Source: Sina Securities
Produced by: Sina Finance Research Institute of Listed Companies
Author: Yi Ling
On the evening of May 20th, Gree Electric issued an announcement, which was reviewed and approved by the company’s board of directors, and adjusted the performance evaluation indicators of the first-phase employee stock ownership plan, and revised the "2021 net profit increased by no less than 10% compared with 2020" and "2022 net profit increased by no less than 20% compared with 2020" as "2021 net profit increased by no less than 10% compared with 2020".
At the same time, Gree Electric launched the second employee stock ownership plan. The holders of this plan include directors, supervisors, middle-level cadres and core employees. The total number of employees to participate in the employee stock ownership plan shall not exceed 12,000, including 8 directors. The price of repurchased shares of the company purchased by the employee stock ownership plan in the second phase is 16.36 yuan/share, which is equivalent to 50% of the closing price of 32.72 yuan/share of the previous trading day of the board of directors. The capital scale does not exceed 1.55 billion yuan, and the lock-up period of the employee stock ownership plan is one year.
After the announcement, the market has different opinions. Some institutions said that the ESOP has obvious incentive effect, and binding the interests of the company with the core employees will help mobilize the enthusiasm of employees to cope with the external environmental impact and coordinate the interests of employees, shareholders and the company.
However, minority shareholders may not agree with this view. The "half-price" subscription under the continuous downward trend of the stock price, even if the performance is less than expected, modifying the incentive threshold will easily lead to a crisis of confidence.
Which side is the balance between the interests of executives, employees and shareholders?
By the close of May 24th, Gree Electric’s share price was 31.79 yuan/share, down 4.33% since the announcement.
Being both a player and a referee? Behind it may be the fatigue of performance growth.
In June 2021, Gree Electric released the first employee stock ownership plan. Among them, Dong Mingzhu, chairman of Gree Electric, plans to subscribe for 30 million shares, accounting for nearly 30% of the shareholding plan; And 11,992 middle-level cadres and core employees will subscribe for 74,685,800 shares, accounting for 68.92%. The stock size of this employee stock ownership plan does not exceed 108 million shares, and the subscription price of employees is 27.68 yuan/share, which is 50% of the stock price at that time.
Because you can subscribe at a 50% discount, there are also performance appraisals at the company level and the individual level. The performance appraisal is divided into two phases, and the proportion of each phase can be up to 50%. Only when employees and executives meet the performance appraisal indicators can they obtain rights and interests.
Among them, in the first vesting period, the performance appraisal index is that the net profit in 2021 will increase by no less than 10% compared with that in 2020, and in the second vesting period, the net profit in 2022 will increase by no less than 20% compared with that in 2020, and the cash dividend per share in that year will not be less than 2 yuan or the total cash dividend will not be less than 50% of the net profit in that year.
Upon the expiration of the first appraisal ownership period, if the company’s performance appraisal indicators are not up to standard, all the shares that can be attributed in the first period will be deferred to the second appraisal ownership period, which requires the company’s performance appraisal indicators to meet the standard, and the total net profit for 21 years and 22 years is not less than 230% of the net profit for 20 years.
However, one year later, Gree Electric failed to successfully cross the assessment threshold of the first attribution period.
In 2021, the growth rate of Gree Electric’s performance slowed down, and the total operating income for the whole year was 189.654 billion yuan, a year-on-year increase of 11.24%; The net profit of returning to the mother was 23.064 billion yuan, a year-on-year increase of 4.01%. There is still a big gap between net profit and 10% growth.
If calculated according to the previous merger assessment target, Gree Electric needs to achieve a net profit of 27.939 billion yuan in 2022 in order to unlock the shareholding plan. For Gree Electric, which only achieved a net profit of 4.003 billion yuan in the first quarter of 2022, there is little hope.
On May 20th, Gree Electric released the first revised employee stock ownership plan (draft), which lowered the assessment threshold.
After adjustment, for the first vesting period, the net profit in 2021 will increase by no less than RMB 1 billion compared with that in 2020, and the cash dividend per share in that year will be no less than 2 yuan or the total cash dividend will be no less than 50% of the net profit in that year; For the second vesting period, the net profit in 2022 will increase by no less than RMB 2 billion compared with that in 2020, and the company’s return on net assets in 2022 will not be less than 22%, and the cash dividend per share in that year will not be less than 2 yuan’s or the total cash dividend will not be less than 50% of the net profit in that year.
If the first vesting period is not up to standard, it can be deferred to the second vesting period for combined assessment. The sum of the net profit in 2021 and 2022 is not less than 3 billion yuan compared with that in 2020.
From this point of view, in 2021, Gree Electric achieved a net profit of 23.064 billion yuan, an increase of 889 million yuan compared with 2020. Although it still failed to reach the assessment threshold of an increase of 1 billion yuan, it can be deferred to the second assessment period. In 2022, it only needs to achieve a net profit of 24.286 billion yuan, which is much less stressful than the net profit of 27.939 billion yuan before adjustment.
