MIDEA GROUP CO., LTD.
Fitch Ratings has assigned
Key Rating Drivers
The proposed bonds are rated at the same level as KRTG's Long-Term Foreign-Currency Issuer Default Rating (IDR) because they will be directly issued by KRTG, and will constitute its direct, unconditional, unsubordinated and unsecured obligations and rank pari passu with all its other unsecured and unsubordinated obligations. The proceeds will be used to finance and/or refinance eligible green projects under KRTG's green finance framework, in accordance with the approval of
Derivation Summary
Fitch assesses KRTG under our Government-Related Entities Rating Criteria, reflecting
Fitch has also factored in the socio-political and financial implications for the government if KRTG were to default. These factors indicate a strong incentive by the government to provide extraordinary support to KRTG, if needed. In addition, the ratings of KRTG take into consideration its Standalone Credit Profile under the Public Sector, Revenue-Supported Entities Rating Criteria.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
an upgrade of KRTG's IDR will result in a similar change in the rating of the proposed bond;
stronger control and support record under
Fitch's perception that
Factors that could, individually or collectively, lead to negative rating action/downgrade:
a downgrade of KRTG's IDR will result in a similar change in the rating of the proposed bond;
weakening of KRTG's role in the development of transportation infrastructure in Kunming and
Fitch lowers its perception of
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Issuer Profile
KRTG is the key metro developer and operator in
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
16
Fitch Affirms Midea at 'A'; Outlook Stable
Thu
Fitch Ratings -
The affirmation reflects our expectation that Midea will maintain a stable credit profile with a leading position in the Chinese home-appliance market, complemented by increased diversification into other segments such as automation, robotics and building technologies. Its financial profile should remain strong over our rating horizon, underpinned by a deep net cash position, robust free cash flow (FCF) and disciplined financial policy.
Key Rating Drivers
Leader in Home Appliances: Midea's strong position in the domestic home-appliance market has supported its revenue growth and market share. We forecast low-single-digit revenue growth in 2022 amid weak consumption and the property downcycle, supported by its product and geographical diversification.
Midea plans to continue focusing on product upgrading and promoting brands targeted at the higher-end market, to meet consumers' replacement and upgrading needs for smarter and better-quality products. Its R&D capability and wide distribution network, including growing its e-commerce business, should support its market position and drive revenue growth.
Increased Diversification: Midea is making efforts to diversify its business outside of home appliances, in an attempt to smooth out the cyclicality of appliance sales and drive revenue growth.
Its other four segments apart from home appliances - building technologies, industrial technologies, automation, and robotics and digital innovation - serve mainly corporate customers. They contributed over 20% of total revenue in the first three quarters of 2022. We expect growth in these segments to outpace that of home appliances in the short-to-medium term due to the low base and stronger demand outlook, especially in automation solutions.
Improving Profitability: Fitch forecasts Midea's EBITDA margin to improve to 10%-11% in 2022, from a low of 9%-10% in 2021. Midea aims to boost profits by shifting its product mix towards higher-end, better production, improving channel efficiency, and increasing the proportion of its own-brand sales in overseas markets. Its strong competitiveness in the domestic market should support margin expansion. Its EBIT margin increased to 10.3% in 3Q22, from 5.4% in 4Q21.
Capex for Capacity Expansion: We expect capex of
Strong FCF,
Cash Adjustments Made: Midea routinely places excess cash in financial assets, such as non-principal-guaranteed structural deposits and wealth management products, to generate higher interest on its high cash balance. We include 70% of the carrying value of these deposits as readily available cash, as these financial assets mature in less than one year and have a low collection risk historically. We will adjust this ratio if there is evidence of deterioration in collection.
Derivation Summary
Midea's rating reflects its leading market position as one of
Midea is one of the few companies in the diversified industrial and capital-goods sector with a net cash position, which provides a strong level of financial flexibility. Its net cash position and larger scale also contributes to it being rated higher than
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Low-single-digit growth in 2022-2025
EBITDA margin of 10%-11%% in 2022-2025
Annual capex of
Dividend payout rate of 45% in 2022-2025
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action is unlikely until Midea can substantially diversify its revenue streams from consumer appliance-related products without a meaningful deterioration in its financial profile
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Evidence of market share loss in key product categories
EBITDA margin below 10% for a sustained period (2021: 9.6%)
FCF margin below 3% for a sustained period (2021: 5.6%)
Material change in financial policy with regard to the net cash position
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Net Cash Position: We believe Midea has abundant liquidity and financial resources to meet its near-term financial obligations. It maintained a net cash position in 2021, with adjusted readily available cash of
Issuer Profile
Midea is one of the largest consumer-appliance manufacturers in
Summary of Financial Adjustments
We apply a 30% haircut on wealth-management products and structured deposits in the readily available cash calculation.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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