Why Gree was overtaken by Haier？

Author | ｜Eastland

Head picture | tiger sniffing

Gree Electric (000651.SZWith good performance and high dividends, it is a star enterprise in the A-share market, although its market value is not as good as that of Midea Group (000333.SZ), but steadily stabilized Haier Zhijia (600690.SH) one end. However, after the market value of Gree peaked in 2019, the situation gradually reversed. By the end of 2022, Gree’s market value had fallen to 77% of Haier’s, compared with 259% at the end of 2019.

As of the close of March 8, 2023, the market value of Gree was 205.5 billion yuan, and the market value of Haier Zhijia was 232.2 billion yuan.

In the first three quarters of 2022, the net profits of Haier and Gree were 17.7 billion and 18.3 billion respectively. Haier earns 600 million less than Gree, but its market value is 30 billion higher.Perhaps it is because Gree gives people the impression that they are "lacking in goodness" and "lacking in skills" in defense..

The contest between diversification and internationalization

1) Revenue: Haier’s leading edge has expanded.

Haier’s revenue scale is higher than Gree’s, but its leading edge is not large, and it was overtaken in 2018. In 2020, Haier’s revenue stood at 200 billion, equivalent to 125% of Gree’s; In the first three quarters of 2022, Haier’s revenue was 185 billion, still 125% of Gree’s.

In 2018 and 2019, Gree’s revenue "hit" the 200 billion mark twice, but unfortunately it fell short. In 2020, despite the impact of the epidemic, the revenues of Midea, Haier and Hisense all maintained growth, but Gree fell to 168.2 billion. In 2021, the recovery of Gree Camp rose to 187.9 billion, 5.2% lower than that in 2018. The revenues of Haier and Midea in 2021 increased by 31.4% and 23.6% respectively compared with 2018. It is an indisputable fact that Gree’s revenue is weak.

2) Income structure: Haier is more diversified.

Gree has never been able to cultivate a "second growth curve", and the proportion of air-conditioning revenue to revenue has remained at a high level of 70%.

The high-speed growth period of air-conditioning market has long passed, and there are many "eaters" such as Midea and Haier. After Gree’s air-conditioning business revenue surged to 155.7 billion in 2018, it fluctuated and fell back. In 2020 and 2021, the revenue was 117.9 billion and 131.7 billion respectively. In 2022, the revenue of H1 air-conditioning business was 68.7 billion, accounting for 72.2% of the revenue.

Gree’s "household appliances sector" includes refrigerators, washing machines, kitchen appliances, drinking fountains, sweeping robots and many other products. In 2019, sales revenue surged to 5.58 billion, accounting for 2.8% of total revenue; In 2021, it fell below 5 billion.

In H1, 2022, Gree’s "household appliances" revenue was 2.2 billion, accounting for 2.3% of the total revenue. Midea’s "consumer appliances" sector covers products similar to Gree’s "household appliances", with H1 revenue of 66.3 billion in 2022. You’re welcome to say that the Gree household appliances sector can’t become a climate.

Gree’s "other businesses" include new energy vehicles, lithium batteries, mobile phones, energy storage, semiconductors, medical and health care, etc. In 2021, the revenue was 43 billion, accounting for 23% of the revenue. Any business, well done, can support "100 billion-level" listed companies and "pile up" together. Although the revenue is tens of billions, only one "other" can be shared. The key question is-Can air-conditioning enterprises that have failed to expand their refrigerator business make new energy vehicles and semiconductors?

Although Haier’s revenue is only 20% higher than Geli’s, its structure is relatively balanced.

Refrigerator and washing machine: the revenue in 2021 was 71.6 billion and 54.8 billion respectively, accounting for 52% of the total revenue, equivalent to 67.2% of Gree’s total revenue;

Air conditioning: revenue in 2021 was 37.5 billion, accounting for 16% of revenue, equivalent to 28.5% of Gree air conditioning sales; In the same period, Midea’s air-conditioning sales revenue reached 141.9 billion, equivalent to 107.7% of Gree’s air-conditioning revenue;

Kitchen appliances and water appliances: the revenue in 2021 was 35.2 billion and 12.5 billion respectively, accounting for 21% of the total revenue;

Intelligent equipment: The revenue in 2021 is 15 billion, accounting for 7% of the revenue, and it is the only business of Haier.

Highly dependent on air conditioning, other household appliances are lacking, air conditioning revenue growth is weak, and Gree’s revenue is naturally difficult to improve.

3) Internationalization

In the field of household appliances in China, Haier, Midea and TCL are highly internationalized. Haier, in particular, has an obvious upward trend in recent years.

In 2016, Haier’s overseas business income was 67 billion, accounting for 41% of revenue, while Midea’s overseas income was as high as 104 billion.

In 2021, Haier’s overseas revenue reached 114.7 billion, accounting for 50% of the revenue, and the proportion of overseas revenue with the United States also increased from 64.5% to 83.3%.

In 2021, Gree’s export business income was 22.5 billion, accounting for 12% of the revenue (0.5 percentage points lower than in 2017.), about one-fifth of Haier.

　

What is more valuable is that the gross profit of Haier’s overseas business has steadily increased: in 2017, the gross profit was 19.6 billion, 1.4 billion less than that of the United States; In 2021, it surpassed the United States for the first time, reaching 32.4 billion, with a gross profit rate of 28.2%, 6.5 percentage points higher than that of the United States.

