Midea's Second Listing: Largest Hong Kong IPO in 3 Years

Midea Group's strategic focus in recent years has been on going global and breaking through internationally.

The company took a groundbreaking step towards accelerating its global expansion by listing in Hong Kong.

On September 17th, the largest IPO (Initial Public Offering) in the Hong Kong stock market in the past three years, Midea Group (0300.HK), officially went public.

The company issued a total of 566 million shares, priced at 54.8 Hong Kong dollars per share, with a net fundraising amount of 30.668 billion Hong Kong dollars.

This makes Midea the second major home appliance company in China to be listed with "A+H" dual primary listings, following Haier Smart Home.

The journey to Midea's secondary listing in Hong Kong has lasted nearly a year since the first announcement.

As early as October 24, 2023, Midea submitted its listing application to the Hong Kong Stock Exchange, but the prospectus became invalid due to the expiration of more than six months without completing the hearing process.

On April 29th of this year, Midea Group resubmitted its application to the Hong Kong Stock Exchange, continuing to seek "A+H" dual listings.

On July 23rd, Midea finally received the China Securities Regulatory Commission's notice of record filing for overseas listing, and completed the Hong Kong Stock Exchange hearing on August 30th.

On September 9th, Midea Group announced in the Hong Kong Stock Exchange that it plans to globally offer 492 million H shares, of which 25 million shares will be publicly offered in Hong Kong, accounting for about 5%, and 468 million shares will be internationally offered, accounting for about 95%.

There is also an adjustment right for a maximum of about 74 million shares and an over-allotment option of up to about 15%-17% to meet additional market demand.

The initial price range for the H share issue was set at 52.00 Hong Kong dollars per share to 54.80 Hong Kong dollars per share.

Midea Group's H share offering raised about 30.668 billion Hong Kong dollars, equivalent to 27.9 billion yuan, making it the largest IPO project in the Hong Kong stock market since Kuaishou's listing in February 2021.

Other major IPO projects in the Hong Kong stock market in recent years include China Duty Free, Tianqi Lithium, JD Logistics, and Kuaishou-W, among others.

Currently, Midea Group's market value is calculated to be 446.7 billion Hong Kong dollars, which can rank in the top 25 of the Hong Kong stock market, higher than large Hong Kong-listed companies such as JD, Baidu, and NetEase.

On the first day of listing, Midea Group's Hong Kong stock price opened significantly higher and closed up 7.85%, at a price of 59.1 Hong Kong dollars per share.

Why list in Hong Kong?

Why does Midea Group seek a secondary listing in Hong Kong?

At the Midea Group's 2023 shareholder meeting in April, the management gave an answer: if it's for raising funds, Midea's dividend in 2023 exceeded 20 billion yuan, and reducing dividends could solve the funding issue.

The reason for going public in Hong Kong is to take advantage of the "breakthrough, convenience, and speed" of the Hong Kong stock market.

The implication is that the main purpose of Midea's listing is not to raise funds.

As one of the top three home appliance giants in China, Midea Group has always been known to the market as a high-performing blue-chip stock, so it is not short of money on paper.

According to financial reports, Midea Group's operating income from 2021 to 2023 was 343.4 billion yuan, 345.7 billion yuan, and 373.7 billion yuan, respectively, with net profit attributable to the parent company of 28.5 billion yuan, 29.5 billion yuan, and 33.7 billion yuan, respectively.

At the same time, the net cash flow from operating activities reached 35 billion yuan, 34.6 billion yuan, and 57.9 billion yuan, respectively.

According to the mid-year report in 2024, Midea Group's total cash on hand, including cash and cash equivalents, reached 104.6 billion yuan, while short-term borrowings and non-current liabilities due within one year were 28.813 billion yuan.

What is "breakthrough, convenience, and speed"?

A long-term analyst who has been following Midea Group said: "In recent years, Midea's strategic core has been focused on going global and breaking through internationally.

This time, the dual listing of 'A+H' in Hong Kong has ushered in another milestone for globalization, which can be said to be a groundbreaking step for Midea Group to accelerate its global expansion pace."

