In China's Consumer-Crazed Stock Market, a Rare Bargain Emerges

  • Midea Group has unaminous buy ratings from 20 analysts
  • Appliance maker's stock trades at a 44% discount to peers

In a Chinese stock market captivated by the prospect of a consumer-led economy, there’s a dearth of cheap ways to bet on the sector. Midea Group Ltd. looks like one of the few remaining bargains.

The nation’s largest maker of air conditioners and rice cookers is valued at 8.3 times projected earnings over the next 12 months, versus an average multiple of 54 for Chinese-listed producers of discretionary consumer products. The $18 billion company has unanimous buy ratings from 20 analysts tracked by Bloomberg, who predict a 47 percent surge in the stock over the next 12 months.

Midea shares have languished this year, trailing a gauge of industry peers by 21 percentage points as China’s weak housing market curbed demand for household appliances and speculators flocked to smaller peers more closely associated with the nation’s booming e-commerce industry. Bulls are betting Midea’s embrace of Internet marketing and web-connected appliances will attract investors searching for less expensive wagers on President Xi Jinping’s plan for a more consumer-driven economy.

“It deserves a better valuation in the market,” Jiang Xuefeng, a Shanghai-based analyst at China International Capital Corp., said in an Oct. 14 phone interview. CICC has a “strong buy” recommendation on Midea shares, the highest in the bank’s five-tier rating system.

Shares of the Foshan, Guangdong province-based company are valued at a 44 percent discount to the CSI 300 Consumer Discretionary Index, after trading almost in line with the gauge as recently as December 2013. The company’s 3.7 percent dividend yield is twice that of the Shanghai Composite Index, according to data compiled by Bloomberg.

Midea’s Rivals

Midea’s stock has slipped 0.2 percent this year through Tuesday, versus a 21 percent gain in the CSI consumer index. Gree Electric Appliances Inc., China’s second-biggest appliance company by market value, has fallen 5.3 percent while Qingdao Haier Co., the third largest, climbed 6.9 percent before the shares were suspended from trading on Oct. 16. The ChiNext Index -- a proxy for smaller “new economy” companies geared to the consumer, technology and service industries -- has jumped 74 percent. Midea dropped 2.2 percent on Wednesday.

Midea’s shares aren’t cheap enough for investors concerned that the company’s size -- with more than 100,000 employees -- and its reliance on traditional sales channels will make a shift toward high-tech businesses difficult, Dai Ming, a money manager at Hengsheng Asset Management Co. in Shanghai, said in a phone interview. The company may also struggle to boost sales amid the nation’s economic slowdown, he said. Data this month showed China’s expansion rate weakening to 6.9 percent in the third quarter, the weakest pace since 2009. Growth in property investment -- an indicator of future demand for household appliances -- slowed to 2.6 percent in the first nine months of this year.

Industry Behemoth

“With a huge market value and lots of employees, it’s hard to make the transition given the burden of its traditional business,” Dai said. “The macroeconomy is weak and the home-appliance sector is also experiencing a downtrend. Under such circumstances, Midea isn’t that attractive.”

Midea, which didn’t respond to written and phone requests for comment, is embracing many of the new economy themes that have propelled shares of smaller consumer-related companies this year. The firm has partnered with Inc. to boost e-commerce sales and teamed up with Xiaomi Corp. to develop appliances that connect to smartphone applications over the Internet. Midea’s embrace of automated production has helped the firm cut production costs, Eva Wang, a Hong Kong-based analyst at Credit Suisse Group AG who has an outperform rating on the stock, wrote in an Oct. 1 report.

Profit Outlook

Despite its size, Midea is still growing. The company’s net income, which nearly doubled to 10.5 billion yuan ($1.65 billion) in fiscal 2014, is forecast to climb another 16 percent this year and 17 percent in 2016, according to analyst estimates compiled by Bloomberg before the firm’s third-quarter earnings on Thursday.

As a globally recognized brand, the company also has appeal to foreign investors, who can now buy the stock through the Hong Kong-Shanghai stock link, said Karine Hirn, who owns shares of Midea in a $100 million Chinese fund that she helps manage at East Capital in Hong Kong.

“This is clearly a company with positive fundamentals in a market where fundamentals are not driving the market yet,” Hirn said in an Oct. 16 interview. “But this is changing. That’s what we are betting on.”

— With assistance by Haixing Jin, and Helen Yuan

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