Key takeaway

MIDEA GROUP maintained stable operations in 2Q26, withboth revenue and net profit attributable to shareholders of theparent company sustaining growth. Profit excludingnon-recurring gains and losses came under temporary pressure,mainly due to foreign exchange losses. Excluding this impact, theunderlying operations remained resilient. Revenue growthaccelerated sequentially in 2Q26, primarily driven by overseassales. Looking ahead to 2H26, the cost and foreign exchangefactors weighing on profitability are both expected to easesignificantly. The company has stepped up foreign exchangehedging, increasing the certainty of an earnings recovery.Overseas sales and proprietary brands continued to grow rapidly,while multiple To B businesses delivered strong results. Togetherwith ongoing share repurchases and cancellations and highdividend payouts, these factors continue to enhance shareholderreturns and underscore the company's long-term investmentvalue.

Event

On August 28, MIDEA GROUP released its 1H26 report.In 1H26, the company recorded total operating revenue ofRMB260.042bn (+3.55% YoY), net profit attributable toshareholders of the parent company of RMB26.446bn (+1.66%YoY), and net profit attributable to shareholders of the parentcompany excluding non-recurring gains and losses ofRMB19.595bn (-25.31% YoY). Net cash flow from operatingactivities was RMB37.552bn (+0.73% YoY).

On a quarterly basis, operating revenue reachedRMB128.944bn in 2Q26 (+4.59% YoY), net profit attributable toshareholders of the parent company was RMB13.771bn (+1.32%YoY), and net profit attributable to shareholders of the parentcompany excluding non-recurring gains and losses wasRMB8.633bn (-35.98% YoY). In 1H26, gross margin was 25.26%(-0.36 pct YoY), while net margin was 10.17% (-0.19 pct YoY).

Quick Take

I. Revenue growth accelerated in 2Q26, with overseas sales outperforming domestic salesThe company's revenue increased by 3.55% YoY in 1H26 and by 4.59% YoY in 2Q26, accelerating from 2.45%YoY in 1Q26. Growth was mainly driven by overseas To C sales and To B businesses such as building technologiesand KUKA. By product, revenue from the smart home business reached RMB174.341bn (+4.27% YoY), whilecommercial and industrial solutions generated RMB66.666bn (+3.30% YoY). Within the latter, buildingtechnologies recorded RMB21.625bn (+10.84% YoY), and robotics and automation recorded RMB16.621bn(+10.27% YoY), leading the growth. Industrial technology remained under pressure, with revenue ofRMB13.138bn (-12.72% YoY), mainly due to demand for air compressors used in consumer air conditioners andoverall industry demand. Other businesses generated revenue of RMB15.282bn (+2.55% YoY).By region, domestic revenue reached RMB146.915bn (+2.07%), while overseas revenue reachedRMB113.127bn (+5.54%). Overseas revenue grew faster than domestic revenue, with OBM accounting for morethan half, making overseas sales the main driver of revenue growth.

II. Gross margin edged down, while foreign exchange movements affected earnings performance

The company’s gross margin was 24.94% in 2Q, down 0.86 pcts YoY, mainly due to a lowe r gross margin onoverseas sales amid RMB appreciation and elevated raw material costs, including higher copper prices and risingplastic prices following the outbreak of conflict in the Middle East. The company partially offset these pressuresthrough cost reductions in non-commodity inputs and R&D-driven cost reductions.

Expenses: the selling expense ratio was 7.90%, down 1.16 pcts, reflecting a notable improvement in operatingefficiency; the administrative expense ratio was 3.05%, up 0.03 pcts and broadly stable; the R&D expense ratiowas 3.34%, down 0.25 pcts; and the financing expense ratio was 1.49%, up 4.04 pcts, mainly because the companyhad a relatively small portfolio of foreign exchange hedging contracts in 1Q and incurred substantial foreignexchange losses in 2Q. The net margin was 10.68% in 2Q, down 0.34 pcts, with fair value changes in theinvestment in ChangXin providing a substantial uplift.

