December 14, 2017 / 9:01 AM / 2 years ago

Fitch Affirms Midea at 'A-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, December 14 (Fitch) Fitch has affirmed Chinese consumer-appliance producer Midea Group Co., Ltd.'s Long-Term Foreign-Currency Issuer Default Rating at 'A-'. The Outlook is Stable. Fitch has also affirmed the senior unsecured ratings of Midea and its wholly owned subsidiary Midea Investment Development Company Limited (Midea Investment) at 'A-'. The rating on the US dollar notes issued by Midea Investment has also been affirmed at 'A-'. KEY RATING DRIVERS Home Appliances Leadership Maintained: Midea has maintained its leadership in the home appliances market in China across major product categories. We expect Midea's market position to remain solid because of strong awareness of its brand in China, its enhanced R&D capabilities after the acquisitions, and its improved distribution system. Strong Financial Profile: Midea's financial profile remains strong, which is a key factor supporting the rating. We expect Midea to sustain its FCF generation and net cash position throughout the market cycle. The strength of the financial profile will depend on Midea's working capital management and future M&As. KUKA Acquisition Long-Term Positive: The acquisition of KUKA AG has resulted in a 17% yoy increase in Midea's 1H17 revenue. We expect KUKA to deliver satisfactory 2017 results after it said sales would rise 12% and EBIT margin would be more than 5.5% (2016: 5.6%). The KUKA acquisition has also helped Midea to establish a solid global presence in robotics and automatic systems market; and KUKA's expertise supports Midea's efforts to automate its production process, which may lift operating efficiency. Despite the rise in borrowings related to the acquisition, we believe the deal is overall positive to Midea in the long term in light of the company's deep net cash position and the benefits KUKA may bring in the medium to long term. Performance to Remain Robust: We expect Midea to deliver strong results for 2017 in line with its performance in 9M17 and high single-digit growth in 2018, backed by expansion in both its existing and newly acquired businesses. Margins are likely to remain stable with the smooth integration of Toshiba Lifestyle Products & Services Corporation (TLSC) and KUKA, which may provide synergies with Midea's existing businesses. Overall market growth is likely to remain supported amid the trend of consumers upgrading to better-quality products in China. Midea's revenue surged 60% yoy to CNY188 billion in 9M17, driven by strong organic growth and contributions from newly acquired KUKA and TLSC. Gross profit margin narrowed by 2.5pp yoy to 25.0% in 9M17 due to the rise in raw material costs and the integration of KUKA and TLSC, which had lower gross profit margins compared with Midea's existing businesses. Limited International Brand Recognition: Midea lacks brand awareness internationally, despite strong recognition in China. In addition, Midea's end-market exposure remains concentrated in consumer appliances, which are subject to similar economic cycles. We believe these factors constrain Midea's ratings at the current level. DERIVATION SUMMARY Midea's rating reflects its position as one of the largest home appliances manufacturers in China and its strong financial profile. Midea's recent M&A activities, in particular, the acquisition of KUKA, have helped the company to gain access to advanced technologies and new markets, and resulted in a more diversified and stronger business profile. Although Midea ranks ahead of its closest international peers, including Royal Philips (A-/Stable) and Whirlpool Corp. (BBB/Stable), in terms of key financial metrics, we believe that Midea's limited global brand awareness and less diversified end-customer base constrain its rating at the current level. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Mid-to-high single-digit sales growth for 2018-2020. - EBITDA margin of 10%-11% in 2017-2020, which is slightly lower than before. This is due to integration of KUKA and TLSC, which have lower margins, although this was partly offset by an increasing focus on value-added products with higher prices. - Annual capex of CNY3.6 billion-3.7 billion in 2017-2020. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action -Strong international brand comparable with those of its global peers and increasing amount of sales from its own brand overseas. -Increase in market share without compromises in profit margins and financial profile. Developments That May, Individually or Collectively, Lead to Negative Rating Action -Sales growth that is weaker than that of the industry -EBITDA margin sustained below 9% (2016: 11.7%) -FCF margin sustained below 3% (2016: 11.5%) LIQUIDITY Deep Net Cash; Abundant Liquidity: Midea has a strong balance sheet. The company had CNY3.2 billion in short-term debt and CNY7.1 billion in long-term debt at end-2016. Its readily available cash of CNY12.5 billion was more than sufficient to cover all its short-term liabilities. In addition, Midea had CNY37.7 billion in interbank deposits at financial institutions, bank wealth management products and structured deposits. The company maintains good access to the equity market, bond market and banking facilities. We believe Midea has abundant liquidity and financial resources available to meet near-term financial obligations and is capable of making large-scale, strategic acquisitions if opportunities arise. Contact: Primary Analyst Cathy Chao Associate Director +852 2263 9967 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Yee Man Chin Director +852 2263 9696 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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