Who would bet against China’s ‘white horses’? Two of the best known are set for a gallop across foreign fields this autumn, prompting investors to retrain their binoculars on their sector: white goods.
China’s leading stocks are sometimes described as white horses (rather than American-style ‘blue chips’). And for one of them – Haier Smart Homes – the direction of its gallop is definitely taking it beyond the Chinese mainland. The Qingdao-based group is already under starter’s orders for a new listing on the Hong Kong Stock Exchange. It also seems likely to run a race with rival Midea to win Philips’ domestic appliances business, a former crown jewel of the Dutch firm.
White goods is a sector where Chinese brands have been growing their global market share without running into protectionist sentiment. As such, Haier and Midea are both leading contenders for the Philips’ brands, which will come up for auction in the next few months.
Philips has been shedding its non-core businesses to focus on healthcare. Analysts believe that its domestic appliance brands should fetch a valuation of €2.5 billion to €3 billion ($3 billion to $3.6 billion) based on €2.3 billion in 2019 sales.
The Dutch group has strong niches in coffee machines (LatteGo), irons (PerfectCare Steam Generator), vacuum cleaners (SpeedPro Acqua) and air purifiers (Airfryer). None of these items sell for as much as larger appliances like washing machines or fridges, but they are sold in large volumes and they would complement the product ranges on offer at Haier and Midea.
Both firms have made internationalisation a core strategy and Haier is close to deriving more than 50% of its sales from overseas – it was a single percentage point away during the first half of the year.
The growth comes from markets like the US, where Haier is putting market leader Whirlpool under pressure. The former’s US revenues rose 6.5% during the first half of the year, cementing its status in the number two spot. According to data from Euromonitor, Haier now has a 20% share of the US white goods market overall, up from 18.5% in 2017. Whirlpool dropped from 23% to 22% over the corresponding period.
In percentage gain terms, Haier has done even better in Europe where its market share has risen from 2.4% to 7.2%. However, this increase has come from a lower base and it still has some way to go before it catches up with market leader BSH Hausgerate (a Siemens/Bosch joint venture) on 17.5%, and Whirlpool on 12.7%.
Haier’s international push has been largely M&A driven, led by its acquisitions of: New Zealand’s Fisher & Paykel for $663 million in 2012; America’s GE Home Appliances for $5.6 billion in 2016; and Italy’s Hoover Candy for $552 million in 2018.
It hasn’t been quite as effective in squeezing out higher levels of profitability from these acquisitions. Haier is now the world’s largest vendor of fridges, freezers, washing machines and wine coolers by retail sales but it reports much lower margins than its main domestic rivals Gree and Midea.
In 2019, Haier generated sales of Rmb200.8 billion ($29.45 billion) and net profits of Rmb8.2 billion. with an EBITDA margin of 5.7%, according to S&P Global Market Intelligence data. Midea leads the trio on revenues of Rmb278 billion, with net profits of Rmb22.95 billion, equating to a margin of 10.6%. Gree’s sales are lower at Rmb198.2 billion but its EBITDA margin of 14.2% was better, delivering a net profit of Rmb24.96 billion last year.
Like Haier, Midea has built up its revenues by diversifying into new products through M&A. It purchased Electrolux’s homecare products division in the US in 2014 (vacuums and floor cleaners), followed by Toshiba’s lifestyle and products business for $461 million in 2016 (Japan and Southeast Asia-focused).
It added German robotics company KUKA for €4 billion the same year (providing a basis for factory automation and smart manufacturing).
Under the leadership of Fang Hongbo, overseas revenues accounted for 44.6% of the total in the first half of this year and the company is targeting 50% of its sales outside China by 2025.
A purchase of the Philips home appliances unit could help it to get there faster, further boosting the share of international headcount in its employment ranks too.
Back in 2017, Fang spoke of his pride that more than half of Midea’s senior executives are non-Chinese and spread across 19 different countries.
One question for analysts is whether Midea will follow Haier’s example and look for another stockmarket listing – in addition to its existing one in Shenzhen.
Chinese companies have a tendency for herd behaviour when it comes to secondary listings. Where one leads, the others follow in hot pursuit. That makes it more plausible that Midea will conclude that a Hong Kong IPO could boost its standing among international investors in tandem with its globalisation strategy.
And what of Gree? Shares of the Shenzhen-listed firm have underperformed those of Midea and Haier this year. Investors are cautious about its dependence on sales of airconditioners, wanting to see evidence that it can diversify into a wider range of goods.
Relying on sales of a core product for too much profitability opens Gree up to pressure from more diversified rivals, if they decide to undercut it on price.
And this is exactly what Midea has been trying with Gree.
The Chinese press has also been making great play of the fact that Midea is now outselling Gree in airconditioners, although the figures are skewed by the fact that Midea’s numbers include sales of heaters and ventilators.
Nevertheless, when the two companies released their first-half results at the end of August, Midea was shown to have surpassed Gree in the segment for the first time with revenues of Rmb64 billion versus Gree’s Rmb41.33 billion.
Part of Gree’s problem is that it has been much slower to embrace e-commerce as a sales channel than Midea. That was a particular weakness during the Covid-19 outbreak, which was much more of a drag on sales at bricks-and-mortar stores. Midea’s online channels weren’t quite as hard hit, supporting its surge in aircon sales.
Midea’s former e-commerce general manager, Wu Haiquan, told 36kr that the company had its boss to thank for outpacing its local rival. “Midea is open to e-commerce because Fan keenly embraces new technologies,” he applauded.
Gree’s boss Dong Mingzhu has tried to make up lost ground by getting personally involved in the online sales effort, even hosting the company’s livestreaming sessions on Douyin and Kuaishou during the second quarter (see WiC501).
Gree is also shaking up its distribution network by cutting primary distributors’ mark-up rates, shedding secondary salespeople and pushing customers to buy direct through channels such as Dong’s WeChat store, which she launched in the fourth quarter of 2019.
Earlier this year, Dong said that Gree wanted more direct oversight of its sales effort and that distributors would also be expected to take more of a role in installation and servicing of its goods.
Dong and Fang both became CEOs of their companies in 2012 and have very different public profiles. Gree’s Dong is typically front-and-centre in the media, while Fang avoids the spotlight, despite starting his career at Midea as editor of its internal company magazine.
Fang did cause slight consternation in early September when he sold 20 million shares, raising Rmb1.36 billion. The following day another 26.8 million shares appeared on the market from undisclosed Midea executives.
Investors tend to regard such divestments as a signal that a stock has peaked. Year-to-date, Midea’s shares are up 20.8%.
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