From the description of the use of funds raised from the IPO by Midea Group, it can also be seen that the globalization strategy holds a significant weight for Midea Group.

The prospectus shows that about 20% of the funds raised by Midea Group will be used for global R&D investment, about 35% for improving the global distribution channels and sales network and increasing overseas sales of its own brand, about 35% for continuous investment in the upgrading of the intelligent manufacturing system and supply chain management, and about 10% for operational funds and general corporate purposes.

So, what is the specific and substantial effect of the "A+H" dual listing on Midea Group's global breakthrough?

The aforementioned analyst said: "For Midea, the significance of raising funds through listing in Hong Kong is not great.

Achieving the dual listing of 'A+H' will not only enhance Midea Group's international vision and brand image but also better utilize international capital to help its overseas development.

At the same time, it provides an important capital operation platform for Midea Group to further carry out overseas mergers and acquisitions in the later stage."

According to the prospectus, Midea Group introduced 18 cornerstone investors in this Hong Kong IPO, including COSCO Shipping (Hong Kong), UBS, National Development Fund, BYD's wholly-owned fund Golden Link, Ruifeng Fund, Dajia Life Insurance, etc., with a total subscription of about 9.79 billion Hong Kong dollars.

Among them, the largest cornerstone investor, COSCO Shipping (Hong Kong), subscribed to 281 million US dollars.

Industry insiders said that as a state-owned global shipping enterprise, COSCO Shipping can provide important logistics support for Midea Group's overseas business, which is of great significance for ensuring the stability of Midea's global supply chain.

From the industry perspective, as an early global strategic layout, Haier Smart Home had already realized the "A+H+D" three places listing in Shanghai, Hong Kong, and Frankfurt, Germany, through the privatization of Haier Electric in December 2020, which is considered to have provided a great boost to Haier Smart Home's global expansion.

After Midea Group's listing in Hong Kong, whether Gree Electric, one of the top three home appliance giants in China, will follow suit has attracted much attention.

It is worth noting that in order to facilitate the smooth progress of Hong Kong subscriptions and to consider the performance and image in Hong Kong after listing, Midea Group finally set the issue price at 54.8 Hong Kong dollars per share.

This price is about 21.5% lower than the closing price of 63.51 yuan per share (equivalent to 69.83 Hong Kong dollars per share) on September 13th of the A-share.

The discount of Haier Smart Home's Hong Kong stock as of September 13th was 13.11%.

Due to Midea Group's issuance at a discount of about 20%, the market response was relatively warm, and it was finally oversubscribed by 5.31 times.

At the same time, on September 17th, the Hong Kong stock price opened significantly higher and closed up 7.85%, with the discount with A-shares narrowing to 15.01%.

However, due to the relatively large discount of the issue price compared to A-shares, it caused a certain damage to the interests of A-share investors.

On the day of the announcement on September 9th, Midea Group's A-share stock price fell by 3.06%, with a closing price of 61.09 yuan per share.

Going global has become a "must option".

At the beginning of this year's Midea Group's management annual meeting, Fang Hongbo, Chairman and President of Midea Group, said: "Global breakthrough is one of the most core strategies of Midea at present, and it is necessary to build a second home field in the overseas market."

The reason why globalization is so important to Midea Group is related to the gradual entry of the domestic home appliance industry into the stock replacement market and even the red sea market, which forces Midea to seek new business growth points.

Data from the National Bureau of Statistics show that in 2023, the per hundred households ownership of air conditioners, refrigerators, washing machines, and color TVs in urban residents in China were 172, 102, 99, and 107 respectively.

Compared with the mature markets in Europe and America, the ownership of large home appliances is close to the reasonable level.

Under the stock market, the market share of the three major home appliance giants in China, Midea, Gree, and Haier, is relatively high, and the competitive pattern is relatively stable.

Among them, the domestic air conditioner and washing machine markets present a duopoly pattern of "Gree+Midea" and "Haier+Midea" respectively, while the refrigerator market is "one super and many strong", with Haier's market share exceeding 30%.

Although small home appliances have a wide variety and good growth, their volume is difficult to compare with large home appliances.

