China’s largest home appliances company, benefitting from the premiumisation trend

Midea Group is China’s largest home appliances company, with a comprehensive product portfolio that includes air conditioners, refrigerators, washing machines and small home appliances.

With its dominant consumer franchise, we believe Midea is well positioned to benefit from rising income levels and the premiumisation trend in China (as incomes rise, consumers demand better-quality and more expensive products).

Midea’s strong emphasis on research and development has improved its product quality over the years; and its market share in most home appliance categories in China ranks it among the top three. Although inflationary pressures have translated into higher prices for raw materials and shipping, we believe Midea should be able to pass through these additional costs in the longer term – either by increasing prices or by continuing to upgrade the product mix (i.e. producing better-quality products with added value). It has also been streamlining its distribution channels and increasing the use of automation in the production process, which should help cut costs in other areas. As a result, we believe the core business can continue to grow with moderate increases in selling prices, market share gains and margin expansion.

Market leader, gaining share (FY2021)

Robust cash flow generation

Source: FactSet, company annual report, FSSA Investment Managers, as at 30 June 2022. Operating cash flow (OFC) measures cash generated by a company's business operations. Free cash flow (FCF) is the cash that a company generates from its business operations after subtracting capital expenditures.

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