Gree: Initiating on China’s Leading Air Conditioner Producer With a Narrow Moat; Shares Cheap
We are initiating coverage on Gree Electric Appliances, one of the largest residential and commercial air conditioner manufacturers in China, with a fair value estimate of CNY 48 per share. We also assign the firm narrow moat, Medium Morningstar Uncertainty, and Standard Morningstar Capital Allocation ratings. With a focus on the domestic air conditioning market, Gree has accumulated rich development capabilities and a strong distribution network, which underpin its sector leadership. While we foresee rising input and marketing costs to weigh on Gree’s midcycle margins, this should be partly mitigated by ongoing product premiumization and manufacturing automation. As such, we model a 2023-28 compound annual growth rate of 4.6% for its revenue and a negative 1.0% CAGR for adjusted earnings per share. Our assumptions price Gree at 10.8 times 2024 price/earnings, which lags peers Midea and Haier, but is higher than its current level of about 9 times. Despite our conservative outlook for the bottom line, we view Gree’s shares as underpriced, given that the market is overlooking its potential of maintaining a healthy secular profitability.