year to 217.274 billion yuan; net profit attributable to the parent company increased by 14.11% year-on-year to 20.8 billion yuan, achieving a double increase in revenue and net profit. in other words, midea can earn an average of 115 million yuan a day. in addition, the key indicator gross profit margin also increased from 25.24% in the same period last year to 27.09%.

moreover, midea group's profit quality is quite high, with net operating cash flow of 33.488 billion yuan in the first half of the year. in the past few years, net operating cash flow has exceeded the scale of net profit. in contrast, gree electric's net cash flow from operating activities in the first half of 2024 was 5.122 billion yuan, a year-on-year decrease of 83.40%.

therefore, midea group's cash holdings have continued to increase in recent years. in the first half of 2024, cash and cash equivalents reached 101.949 billion yuan, an increase of 24.8% from the end of 2023, and a year-on-year increase of 47.8% last year.

more importantly, midea's efficiency in making money does not seem to be affected by the expansion of its scale. its net profit margin has increased from an average of about 7.4% when its revenue scale was 100 billion yuan, to an average of 8.6% when its revenue scale was 200 billion yuan, and to an average net profit margin of nearly 9% when its revenue scale was 300 billion yuan in recent years.

behind the expansion of debt-based mergers and acquisitions, cash for debt repayment increased fourfold in the first half of the year

since it has hundreds of billions of cash, why does midea still need to raise “only” 30 billion hong kong dollars through the hong kong stock market?

in april of this year, midea’s senior executives clearly responded at the 2023 annual general meeting of shareholders: listing in hong kong is not for raising funds. if it were for raising funds, midea group would now distribute dividends of more than 20 billion yuan a year. reducing dividends would solve the funding problem. the most fundamental reason for listing in hong kong is that hong kong stocks are breakthrough, convenient and fast.

however, does midea really not lack money? in fact, as the scale of operations has expanded in recent years, the scale of midea group's debt has also increased significantly. total liabilities have expanded from 253.1 billion in 2021 to 311.7 billion in 2023, and as of the first half of this year, total liabilities have reached 330.3 billion yuan.

among the total liabilities, the expansion of non-current liabilities, including long-term loans, is the most obvious. in 2021, midea group's non-current liabilities were 30.268 billion yuan, and increased to 64.289 billion yuan and 60.492 billion yuan in 2022 and 2023, nearly doubling. as of the first half of this year, non-current liabilities still amounted to 53.98 billion yuan.

judging from midea group’s semi-annual reports in the past three years, the current ratio was 1.18, 1.11 and 1.09 respectively - this means that the short-term debt repayment ability has declined.

the increase in borrowing in recent years has also led to an increase in financial expenses and principal and interest payments. the proportion of financial expenses to revenue shown in midea group's prospectus is 0.4%, 0.6% and 0.9% from 2021 to 2023, respectively. however, in addition to the increase in financial expenses caused by the increase in the scale of borrowing, midea group's prospectus also mentioned that the increase in overseas borrowing interest rates is also one of the reasons for the increase in financial expenses.

in the first half of this year, midea group paid 19.083 billion yuan in cash to repay debts, while in the same period of 2023 and 2022 it was only 3.773 billion yuan and 3.916 billion yuan, an increase of more than 4 times.

it is worth noting that midea group's bills payable and accounts payable account for a large proportion. in the first half of this year, midea group's bills payable and accounts payable totaled 108.203 billion yuan, a year-on-year increase of 14.8%, but midea group's monetary funds and trading financial assets totaled 104.695 billion yuan in the first half of the year.

in other words, midea group's cash and quickly convertible trading financial funds are no longer able to cover short-term debts.

in recent years, midea has expanded its business circle through multiple large-scale mergers and acquisitions. major m&a projects include: midea acquired kuka in 2017 and privatized it in 2022 to enter the robotics and automation market; in 2020, midea acquired elevator manufacturer lingwang, expanding its business to elevators and building technology products; in 2020 and 2023, midea acquired new energy companies hekang new energy and kelu electronics respectively to enter the energy storage solution business; in 2021, it acquired domestic medical imaging appliances and service provider wandong medical to enter the medical imaging market. the current midea group is far from being a home appliance company that focuses on the c-end market, but has extended its tentacles to b-end businesses such as automation, new energy, and building technology products, becoming a comprehensive company.