In this regard, the explanation given in the announcement is that due to the great changes in the external environment, production and operation are facing more uncertainty. In order to make up the shortcomings of the company’s long-term lack of incentives, fully mobilize the enthusiasm of employees to cope with the severe impact of the external situation, and realize the steady growth of the company’s future performance, it is planned to adjust the performance net profit assessment index of the first employee stock ownership plan.
However, the threshold of increasing by 10% and 20% respectively before the adjustment is actually not high. Looking back at the performance of Gree Electric in previous years, we can find that the revenue and net profit of Gree Electric in 2019 and 2020 showed significant signs of decline. Taking the net profit in 2020 as the base to set the threshold, the requirements for the company are probably only to return to the performance level between 2018 and 2019.
At the same time, setting the appraisal threshold itself is a requirement and challenge for the company and its employees. However, if the performance appraisal threshold is not met, it will not only affect the credibility of the company and management, but also dampen the confidence of investors in the secondary market. More importantly, it may convey the expectation to the market that Gree Electric will mainly maintain its current performance level in the future, and it will be difficult to have bright performance in the short term.
In addition, unlike the first employee stock ownership plan, employees can’t trade until they retire. The lock-up period of the second employee stock ownership plan is one year from the date when the company announces the transfer of the underlying shares to the name of the employee stock ownership plan. In this way, small and medium shareholders also need to bear the risk of losses caused by the stock price decline caused by employees selling shares after the lock-up period.
Air-conditioning "backyard fire" diversification is still not improving
Why do white goods giants need to take the initiative to lower the threshold when their performance is not as good as the expected equity incentive?
In the past two years, domestic epidemics have been repeated, and all walks of life have suffered a certain degree of impact, which has brought no small challenge to the recovering economy. The prosperity of the real estate industry continues to decline, which has a negative impact on investment and consumption, and the home appliance industry bears the brunt. After years of development, the home appliance industry has entered the era of stock, and the market scale rarely breaks out, making it difficult for the demand side to boost.
On the other hand, the rising prices of raw materials and shipping also forced home appliance enterprises to operate at high cost. The upstream raw materials of home appliance industry are mainly copper, aluminum, steel, plastic and other bulk raw materials, and the price fluctuation is particularly obvious in 2021. The price of LME copper increased by nearly 100% compared with 2020, and the price of steel increased by about 50% year-on-year. The rise in raw material prices has increased the overall cost of the home appliance industry by about 10%.
According to the Gree Electric Annual Report, raw materials accounted for 88.27% of the operating costs, totaling 86.2 billion yuan, up 13.64% year-on-year, which was the fastest among all costs and exceeded the growth rate of revenue and net profit in the current period.
At the same time, Fang Hongbo, chairman of Midea Group, was pessimistic and blunt when explaining Midea’s strategic plan for 2022: "The next three years will face greater difficulties, which is an unprecedented winter." Since then, it has been "business contraction" and "personnel optimization".
See micro-knowledge, as Fang Hongbo said, the cold wave of home appliance industry will sweep all players.
From the business side of Gree Electric, the diversified business that has been laid out for many years is still not improving, and the heavily dependent air conditioning business or backyard is on fire.
According to the revenue scale of sub-products, it is clear that air-conditioning business is still the main force to create performance in Gree Electric, contributing 70.11% of the revenue in 2021. The second business is other business, which is the sales revenue of Gree through purchasing raw materials in a unified way and reselling them to suppliers. It belongs to trade business, and its gross profit margin is low. If other businesses are not taken into account, the proportion of air-conditioning business will exceed 90%.
At the same time, in the field of air conditioning, Gree Electric was overtaken by the United States. In 2021, Midea achieved a total revenue of 343.4 billion yuan, of which the revenue from air conditioning was 141.8 billion yuan. Compared with Gree Electric’s income of 131.7 billion yuan from air conditioning, there is a volume gap.
Although Gree has been exploring diversification for many years in order to get rid of the company’s dependence on air-conditioning business, it has had little effect.
Since 2014, small household appliances, ice washing and other fields related to household appliances have been laid out, but it is difficult for products to keep up with the market trend in terms of research and development, channels and listing, and it is still far from playing a leading role in Gree’s revenue. In 2021, Gree Electric’s household appliances business income was 4.882 billion yuan, up 7.96% year-on-year, while the US’s small household appliances business income was 130 billion yuan, up 15.8% year-on-year.
In terms of mobile phones, it has been five years since Dong Mingzhu said that "Huawei is the first and Gree is the second", but there is still no place for Gree mobile phones in the Red Sea market of mobile phones;
In 2021, Gree Electric entered the field of new energy and energy storage through the acquisition of Yinlong. However, in the market of energy storage, where competition is increasingly fierce and mainstream battery players are exerting their strength, the future development prospect of Gree still needs time to prove.
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