Midea aims to score Hong Kong IPO to boost global profile

The leading Chinese maker of home appliances has been expanding overseas and actively promoting its brand

Key Takeaways:

• The Midea Group failed in its first Hong Kong IPO attempt last October, but is making another run as the market rallies, with a reported fund-raising target of more than $1 billion
• The appliance maker logged a record profit of 33.7 billion yuan last year

By Fai Pui

At the height of the English soccer season, fans avidly tune into live Premier League games. Aside from the on-pitch action, the broadcasts offer a commercial showcase for ambitious Chinese brands.

Adverts for Chinese home appliance maker Midea flash up regularly on the screen, reflecting the company’s desire to go from being a contract manufacturer to a globally recognized brand in its own right.

The firm was first traded on the Shenzhen Stock Exchange as far back as 1992. The original company was subsumed under the Midea Group Co. Ltd. (000333.SZ) in an internal share-swap in 2013, going public in Shenzhen that year as an integrated business. Last year, its revenue rose 8.1% to 373.7 billion yuan ($51.6 billion), while profits rose 14.1% from the prior year to a record 33.7 billion yuan. The company issued a 30 yuan dividend per block of 10 shares, indicating that the IPO is not motivated by any need for financial relief.

Midea first filed for an IPO at the Hong Kong Stock Exchange last October, but the application stalled, probably because a market slump made it hard to secure a satisfactory valuation. But the Hang Seng Index recently rebounded sharply, and Midea fired off a second listing attempt with a reported fundraising target exceeding $1 billion. Given that the company is currently valued at around 480 billion yuan in the A-share market, success this time could deliver Hong Kong’s biggest IPO in recent years.

With annual profits at record highs and a cash pile of nearly 60 billion yuan at the end of last year, Midea is stepping up its overseas expansion. If successful, the IPO would raise the company’s profile with international investors and facilitate easier access to funding.

The company laid out clear overseas goals in its preliminary prospectus, stating an intention to spend the IPO proceeds on building up global R&D and smart manufacturing systems, upgrading supply chain management, improving global retail channels and boosting overseas sales of its brands.

The company was founded back in 1968 by He Xiangjian, who currently holds a 32% stake in Midea. The business started out producing simple products such as glass bottles before shifting to the electric fan business when China’s home appliance industry took off in the 1980s. it became one of the earliest air conditioning manufacturers in China after buying in equipment and technologies from abroad.

The overseas ambitions go back a long way. In the 1980s, not content with cornering the domestic market, Midea plunged into the international arena, mainly acting as a subcontractor for General Electric, Panasonic, LG, Toshiba and other world-famous home appliance brands.

Midea set up its own overseas factories in 2006, hoping to take its brand global. In 2016 to 2017, it acquired Toshiba Lifestyle, the group’s home appliance business, and Clivet, an Italian air conditioning brand, and German robotics group KUKA. Midea’s performance made a leap forward in 2017 when its annual turnover jumped by 50% and overseas revenue topped 100 billion yuan for the first time.

The group is committed to becoming a global leader, with a goal of increasing its overseas revenue to $40 billion, or around 290 billion yuan, by 2025. Midea aims to become the industry’s biggest player in Southeast Asia and rank among the top three in North America.

But the earnings results show the company still has a long way to go, despite operating in more than 200 countries and territories, with 17 R&D centers and 21 main production bases in more than 10 overseas locations.

Revenue from outside China amounted to about 137.6 billion yuan in 2021, rising only 3.6% in 2022 and 5.8% in 2023 to about 150.9 billion yuan. The company would have to nearly double the revenue stream within two years to hit the goal of 290 billion yuan by 2025. The IPO looks to be a catalyst for faster overseas expansion, to close in on the revenue target.

Profits hit peak

Producing goods for others was always a less favorable option for Midea than operating as an independent brand. Midea’s chairman Paul Fang has reaffirmed the overseas commitment, vowing to work relentlessly to raise the firm’s profile as an original brand manufacturer (OBM). Under the plans, the company is seeking to strengthen its R&D, manufacturing capability, marketing and other services to develop a global value chain.

The prospectus said more than 40% of Midea’s overseas income from smart home solutions now comes from its in-house brands, including Toshiba, Midea and Comfee. On Amazon Prime Day, Black Friday and Cyber Monday last year, the company had more than 100 products on Amazon’s “Best Sellers” list across multiple categories. Its window-mounted air conditioners had a 28% market share on the U.S. Amazon platform last year, while its microwave ovens grabbed a 44% share.

The company posted another positive earnings report at the end of last month, announcing its revenues rose 10% in the January-March period to 106.5 billion yuan, its highest ever quarterly figure. The company also said it spent 3 billion yuan on faster development of its brands outside of China. Midea’s overseas e-commerce sales surged by around 60% year on year in the first quarter, while sales of its own brands soared by more than a half in Brazil, Egypt, Malaysia and the Middle East.

Investors have been bullish on Chinese home appliance stocks recently. Haier Smart Home (6690.HK) has rallied more than 30%, while Hisense Home Appliances (0921.HK) has doubled its share price to a record high. Both companies command a price-to-earnings (P/E) ratio of about 15 times, slighter higher than Midea’s 14.4 times in the A-share market. All three trade at a much lower multiple than international rivals Carrier Global (CARR.US) at 39.3 times and Daikin (6367.T) at 25.1 times. The gap may stem from market concern that China’s volatile relations with the U.S. and Europe could get in the way of Midea’s global ambitions.

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