What I read in September 2023

Estimated reading time: 23 minutes

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Summary

• I read a total of 14 write-ups in September, most of which were either released publicly on Value Investors Club (with a 45-day lag) or on a variety of Substacks.

• Among the large caps in this sample, I think both JD.com and China Tower might trade below my personal estimates of fair value.

• I can also see an upside to my estimates of fair value for Ossia International and Ming Fai. But then again, I’m not sure whether these companies enjoy any competitive advantages.

Midea (000333 CH)

Midea (000333 CH - US$52 billion) is one of China’s three leading home appliance manufacturers. User “fw51” wrote up the stock on Value Investors Club in early June and the write-up is available here. Midea sells refrigerators, washing machines, air conditioners, kitchen appliances, etc. Since its 2016 acquisition of German robotics maker Kuka, it’s also present in the industrial automation market in direct competition with Fanuc and ABB.

Midea is definitely at the top of the Chinese home appliance industry and might eventually dominate it globally. It’s taken market share over the past decade thanks to quality control and customer service. I also Midea’s capital allocation is decent, with a 20%+ return on equity and industry-leading margins. I hope that the costs are all taken within the ListCo. Judging from Google search query data, the consumer mindshare of Midea is growing internationally, with a chart that goes from the bottom left to the top right. That’s encouraging to me.

The stock now trades at a forward 2024e P/E of 10.4x with a dividend yield of 5.0%. An incredibly low level for the Chinese A-share market, considering Midea’s market-leading position. Its Western peers, such as Electrolux, have historically traded closer to 15x.

The big question mark regarding Midea is its exposure to the Chinese property market. Construction activity has plummeted, with new starts down by more than half. Out of Midea’s product portfolio, roughly 41% of the demand has come from replacement demand and the rest from construction of new property. Surely Midea must be hurt somehow?

One alleviating factor is that many Chinese apartments remain empty shells until the new owners move in. So many home appliances are not purchased until the new owners move in. Therefore, I suspect the hit to Midea’s revenues will be far less than the drop in new starts. So far, so good. Midea’s first-half 2023 revenues showed year-on-year growth of +8%.

Still, I can’t help thinking that Midea must have been a beneficiary of China’s construction boom. I will want to wait a bit longer before entering, just to be safe. And that goes for Haier’s D-share as well － another Chinese home appliance stock that trades at a low multiple.

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JD.com (JD US)