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No price war this summer

Dong Mingzhu, the indomitable boss of Gree Electric, likes to lead from the front. The 66 year-old proved it again last year by hosting a series of livestreaming shows. And last week China’s biggest producer of air-conditioners was back in the headlines for setting the pace again after news that Gree will buy back more than Rmb15 billion ($2.35 billion) of its own shares, a record amount for an A-share company.

The Shenzhen-listed company will purchase the equity at no more than Rmb70 a share, a premium of about a fifth on the price on the day of the announcement. HSBC has a target price of Rmb83 for Gree stock, which was trading at just over Rmb53 on Thursday.

It follows two repurchase programmes over the previous year (see WiC492) that cost another Rmb12 billion. The standard thinking is that companies repurchase their shares when they believe they are undervalued. Indeed Gree’s revenues are moving back towards pre-pandemic levels, bolstering cash reserves that already exceed Rmb130 billion, HSBC says. Inventories have fallen across the sector, which means another price war this summer is unlikely.

Gree has insulated itself from increases in raw material costs in the short term with hedging, building up supplies in advance and improving its manufacturing performance.

There are encouraging signs in how it has picked up market share in online sales as well, following criticism that its distribution strategy was too dependent on contracts with large dealerships in traditional retail channels.

That reliance came home to roost during the first six months of last year, when disruption at bricks-and-mortar stores because of the pandemic saw Gree lose top spot in air-conditioner sales to mortal enemy Midea. Stung by the slump, Dong poured more of her energies into the shift towards e-commerce, including the livestreaming shows that brought in Rmb18 billion ($2.8 billion) in sales (see WiC494).

A wider refocusing on online distribution is paying off for Gree, adds sector specialist AVC, which estimates that Gree’s share of online sales has grown 6.7% to 29%. It continues to lead in offline sales with 35.1% of the market.

Gree’s rivalry with its Guangdong neighbour Midea is a longstanding one (see WiC504) and it will not have escaped Dong’s notice that her competitor launched a Rmb14 billion buyback of its own in February that was billed as the biggest in Chinese stock market history.

Gree now grabs that title for itself, although the bigger factor in the buyback is the shift in shareholding that saw the Zhuhai local government sell its stake to a consortium headed up by Hillhouse Capital, which took over as the largest shareholder (see WiC473).

Hillhouse’s arrival was seen as a trigger for a more forward-looking company. There was also a promise of more incentives for employees. Indeed, a portion of the repurchased shares will be allocated to a new share ownership plan.

The irony is that Dong is said to have clashed repeatedly with her former shareholders from the Zhuhai government, who pushed her to do more to boost the share price in the short term and to pay out more of the company’s profits in dividends (see WiC347).

She preferred to put the cash into efforts to diversify Gree into new areas, with investments in ventures involving smartphones, new energy vehicles, semiconductor chips and medical equipment. Most of the spending seems to have fizzled out without much return (see WiC408).

Gree cut back its dividend payout to ride out the worst of Covid-19 but it then surprised the market with an interim dividend in the second half of last year that took the annual payout above full-year profit.

It will be hoping the buyback plan lifts the share price in the months ahead, although it still needs to allocate capital to new business lines to reduce its reliance on air-conditioners, which make up about two-thirds of revenues.

Prior to the pandemic sales growth for air-conditioners had slowed markedly in China to not much more than 2% a year. Future demand is reliant on replacement sales and Gree is counting on income from higher-priced models as consumers upgrade to ‘smart’ home appliances.

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