Midea Builds a Durable Foundation on China Consumer Credit Wave
(Bloomberg) -- Sales of washing machines, fridges and rice cookers can speak volumes about where the much-vaunted Chinese consumer is heading. A look at Midea Group Co., the nation's largest maker of home appliances, offers a few more clues.
Kitchen appliances made by Shenzhen-listed Midea, known for its $5 billion acquisition of German robotics giant Kuka AG and Toshiba Corp.'s white-goods business, have been flying off the shelves. The company posted revenue growth of about 30 percent last year; including acquisitions, that figure jumps to more than 50 percent. Margins are high and stable at about 25 percent, based on earnings before interest, taxes, depreciation and amortization.
Midea's fortunes line up with surging consumer confidence in China. The company is going big in Tier 3 cities, adding higher-end products to cater to customers' evolving tastes and to encourage them to upgrade. To keep up with demand, Midea has slashed its inventory-to-cash days sharply and is using its financial resources more efficiently.
How sustainable is this consumer wave? Sure, disposable incomes are rising, but perhaps not fast enough. Auto sales have grown about 25 percent annualized in the past decade. Consumption expenditure per capita on education and entertainment in urban areas has climbed an annual 9.5 percent over the past five years, compared with 7.8 percent for lifestyle goods. On this basis, the air-conditioners and dishwashers churned out by Midea aren't at the top of shopping lists.
Here's where resemblances to the U.S. in the early 20th century offer a pointer. The pre-World War II era saw the rise of consumer credit into a central part of the American economy as the middle class started taking on loans to buy fridges and the like. And there were plenty of lenders -- consumer loan departments started by banks, personal finance companies and the famed installment plan all helped to feed the demand, according to Lendol Calder’s "Financing the American Dream: A Cultural History of Consumer Credit."
Almost a century later, consumer credit in China is swelling as the next wave of almost 500 million consumers -- with financial power but no credit records -- takes to the shops. Household credit has reached about 40 percent of GDP, Goldman Sachs Group Inc. estimates; a separate survey showed that more than 75 percent of respondents had some form of personal loans.
Annualized growth of more than 30 percent between 2016 and 2020 will add 82 billion yuan ($13 billion) to durables consumption this year, Goldman analysts have found. Borrowing for the home is one of the top purposes. As in the U.S., an array of channels has sprung up to serve consumers' new-found predilection to take on debt -- from peer-to-peer lenders to Chinese banks looking in unexplored pockets of the economy to find borrowers.
That supports the case for Midea. Granted, it's unlikely that consumers are taking out loans for the appliance maker's favored induction cookers or kettles. And markets for some products, such as fridges, are beginning to show signs of peaking. But, seeing the eventual plateauing of its core business, Midea has moved faster than rivals to seek fresh growth by buying Kuka.
Midea has talked about increasing capital expenditure as it ramps up investment in automation-related research and development, which could rise significantly over the next two years. In the meantime, the costs of the Kuka takeover are biting as expenses increase faster than sales.
That hasn't prevented Midea shares from more than doubling since the acquisition was announced in May 2016. While the stock has retreated from its January highs, at 15 times forward earnings the company still trades at a 13 percent premium to peers.
Investors clearly see that as a price worth paying for a company that's keeping China's consumers happy.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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