Under this situation, the domestic market revenue of the three major home appliance giants has slowed down to varying degrees in recent years.

Among them, Midea Group achieved a revenue of 218.1 billion yuan in the first half of 2024, with a net profit of 20.8 billion yuan.

Among them, domestic revenue was 126.2 billion yuan, a year-on-year increase of 8.3%; overseas revenue was 91.076 billion yuan, a year-on-year increase of 13.09%.

Haier Smart Home achieved a revenue of 135.6 billion yuan in the first half of the year, with a net profit of 10.42 billion yuan.

Among them, domestic revenue was 64.8 billion yuan, a year-on-year increase of 2.3%; overseas market revenue was 70.82 billion yuan, a year-on-year increase of 3.6%.

Gree Electric achieved a revenue of 100.3 billion yuan in the first half of the year, with a net profit of 14.14 billion yuan.

Among them, domestic sales revenue was 75.12 billion yuan, a year-on-year increase of 9%, and foreign sales revenue was 14.82 billion yuan, a year-on-year increase of 15.64%.

In recent years, Midea Group has gradually taken the lead in the competition with Gree Electric and Haier Smart Home in the domestic market.

From the perspective of operating income, Midea Group currently ranks first in the domestic home appliance industry, Haier Smart Home ranks second, and Gree Electric ranks third; from the perspective of net profit, Midea Group has won the industry's first place after surpassing Gree Electric in 2020, Gree Electric ranks second, and Haier Smart Home ranks third; from the perspective of domestic revenue, Midea ranks first, Gree ranks second, and Haier ranks third; from the perspective of overseas revenue, it is Midea first, Haier second, and Gree third.

Looking at the gross profit margin, due to the incomplete disclosure of the mid-year report data, according to the 2023 annual report data, Gree Electric's gross profit margin in the domestic market was 36.84%, ranking first; Haier Smart Home's gross profit margin was 36.37%, ranking second; Midea Group's gross profit margin was 26.03%, ranking third.

Midea Group's domestic market has relatively low pricing and weaker profitability.

In terms of overseas markets, Midea Group's gross profit margin was 27.16%, ranking first; Haier Smart Home's gross profit margin was 26.77%, ranking second; Gree Electric's gross profit margin was 23.75%, ranking third.This has also enabled Midea Group to surpass Gree Electric Appliances with its scale advantages in revenue and net profit, topping the Chinese home appliance industry in market value.

As of the close on September 11th, Midea Group's market value was approximately 430.7 billion yuan, nearly twice that of Gree Electric's 220.1 billion yuan and Haier Smart Home's 235.5 billion yuan.

After the slowdown in domestic market growth, the three giants in home appliances are all looking for their own different growth points.

In recent years, Midea Group has been focusing on expanding from its consumer-facing smart home business to a business and industrial solutions business targeting enterprises.

The former is mainly Midea's basic business in home appliances, while the latter includes smart building technology, robotics and automation, as well as new energy and industrial technology businesses.

However, Midea Group's business targeting enterprises has not been smooth.

In the first half of 2024, the revenue from business-to-business was 46.7 billion yuan, with a growth of only 7% year-on-year.

Apart from the new energy and industrial technology business maintaining a high growth rate, the revenue growth rate of smart building technology fell back to a single-digit increase of 6%, and the revenue from robotics and automation declined by 9% year-on-year.

Haier Smart Home is making efforts in the high-end brand, occupying a place in the high-end home appliance market with Casarte.

Gree Electric has been actively expanding beyond air conditioners to other home appliance categories and has been frequently active in new energy vehicles, but the results have been less than satisfactory.

Under these circumstances, the three giants in home appliances have all turned their attention to the overseas market.

Haier Smart Home was the earliest to go abroad in the industry, Midea Group is making efforts, and Gree Electric's overseas revenue scale is still relatively small, but their common feature is that the growth rate of overseas revenue for the three giants in home appliances is relatively fast.

According to the financial report, in the first half of this year, Midea Group's overseas revenue increased by 13.09% year-on-year, with the growth rate of overseas markets higher than that of the domestic market, and the proportion increased to 41.92%.