III. Overseas sales and B2B businesses jointly drive growth, with operations set to stabilize and improve 2HFrom a business perspective, diverging growth momentum across segments presents structuralopportunities. For domestic sales, the company still faces some near-term pressure due to the slow recovery domestic consumption and intensifying industry competition. However, its channel efficiency and retailoperations continue to improve, and its market share remains solid. As the high comparison base from the sameperiod last year eases and cost pressures subside, domestic sales are expected to improve QoQ in 2H, withoverall performance surpassing that in 1H26. Further recovery remains possible as the consumer environmentimproves. Overseas sales offer greater certainty. The company continues to deepen its overseas proprietarybrand strategy, strengthen brand equity and distribution networks, and steadily increase the share of proprietarybrands. Together with its expanding global production footprint and increasingly localized operations, thesefactors are expected to drive faster overseas sales growth in 2H26 and beyond than in 1H26, sustaining overseassales as the main growth engine.

The B2B businesses are making progress across multiple fronts, with improving trends. In the new energysegment, revenue recognition delayed by the postponed delivery of large overseas orders will graduallymaterialize in 2H. Coupled with a robust order backlog, the segment is still expected to deliver solid full-yeargrowth. Integration of acquisitions in the medical segment continues to advance and will gradually contributeincremental revenue. Building technology continues to achieve rapid growth, supported by strong overseasorders and accelerating sales in emerging areas such as data centers, providing high visibility for medium- tolong-term growth. Although industrial technology faces near-term pressure from demand related to the B2Cbusinesses, emerging businesses such as automotive components, AIDC HVAC systems, and humanoidrobot-related components are scaling rapidly and are expected to gradually offset pressure on traditionalbusinesses. Overall, To B revenue growth is expected to outpace To C revenue growth in 2H26, furtherstrengthening the company's resilience to economic cycles.

IV. Headwinds gradually ease, increasing certainty of earnings recoveryLooking ahead to 2H26, the two major factors weighing on the company's profitability are expected to easesignificantly, providing a relatively clear path to earnings recovery. On the cost side, raw material prices, whichpreviously put pressure on gross margin, have stabilized, while costs for some product categories have declined,marginally easing overall commodity cost pressure; meanwhile, the company continues to reduce costs andenhance efficiency across multiple dimensions, offsetting cost fluctuations through procurement optimization,manufacturing efficiency improvements, and R&D cost reductions, among other measures. The drag frommaterial costs on gross margin is expected to narrow further, supporting a QoQ improvement in gross margin.

On the foreign exchange side, the company has significantly stepped up its foreign exchange hedgingefforts, with a more refined hedging strategy and more balanced coverage over time. The impact of exchangerate fluctuations on profitability is expected to narrow substantially. The company generates ample operatingcash flow, which is well aligned with its profit, and maintains a healthy collection structure, providing solidsupport for subsequent earnings recovery and shareholder returns.

V. Investment recommendations and risk reminder

Investment recommendation: We believe the company's operating quality and profitability will improve steadilyin 2026, supported by its stable core businesses, accelerating breakthroughs in innovative businesses, andefficiency gains from its global footprint, while its long-term growth potential continues to expand. We expectthe company's revenue to reach RMB486.4bn, RMB520.6bn, and RMB556.4bn in 2026-2028, respectively,representing growth of 6.56%, 7.04%, and 6.86%. Net profit is expected to reach RMB47.0bn, RMB51.0bn, andRMB54.9bn, respectively, representing growth of 7.00%, 8.40%, and 7.67%, corresponding to PE multiples of 13.99x,12.91x, and 11.99x. We maintain “Buy” rating.

Risks:

1) Macroeconomic volatility risk: global economic development continues to be affected by uncertainties such asgeopolitical conflicts and inflationary pressures. If persistent macroeconomic pressure slows the growth ofresidents' disposable income, consumer demand for home appliances will be dampened.

2) Market competition is intensified: industry competition is more intense in a weaker market environment, so thecompany faces the risk of market share loss and low-price competition, which will drag down profits.

3) Raw material price volatility risk: unexpected changes in the supply-demand dynamics of upstreamcommodities will directly feed through to product manufacturing costs. Meanwhile, amid the restructuring ofglobal supply chains, volatility in international ocean freight rates and rigid increases in regional labor costs maycreate compounding cost pressures across multiple stages, placing sustained pressure on the company's profitmargins.

4) Exchange rate volatility risk: sharp one-way exchange rate movements may create a mismatch between sellingprices and raw material procurement and localized operating costs. In particular, local currency depreciation emerging markets will weaken the price competitiveness of exported products and squeeze the gross margin ofoverseas operations.

5) Risk from a complex global trade environment: to strengthen protection for domestic industries, somecountries have erected trade barriers by imposing additional special tariffs and mandating local procurement.

Such policies directly increase the company's product compliance certification costs and tariff burden, and maylead to a temporary loss of market share in certain regions.