　

The scale of Gree’s overseas business is much smaller than that of Haier and Midea, and the gross profit margin is not in the same level: in 2021, the gross profit margin of Gree’s overseas business was 2.22 billion, and the gross profit margin was 9.8%; Gross profit is less than 7% of Haier’s, and gross profit rate is 18% lower than Haier’s.

The fundamental reason for the weak growth of Gree’s revenue is that diversification and internationalization have not achieved remarkable results:In the revenue structure, air-conditioning sales account for more than 70%, and none of the household appliances, such as refrigerators, washing machines and kitchen appliances, can be used. Overseas sales revenue has almost stagnated-22.3 billion in 2018 and 22.5 billion in 2021, and gross profit has dropped from 37.8 billion in 2018 to 22.2 billion in 2021, a drop of more than 40%.

Gree "blade inward" wants profit

1) Gree’s ability to control expenses is super strong.

In 2017, Gree’s gross profit reached 59.9 billion. Since then, it has "unilaterally" declined to 37.7 billion in 2021, with a cumulative decline of 37.1%.

Haier’s gross profit surpassed Gree in 2018, and its leading edge has expanded year by year since then: Haier’s gross profit in 2018 was 59.9 billion, 10% higher than Geli’s; 42% higher than Geli in 2019; 56% higher than Geli in 2020; In 2021, Haier’s gross profit was 56.3 billion, 50% higher than Geli’s.

Although the gross profit of Gree Air Conditioning is 2 percentage points higher than that of Haier, the overall gross profit rate is 4 percentage points behind.

In the figure below, the blue broken line represents gross profit (rate), colored stacked columns represent expenses (rate), when blue drowns color, enterprises can earn operating profits.

Since 2017, Haier’s gross profit margin and total expense ratio have remained at 30% and 24% respectively, and there is a distance of about 6 percentage points between "blue" and "color".This is the "width of the profit moat".

Haier gives the impression of being steady, one step at a time.

　

Strong China has its own strong middle hand, and Gree’s cost and expense control ability is still above Haier. Although gross profit (rate) has been declining year by year, but the expense ratio has been repeatedly compressed-

In 2017, the gross profit rate was 33% and the total expense rate was 15%, which was 18 percentage points apart;

In 2021, the gross profit margin and total expense ratio were 24.3% and 11.7% respectively, with a distance of 12.6 percentage points. Although it was not as good as before, the "moat" was still twice as wide as Haier.

The expense ratio may not be as low as possible, and a moderate increase in sales expenses, management expenses and R&D expenses will promote the development of enterprises. Blindly compressing expenses is a "defensive" strategy.

In some cases, defense may "drag down a strong enemy", such as Sima Yi to Zhuge Liang. However, Fang Hongbo and Haier Lianghaishan of Midea are all ten years younger than Dong Mingzhu, and Gree is the one who can’t afford it.

2) Net profit and cash flow

Although the revenue, gross profit and gross profit rate all fell behind, Gree achieved much higher net profit and cash flow than Haier with strong cost control.

In 2019, the revenues of Haier and Gree were similar. Haier’s gross profit was 5.2 billion higher than Geli’s. As a result, Gree’s net profit reached 24.7 billion, 200% higher than Haier’s! The net cash inflow from operating activities reached 27.9 billion, 85% higher than Haier.

In 2021, Gree’s net profit was 23.06 billion, a year-on-year increase of 4%; Net cash flow from operating activities plummeted by 90% to 1.89 billion (It will be 19.2 billion in 2020.）。

In the first three quarters of 2022, Gree’s net profit and cash flow from operating activities were 18.3 billion and 22.46 billion, respectively, returning to "normality".

Haier’s net profit and cash flow from operating activities are "a lot shorter" than Gree. In the first three quarters of 2022, the net profit was 11.7 billion, and the net cash flow from operating activities was 11.2 billion, less than half of Gree’s.

In recent years, Gree’s book cash has been above 100 billion, reaching 153 billion at the end of September 2022, while Haier’s book cash was only 47 billion in the same period.

The main function of book cash is to maintain daily operations, such as paying wages and energy costs, and paying suppliers according to schedule. With reference to the revenue cost of the previous quarter, it is enough to keep the daily operating expenses for the next three or four months.

Haier’s book cash at the end of 2021 is equivalent to 29% of this year’s revenue cost. If there is no big change in 2022, the book cash is enough for one quarter. The numerical ratio of 30% is reasonable, and Gree’s book cash is somewhat exaggerated.

On the other hand, at the end of 2022, Gree’s balance of accounts payable/notes reached 76.6 billion, a net increase of 23 billion compared with the end of 2021.

Gree’s ability to absorb gold is amazing, but the capital market has been "aesthetically tired"At present, the dynamic P/E ratios for Midea, Haier and Gree are 11.4 times, 15.1 times and 8.4 times respectively; The P/B ratios are 2.7 times, 2.6 times and 2.1 times respectively.

Like a football match, Gree defends year after year, and the number of counterattacks is few and far between, and it is easily disintegrated by opponents. The "spectators" are losing confidence in Gree.

* The above analysis is for reference only and does not constitute any investment advice.