Company Reports

Narrow-moat Gree posted flat revenue year on year for the first half, as the air conditioner sales increase was offset by other businesses’ decline. That said, the 180-basis-point operating margin expansion to 15.9% versus a year ago beat our estimate, thanks to a favorable mix shift to more profitable air conditioners. Despite soft domestic demand, Gree’s 11% year-on-year air conditioner revenue growth was driven by robust sales overseas. While we expect foreign demand to temper off higher bases, we are constructive about the new government subsidies’ boost on home appliance consumption in China. Consequently, we cut our revenue forecasts by 3%-4% while raising operating margin assumptions by 110-130 basis points for 2024-26. This translates to an unchanged CNY 48 per share fair value estimate, and we view shares as undervalued. However, our sector top pick remains Midea, as Gree’s heavy exposure to air conditioners implies a higher concentration risk.

Gree has been one of the leading air conditioner manufacturers in China for the past decade, with high-quality products for residential, commercial, and industrial uses. We think the company’s sector leadership is cemented by its superior brand equity, strong technological capabilities, and effective distribution through online and offline channels. While Gree focuses on cost-competitive air conditioning products in the domestic market, it has seen continuing progress in premiumization, such as holding the top two market shares by sales value in high-end central air conditioners to household and commercial clients in China, as per Aircon.com.cn. Looking forward, we expect Gree to maintain a sound brand reputation and sales network, which should translate into mid-single-digit top-line growth over the next few years.

We are positive about the incremental subsidies to the nationwide home appliance trade-in program revealed by the National Development and Reform Commission, or NDRC, and the Minister of Finance, or MOF, on July 25, 2024. The subsidies will span eight categories, including air conditioners, fridges, and washing machines. Each consumer can enjoy a subsidy for one product per category, with 15%-20% discount on the selling prices of energy-efficient units. Compared with prior subsidies, we are upbeat that more clarity is provided on the funding, which is mostly backed by the issuance of super-long-term government bonds. While the CNY 150 billion in total subsidies also incorporates automobile and consumer electronic products, we expect a material proportion to flow to home appliances.

We are initiating coverage on Gree Electric Appliances, one of the largest residential and commercial air conditioner manufacturers in China, with a fair value estimate of CNY 48 per share. We also assign the firm narrow moat, Medium Morningstar Uncertainty, and Standard Morningstar Capital Allocation ratings. With a focus on the domestic air conditioning market, Gree has accumulated rich development capabilities and a strong distribution network, which underpin its sector leadership. While we foresee rising input and marketing costs to weigh on Gree’s midcycle margins, this should be partly mitigated by ongoing product premiumization and manufacturing automation. As such, we model a 2023-28 compound annual growth rate of 4.6% for its revenue and a negative 1.0% CAGR for adjusted earnings per share. Our assumptions price Gree at 10.8 times 2024 price/earnings, which lags peers Midea and Haier, but is higher than its current level of about 9 times. Despite our conservative outlook for the bottom line, we view Gree’s shares as underpriced, given that the market is overlooking its potential of maintaining a healthy secular profitability.

Gree has been one of the leading air conditioner manufacturers in China for the past decade, with high-quality products for residential, commercial, and industrial uses. We think the company’s sector leadership is cemented by its superior brand equity, strong technological capabilities, and effective distribution through online and offline channels. While Gree focuses on cost-competitive air conditioning products in the domestic market, it has seen continuing progress in premiumization, such as holding the top two market shares by sales value in high-end central air conditioners to household and commercial clients in China, as per Aircon.com.cn. Looking forward, we expect Gree to maintain a sound brand reputation and sales network, which should translate into mid-single-digit top-line growth over the next few years.