Investors Still Love This Appliance Maker Despite Buying Restrictions

(Bloomberg) -- Foreign investors may not be be able to buy shares of Midea Group Co. soon as the Chinese home-appliance maker’s overseas ownership approaches a limit, but analysts say this won’t dampen long-term interest in Midea and other domestic white goods giants.

  • Midea isn’t overvalued despite a 44 percent rally in its share price this year, outperforming a 32 percent gain in the broader A-share market, as some fund managers and analysts expect the company will be bolstered by a recovery in the Chinese property market. The stock surged 8.3 percent on Monday, the biggest daily gain in more than two years.
  • According to a report by property research institute China Index Academy on March 25, real estate transaction volume in 22 Chinese cities rose 16 percent on year in the third week of March.
  • As of March 28, foreign investors had bought a 27.1 percent stake in Midea through China-Hong Kong stock link, QFII and RQFII, approaching an ownership limit of 28 percent. Foreign stake in Shenzhen-listed Han’s Laser Technology Industry Group exceeded a combined 28% last month, triggering a halt of foreign buying under exchange rules and removal by MSCI Inc. from its China indexes.

Key Insights:

  • Citic Securities said in a research note posted on its weibo account on March 31 that there is growing optimism over a recovery in sectors driven by property demand that have been improving this year on policy support. Therefore, it is worth paying attention to the discretionary consumer sector, including stocks of appliance makers.
  • Chinese appliance manufacturers are moving up the value chain amid a state push to develop the Internet of Things, and major companies’ products such as air-conditioners are gaining market share at the expense of smaller players due to the companies’ stronger R&D capabilities, said Arthur Kwong, head of Asia Pacific equities at BNP Paribas Asset Management, in Hong Kong.
  • Vincent Hsu, a Taipei-based fund manager at Fuh-Hwa Securities Investment Trust Co., said he intends to hold Midea for the long term because he likes the company’s management, business strategy and stable balance sheet. Foreign investors also favor Gree Electric Appliances Inc. because of its strong dividend track record. And compared to their overseas peers, Chinese appliance companies hold a brighter growth outlook, he added.
  • But fund managers including Hiroki Lu of SinoPac Securities Investment Trust in Taipei say the high-growth era for Chinese appliance companies is over. That means the upside for their share prices should be limited, he said.

Market Insights

  • Midea Group trades at around 17 times its estimated earnings per share for the coming year. The analyst consensus one-year price target for the company is 50.29 yuan, for a potential loss of 2.7 percent. Analysts raised the target by 4.4 percent in the past three months.
  • Gree Electric trades at around 10 times its estimated earnings per share for the coming year. The company’s dividend yield is 2.5 percent on a trailing 12-month basis. The analyst consensus one-year price target for the company is 46.51 yuan, for a potential loss of 1.5 percent. Analysts raised the target by 8.2 percent in the past three months.

©2019 Bloomberg L.P.

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