Haier Smart Home finds bargain in commercial refrigeration acquisition

By Bai Xin Rui

Just a year after becoming a blue-chip stock with its inclusion in the benchmark Hang Seng Index, Haier Smart Home Co. Ltd.(6690.HK; 600690.SH; 690D.DE) is cooking up another milestone with a major new acquisition. This time, the listed unit of Chinese appliance giant Haier  it will pay $640 million for Carrier Commercial Refrigeration, the commercial refrigeration unit of Carrier Global Corp. (CARR.US).

Haier will have its work cut out, since Carrier Commercial Refrigeration is a relative laggard compared with its global peers both in terms of revenue and profit performance. But the Chinese company has shown it’s often up to such challenges, boasting a strong track record for buying similar global laggards and returning them to financial health.

Carrier Commercial mainly provides refrigeration-related commercial products like cabinets and refrigeration counters for supermarkets and other retail food sellers, as well as other cold storage equipment. It operates in more than 10 countries and regions worldwide, with about 4,000 employees.

Before the purchase, Carrier Commercial Refrigeration and Haier worked together for more than 20 years. The two set up a joint venture in China in 2001, with Carrier Commercial Refrigeration holding 51% and Haier Smart Home the remaining 49%. Haier Smart Home will take over complete ownership of the joint venture after the acquisition.

Investors gave the acquisition a relatively chilly reception, perhaps reflecting the challenges Haier could face. Haier Smart Home’s Hong Kong-listed shares remained unchanged on the day of the announcement earlier this month, and its Mainland-listed A-shares rose only marginally. 

Carrier Commercial Refrigeration’s operations look relatively solid, if not extremely impressive, based on information provided in the acquisition announcement. Its revenue rose 0.8% year-on-year to $1.23 billion in 2022, while its net profit jumped by a stronger 27.4% to $58.1 million. The company ranked first in Europe and second in the Asia Pacific region in its category, according to a report by JPMorgan and Guolian Securities. About 80% of its sales last year came from Europe, while Asia and North America accounted for 15% and 5%, respectively.

Carrier Global is also a strong player in its core area of supplying heating, ventilation and air conditioning (HVAC) systems. The company listed in New York in 2020, and recorded $20.4 billion in revenue last year. HVAC products accounted for 70% of its total, with the rest coming from its refrigeration and fire security businesses. 

Carrier Global previously indicated it would focus on its HVAC business, and has been actively selling its remaining businesses. A week before announcing the sale of its refrigeration business, it sold its Global Access Solutions to Honeywell International (HON.US) for $4.95 billion.

The deal looks like a relative bargain for Haier. Using Carrier Commercial Refrigeration’s profit last year, the Chinese company is obtaining a major European commercial refrigeration asset at a price that represents a relatively modest price-to-earnings (P/E) ratio of 11 times. That’s a healthy discount compared with average ratios of 15 to 30 times for similar assets.

Haier also believes the global market for commercial refrigeration equipment is full of potential, especially due to the growing popularity of buying food online. It pointed out the commercial refrigeration cold storage equipment markets in Europe, Asia and North America are now worth about $11 billion annually and growing as people do more purchasing online. It believes the market in Europe, Asia and North America this year alone could reach $15 billion, with an estimated growth rate of around 13% from 2023 to 2028.

The purchase is just the latest in a long string of overseas acquisition for Haier, which has been one of China’s more acquisitive companies over the last two decades. The company bought the washing machine and refrigerator business from Japan’s Sanyo in 2012, and the home appliance business from Italy’s Candy in 2019. 

Its highest-profile deal was its purchase of industry veteran General Electric’s (GE.US) home appliance unit in 2016 for $5.4 billion. In the five years after that purchase and an overhaul by Haier, the GE home appliance unit saw its revenue double and its profit rise even more by 2021, reversing nearly 10 consecutive years of losses. That kind of strong track record could bode well for Carrier Commercial Refrigeration, which will be looking to jumpstart its revenue growth under its new ownership.

While Haier appears to have snatched up a bargain, Carrier Commercial Refrigeration will take some time to become a true contributor to the company. Carrier Commercial would have only accounted for 3.6% of Haier’s revenue and 2.8% of its profit last year. And in terms of profitability, there also seems to be big room for improvement. That’s because Carrier Commercial Refrigeration recorded a net profit margin of just 4.7% last year, well below the 9.9% industry average, according to Guotai Junan Securities.

That means Haier Smart Home has its work cut out, and may need to use all of its experience from past M&A to bring Carrier Commercial Refrigeration up to industry standards. Doing that would have brought in a net profit of $120 million in 2022, or roughly double the $58.1 million net profit the unit actually reported. Clearly there’s some big potential in there, both for better revenue growth and greater profitability. Now, Haier Smart Home just needs to go to work making its latest acquisition into a meaner, leaner business machine.