the continuous merger and acquisition expansion has also significantly increased midea group's goodwill. before 2015, midea group's goodwill was less than 3 billion yuan. it soared to 28.9 billion yuan in 2017. as of the first half of this year, goodwill continued to climb to 30 billion yuan, which also means that it faces certain risks of goodwill impairment in the future.

in recent years, midea group has demonstrated good business integration capabilities in mergers and acquisitions. for example, after midea group acquired the japanese home appliance brand toshiba, it successfully turned toshiba from loss to profit with the help of midea's supply chain and operational management. in addition, midea acquired germany's kuka robotics at a high premium in 2017. in the years after the acquisition, kuka's revenue declined and it even suffered losses in 2020. however, in 2023, kuka group's revenue and profits both hit record highs, and the doubts brought about by the previous high-premium acquisition have been alleviated to a certain extent.

however, in the history of midea's development, it has suffered from business diversification and being big but not strong. fang hongbo, who graduated with a major in history, certainly has not forgotten the experience when he just took over the "scepter" from he xiangjian in 2012.

starting from the second half of 2011, midea group's performance experienced a rare decline. in 2012, its revenue dropped by 23.4% and its net profit dropped by 7.5%. all products except refrigerators also saw a decline in net profit. in 2012, midea group's decline became more obvious, with revenue down 26.89% and net profit down 7.5% year-on-year. although its performance rebounded in the following two years, its revenue fell again in 2015.

the main problem midea faced at that time was that it had many product lines, but its profitability was lower than that of its competitors. fang hongbo acted decisively and decisively, and despite the pressure from other company veterans, he cut 7,000 of midea's original product models, stopped the operation of more than 30 product platforms, and almost closed all non-home appliance businesses to focus on the white appliance sector. along with these product lines, 70,000 employees were also cut by the "ruthless" fang hongbo.

domestic growth slowed down, and ipo funds were mainly invested overseas

history is not far away. when midea once again starts its m&a expansion and diversification strategy, whether it will make rapid progress or repeat the same mistakes remains to be further observed. however, the current industrial landscape is no longer what it used to be.

home appliances and real estate are closely linked. as real estate enters the stock era and the supply and demand relationship changes, the incremental space of the home appliance industry is visible to the naked eye. moreover, the slowdown in the domestic market growth is directly reflected in midea. in the first half of the year, midea group's domestic market revenue was 126.198 billion yuan, a year-on-year increase of 8.37%, which was significantly slower than the 11.09% growth rate in the same period last year.

another data worth noting is the change in the number of midea dealers. in 2018, midea launched the midea cloud sales platform, which attracted a large number of small and medium-sized dealers. the number of dealers jumped from thousands in previous years to 78,159 in 2021. however, after 2022, midea terminated its cooperation with some dealers with poor performance. midea's prospectus shows that in 2022 and 2023, the number of inactive or terminated dealers will be 1,549 and 8,600 respectively, of which inactive dealers refer to those that have not generated any revenue in the past 12 months.

therefore, it is midea's inevitable choice to develop overseas markets and go global. in recent years, the multiple mergers and acquisitions and project investments in overseas companies are the concrete implementation of midea's globalization strategy. the proportion of midea group's overseas business has continued to rise in recent years, reaching 41.92% as of the first half of this year. the revenue growth rate of overseas markets has reached 13%, higher than that of domestic markets. even the gross profit margin of overseas business has reached 28.4%, 2.25 percentage points higher than that of domestic markets.

however, as early as 2021, midea stated that it would achieve overseas sales revenue of more than us$40 billion by 2025. judging from last year's overseas revenue, it only achieved more than 50% of this goal. therefore, it will not be easy to achieve the goal of us$40 billion next year.

moreover, midea's intention to expand its overseas business is clear with its listing on the hong kong stock market. the prospectus shows that of the funds raised this time, about 20% will be invested in global technology research and development projects, 35% will be invested in improving global sales channels and networks and increasing overseas sales of its own brands, and 20% will be used to expand overseas production capacity.

at the same time, midea also wants to attract more global investors through the hong kong stock channel. the diversified investor structure will also help to carry out more efficient capital operations and strategic layout on a global scale, including more convenient implementation of employee equity incentive plans and attracting and retaining top talents in overseas markets.