BEIJING，April 6, 2022 -- S&P Global (China) Ratings has assigned its “AAA_spc” issuer credit rating to Midea Group Co. Ltd. ("Midea Group" or "company”), the outlook is stable.

Midea Group Co., Ltd. ("Midea Group" or "company") is the largest home appliance manufacturer in China. It has a leading share in the markets for residential air conditioning units, washing machines, refrigerators and small home appliances. Main business lines are heating, ventilation and air conditioning (“HVAC”), consumer appliances, robotics, automation systems and other manufactured products. With particular strengths in air conditioning, its HVAC and consumer appliances businesses are the main sources of revenue and profit, accounting for more than 90% of total gross profit. Robotics, automation systems and other manufactured products contribute less than 10% of gross profit. Its products are sold to major global markets, with a balanced domestic-overseas income structure. From January to June 2021, overseas revenue accounted for about 43%.

In our view, the company’s "excellent" business risk profile reflects its excellent brand awareness, outstanding supply-chain integration and strong domestic distribution channels. It has a diverse product mix and brand layout, strong operating efficiency and cost control ability, elevating its competitive strengths above most of its peers. These strengths have seen Midea Group long maintain a leading market share in the domestic home appliances market. Its global operations also allow it to mitigate against fluctuating domestic demand. However, its overseas business is still predominantly original equipment manufacturing (OEM) and it has room for improvement in terms of pushing its brand retail. We expect rising raw material prices to lead to some minor profit erosion. Rising cost pressure can be somewhat relieved through raising product prices and tighter cost control.

The company’s "minimal” financial risk profile reflects its prudent financial policy, strong operating cash flow, abundant cash and low debt level. We expect cash flow to fully meet capital expenditure and R&D demands, while leverage (measured by debt/EBITDA) should remain very low.

The rating outlook for Midea Group is stable. We expect Midea Group to continue maintaining its leading market share in China's home appliances market over the next 24 months, considering its excellent brand awareness, rich and diversified product mix and proprietary brands, strong distribution channels, leading operating efficiency and cost control ability. Despite slowing revenue growth and rising raw material prices, we expect the company to maintain strong cash flow and low debt, with a "minimal" financial risk profile.

Downside scenario: In the following circumstances, we may consider downgrading the company's issuer credit rating: 1. The company's financial risk increases, with leverage (measured by debt/EBITDA) reaching and maintaining a level significantly higher than 1.5 times. Such a scenario could, for example, be caused by large-scale capital expenditure or M&A, leading to a substantial increase in debt; or its EBITDA margin contracting far beyond our expectations; 2. The company's competitive position in China's home appliances market weakens. For example, its share of the markets for white goods and small household appliances enters a long-term significant decline, or operating efficiency and cost advantages weaken significantly.

Upside scenario: N/A.

Related methodologies:

―    S&P Global (China) Ratings - Corporate Methodology, July 28, 2020.

―    S&P Global (China) Ratings Supplementary Rating Methodology - Consumer Durables Industry, May 21, 2019.

―    S&P Global (China) Ratings - General Considerations on Rating Modifiers and Relative Ranking, May 21, 2019.

Related research:

―    Commentary: Understanding S&P Global (China) Rating Corporate Methodology, July 28, 2020.

―    Commentary: Understanding S&P Global (China) Ratings General Considerations On Rating Modifiers and Relative Ranking Methodology, June 29, 2020.

Media Contacts:

Sharon.Tang，Beijing； (86)10-6569-2988；sharon.tang@spgchinaratings.cn

Analyst Contacts:

Yingxue Ren, Beijing; yingxue.ren@spgchinaratings.cn

Yanliang Liu,Beijing; Alan.liu@spgchinaratings.cn

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