As one of the world’s top producers of air conditioners, Gree Electric Appliances Inc. of Zhuhai (SHE listed) knows a thing or two about cooling down. Unfortunately for investors, what has cooled lately is interest in the company’s stock, which has seen its price fall by more than 45% over the past year.
Initially launched as a maker of residential air conditioners in 1991, Gree Electric has expanded to become a global business with products ranging from air conditioners and home appliances, to communication equipment, solar energy, robotics, smartphones, recycling and even the production of electric vehicles.
Despite the diversity of its business, however, Gree, like other appliance makers, has seen its business heavily impacted by the COVID-19 pandemic, the U.S.-China trade war, dramatic increases in the cost of key manufacturing materials and a significant falloff in new home construction.
“Gree Electric Appliances has seen its stock price halve since its peak in December 2020 due to pressure on two fronts. First, macroeconomic issues, including inconsistent consumer demand and high commodity inflation, has squeezed profit margins across manufacturing sectors,” said Nathan Handwerker, co-founder and editor-in-chief of The China Guys, a China-focused publication focused on researching business and economic topics. “Copper, aluminum, stainless steel and other non-ferrous metals that are common in the manufacturing process for air conditioners have risen dramatically in price throughout the year. And, with dampened consumer demand, producers are bearing most of the cost of inflation.”
In the case of the drastic decline of in-store sales caused by pandemic-related lockdowns, Dong Mingzhu, Gree’s chairwoman and a widely respected and outspoken businesswoman, successfully shifted gears by moving sales to multiple e-commerce sites within China and the introduction of an Amazon store that was rapidly embraced by U.S. consumers.
Yet even with the rise of the company’s GREE Window AC to one of Amazon’s top new releases, Gree’s position as the market leader was usurped in 2020 by Chinese electrical appliance manufacturer Midea Group Co Ltd. (SHE listed). Meanwhile, with the Chinese government striving to avoid the risks of an economy overly reliant on property by pulling back mortgage lending for both real estate developers and home buyers, residential sales are likely to remain on the weak end as well.
Resignation of Huang Hui has created succession questions
Added to these setbacks is the February 2021 resignation of Gree’s chief executive officer, Huang Hui, one of the company’s longest serving board members whose departure took the market by surprise. With Hui having been expected to eventually takeover the role of chairperson, his departure creates questions about succession plans at the company. The Zhuhai government also has a controlling position in the company as the sole owner of the Gree Group, Gree Electric’s largest shareholder.
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“Competition is fierce and rising specifically within the air conditioner market. While historically beating out most of its competition, results show that Midea Group has become the market leader in sales for most types of air conditioning units domestically. Internationally, Gree has failed to break into the top ten air conditioner brands by sales, among which Midea is the only Chinese brand,” said Handwerker. “Given a more friendly economic environment with higher consumer demand and stable commodities prices, it is safe to say that Gree should be able to pad its bottom line, giving the stock more solid future prospects. However, Midea’s leap to number one in domestic sales and top 10 in international sales marks a clear shift in the industry’s long-term trend,” he said, adding that Midea has twice the market cap of Gree, better access to international markets and is unlikely to lose its hold as the industry’s top player anytime soon.
In its most recent day of trading on September 30th, Gree Electric Appliance’s stock closed at $38.75. Comparatively, the stock hit a 52 week high of $69.79 on December 2, with its low of $37.44 during that period coming only two weeks ago on September 22.