Midea will test China Inc’s welcome overseas

Toshiba

07/12/2023 16:20

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Thomas Shum
       HONG KONG, Dec 7 (Reuters Breakingviews) - China Inc is
caught between a rock and a hard place. As growth in the world’s
second-largest economy slows, companies on the mainland are
looking to deepen their presence overseas through mergers and
acquisitions. Exhibit A is Shenzhen-listed Midea  000333.SZ .
The world’s largest home appliance company by sales is preparing
its balance sheet via a bumper, possible $3 billion, initial
public offering of shares in Hong Kong.
    The $48 billion Guangdong-based company churns out air
conditioners, refrigerators, laundry machines and more and is
planning to use listing proceeds to invest in or acquire
high-end home appliance brands, especially in Europe and the
United States. That’s an eye-catching plan for two reasons.
Western governments’ wariness of China is growing and, despite
the weak economy in the People’s Republic, Midea’s domestic
sales have climbed 42% since 2020, faster than the 33% rise
overseas.
    A fresh purchase by Midea could potentially shift the focus
of its business offshore. In 2016, it bought a controlling stake
in Toshiba’s  6502.T  home appliance unit and a year later it
acquired German robotics manufacturer Kuka for nearly $5
billion. Now some 40% of its top line comes from overseas.
Midea’s net profit margin has improved too, hitting 8.6% in
2022, up 150 basis points since the Kuka deal.
    Midea has explored a takeover of Electrolux  ELUXb.ST , but
dropped its pursuit after the $3 billion Swedish firm sought
assurances on pricing and regulatory clearances, Bloomberg
reported in June. Despite the obvious difficulties of Chinese
takeovers in the new geopolitical environment, Sumeet Singh, an
analyst at Aequitas Research, reckons Midea can cut small deals.
    Indeed, China’s outbound M&A continues. The $18 billion
announced this year is 67% less than in 2019 and far from the
record $213 billion in 2016, per Dealogic, but the current
volumes are not insignificant. The top 10 deals in 2023 include
a $1.5 billion acquisition by Tencent  0700.HK  in Poland and a
$456 million purchase in Belgium by sensory solutions provider
AAC Technologies  2018.HK .
    Whatever Midea is planning, it’s sufficiently important for
the company to brave the discount Hong Kong shares endure:
China’s A shares currently trade at a 49% premium to their
equivalent in the offshore hub, 9 percentage points more than at
the start of the year. A deal would be significant too for Hong
Kong. Perhaps sensing the need to lend the city a hand, Chinese
regulators are talking up plans to make it easier for mainland
companies to list in the hub which has not seen a $1 billion IPO
in over one year. 
    Midea has set its sights overseas but a shifting global
stage means it will be a harder slog than before.
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    CONTEXT NEWS
    Shenzhen-listed Chinese home appliance maker Midea Group
filed a prospectus on Oct. 24 to float on the Hong Kong Stock
Exchange. The listing could raise about $3 billion next year,
IFR, an LSEG publication, reported citing unnamed sources.

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 (Editing by Una Galani and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
click on  SHUM/ 
thomas.shum@thomsonreuters.com; Reuters Messaging:
thomas.shum.thomsonreuters.com@reuters.net))