In the first half of the year, Gree Electric achieved a rapid growth of 15.64% in the overseas market under the condition of single-digit growth in the domestic market.

Although the growth rate of Haier Smart Home's overseas market slowed down in the first half of the year, with only 3.6%, the proportion of total revenue has reached 52.22%, exceeding the volume of domestic market revenue.

Midea's management stated at this year's shareholders' meeting that the Chinese home appliance market has entered a red ocean, and the competition in the industry is extremely fierce.

There is still a huge opportunity in the overseas market, with the global home appliance market size close to 400 billion US dollars, but there are few global players.

Independent brands still need to break through.

According to the prospectus of Midea, according to the report of Frost & Sullivan, a third-party research institution, Midea Group has taken the lead in the global home appliance industry in terms of sales and revenue in 2023, with a market share calculated by sales reaching 7.9%.

In 2023, Midea Group was among the top three in global sales in the fields of home air conditioners, washing machines, refrigerators, and kitchen appliances and other home appliances, accounting for 23.7%, 14.2%, 10.5%, and 6.0% of the market share, respectively.

Although from the data point of view, Midea Group has ranked first in the global market, from the perspective of the development of overseas markets, Midea still has a long way to go.

In the past, the Chinese home appliance industry, including Midea, went abroad with a complete industrial chain support and cost advantage of labor force, bringing high cost-effectiveness, and the form of going abroad was mainly overseas brand OEM, with a low proportion of independent brands.

Midea has been going abroad in the form of OEM for a long time, not only with low industrial chain value and low gross margin, but also with a short cost dividend period.

After 2010, the Chinese home appliance industry entered a peak period of overseas mergers and acquisitions, starting a model of independent brands combined with the acquisition of local brands.

Due to the long history of the development of the home appliance industry in Europe and the United States, the higher market acceptance of local brands, and certain channel barriers, the way of mergers and acquisitions has become the most convenient way to establish independent brands.

Home appliance leaders quickly entered the local market by acquiring overseas mature brands and channel resources.

In this process, Haier took the lead in the industry.

Haier Smart Home built a high-end home appliance brand matrix in different markets around the world by acquiring the white appliance business of Japan's Sanyo, the home appliance business of the United States' GE (General Electric), New Zealand's Fisher & Paykel, and Italy's Candy (Candy).

Especially in 2016, Haier's acquisition of GE's home appliance business in the United States directly increased Haier's market share in North America, making Haier Smart Home's overseas revenue almost entirely from its own brand.

In the past few years, Midea Group has also successively acquired Japan's Toshiba white appliance business, Italy's central air conditioning Clivet, and Electrolux's vacuum cleaner brand Eureka, promoting its overseas independent brand to break through and develop in the global market.

The scale of Midea Group's overseas business revenue increased from about 45 billion yuan in 2013 to 150.9 billion yuan in 2023, increasing more than three times.

By 2023, Midea Group's own brand business revenue has reached more than 40% of the overseas home appliance business revenue, mainly led by Toshiba, Midea, and Comfee brands.

Midea Group has also set an overseas development goal: by 2025, overseas sales revenue is expected to exceed 40 billion US dollars, the international market share is expected to reach 10%, and the market share of the five major strategic industries is expected to reach 15%-20%, with Southeast Asia aiming to be the first and North America aiming to be in the top three.

However, compared with this, Midea Group still needs time to settle in from OEM to increasing its own brand in the overseas market and truly occupy a position in the high-end market abroad.

Therefore, one of the biggest challenges for Midea Group is how to improve the positioning of its own brand in the overseas market.

In this regard, Midea stated in the semi-annual report: developing its own brand overseas is still one of the key tasks in the second half of the year, and it is determined to prioritize the OBM (overseas own brand) strategy, fully go overseas, completely change the strategy, learn from excellent overseas enterprises, and strive to become an international enterprise.

"Whether it can help Midea Group truly achieve a global breakthrough through this Hong Kong listing, and open up new growth space through the overseas market, is the focus of the capital market's attention to Midea Group and its valuation in the next step."

said the industry insiders.