7 Things You Need To Know About Gree Electric Appliances Inc

1. Stock Information

TICKER SYMBOL: SZSE: 000651 / SHE:000651

MARKET CAP: RMB 217 billion (June 2017)

INDUSTRY: Consumer Staples / Household Appliances

2. Business Overview

Gree Electric Appliances Inc of Zhuhai ([stock_quote symbol=”SHE:000651″ show=”name” nolink=”1″ class=”1″]) is one of China’s largest producers and sellers of household electrical appliances, including air conditioners, refrigerators, air water heaters, small appliances, and more. It has a market capitalisation of RMB 244 billion and its air conditioner business is the largest in mainland China, with a market share of 37%. Its other white goods and small appliances products are sold under the Kinghome and TOSOT brands. Gree has also recently entered into the smartphone business, though it represents a very small part of its business. The company was formed in 1989 through a merger of three separate companies, and went public in November 1996. It is headquartered in Zhuhai and sells its products all over the world. Gree Electric Appliances Inc is today a Forbes 500 company.

Gree’s revenues grew 10.8% to RMB 108 bn in FY16. Its operating profit grew 15.3% to RMB 12 bn, and net income grew 23% to RMB 15.4 bn.

Gree’s business is primarily derived from air conditioner sales, which occupy 81% of revenues or RMB 88.09bn in FY16. The other two segments are small household appliances manufacturing and others, which brought in RMB 1.72bn and RMB 3.39bn in revenues respectively.

Gree is the largest player in the air-conditioning unit market, with 37.1% market share. Main competitors include Midea (22.1% market share, RMB 289bn market cap), Qingdao Haier (11.4% market share, RMB 90.3bn market cap), and Hisense Kelon (6.7% market share, RMB 22.0bn market cap). 

3. Key Strengths

Focus on air-conditioning unit industry

Gree Electric is the only company to have such a dedicated focus on the air-conditioning unit industry, as the segment comprises 81% of total revenues. It is estimated that two out of every five air-conditioning units in China are sold by Gree.

Heavy emphasis on R&D

The company is heavily focused on R&D, and leverages its technological expertise to upgrade products every year. This helps them raise its average selling price (ASP), which offsets gradual increases in raw materials and commodities prices. The company also has a system that allows for management to monitor the performance of its products after their sales, which enables the company to detect problems and provide improved customer service.

4. Key Opportunities

Resurgent industry growth was driven by channel de-stocking and China property support

Though air-conditioning unit sales saw slowing growth in 2015, channel de-stocking and China property support have led to an increase in sales volumes, which grew 20% YoY across the industry in 2016. This year, key players are taking advantage of their strengthened positions and raising their ASPs by 5-10% this year, which is expected to have a 25% impact on gross profits.

Overseas expansion

As growth slows in China and the air conditioner and small appliances markets become more and more fragmented, Gree is looking to overseas markets to help drive growth. It is estimated that the global market for small appliances is US$178 bn, and the market for air conditioners is around US$60.6 bn. Gree currently obtains 15% of its sales from overseas markets, though due to lack of brand awareness gross margins are lower at 17%, compared to 35% overall.

5. Key Risks

Shift in management

Recently chairwoman Dong Mingzhu had been removed as chairman of parent company Gree Group, a state-owned enterprise. As it was ordered by the State-owned Asses Supervision and Administration Commission of Zhuhai city. Though some say it was because she was already director of the listed subsidiary Gree Electric Appliances Inc. She is also widely recognized to have overextended the company in recent years. In October she criticized shareholders publicly for not supporting her aggressive acquisition program, which included a $1.9bn takeover of electric car maker Yinlong New Energy that would’ve required a dilutive private placement amounting to nearly a quarter of current shares. The attempted acquisition led to a stock suspension for six months in 2016. Her removal may have an effect on the company’s operations going forward. Dong Mingzhu had joined Gree in 1990 as a salesperson and slowly worked her way to the top.

She is quite a character in China. You can see an interview of her.

*Please note the interview is in Mandarin.

Maturing industry

At some point, urbanization and real estate demand will slow in China, which could hurt demand for air conditioning units. Revenue for 2015 fell 29% to RMB 97.7bn, though this past year did see a strong recovery. As a result, the company has attempted to diversify into smartphones and electric cars, which haven’t worked out so well. Additionally, strong competition from rival Midea Group poses an additional threat, having acquired German industry robot manufacturer Kuka for $5bn last August. Midea intends to use the acquisition to help automate its manufacturing processes as labor costs continue to rise in China.

6. Valuation

Gree currently trades at a trailing P/E ratio of 14.6x, compared to peers Midea and Haier, which trade at 18.3x and 17.3x earnings respectively. The stock is up approximately 60% YTD, as of June 2017.

7. Shareholding Structure

State-owned Gree Group owns an 18% stake, followed by Hebei Jinghai Guaranty Investment with 9.4% and Gree Real Estate with 1.15%. Former chairwoman Dong Mingzhu owns 0.7%.

Financials for 2016

Income statement

Gree’s revenues grew 10.8% to RMB 108 bn in FY16. Its operating profit grew 29.1% to RMB 17.5 bn, and net income grew 23% to RMB 15.4 bn.

Balance Sheet

Gree has a very strong balance sheet as it has a net cash balance of RMB 87bn. Its debt-to-assets ratio stands at 10.95%.

Cash Flow

Gree saw net operating cash flow decline by 66.5% to RMB 14.9bn

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ker Zheng’s personal capacity. It does not in any way represent those of his employer and other related entities. Ker Zheng does not own any companies mentioned.

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