Gree Earnings: Top-Line Growth Muted While Margin Expansion Positive; Shares Underpriced

Narrow-moat Gree posted flat revenue year on year for the first half, as the air conditioner sales increase was offset by other businesses’ decline. That said, the 180-basis-point operating margin expansion to 15.9% versus a year ago beat our estimate, thanks to a favorable mix shift to more profitable air conditioners. Despite soft domestic demand, Gree’s 11% year-on-year air conditioner revenue growth was driven by robust sales overseas. While we expect foreign demand to temper off higher bases, we are constructive about the new government subsidies’ boost on home appliance consumption in China. Consequently, we cut our revenue forecasts by 3%-4% while raising operating margin assumptions by 110-130 basis points for 2024-26. This translates to an unchanged CNY 48 per share fair value estimate, and we view shares as undervalued. However, our sector top pick remains Midea, as Gree’s heavy exposure to air conditioners implies a higher concentration risk.