Midea Earnings: Boosted by Better-Than-Expected Margin; Shares Undervalued

Midea’s first-half 2023 net profit rose 14% year on year to CNY 18.2 billion, slightly ahead of our expectation due to the better-than-expected gross margin. We raise 2023-24 earnings estimates by 3%-4% to factor in the latest results, but our longer-term earnings are largely unchanged. We keep our CNY 86 fair value estimate, but we lower our Morningstar Uncertainty Rating to Medium from High to reflect Midea’s resilient business, which continued to deliver earnings growth during the coronavirus pandemic. Although the near-term share price performance may be capped by concerns about the lackluster property market and weak domestic economy, we believe Midea is undervalued. This is underpinned by the firm’s decent net income CAGR of 9.3% for 2022-27.