Citigroup’s downgrade of Gree, China’s biggest home appliances maker, could cool bull run

China’s world-beating stock rally has hit another snag, after Gree Electric Appliances, the country’s biggest appliance maker, had its rating downgraded by US bank Citigroup.

In a report on Sunday, the bank cut its recommendation for Gree to sell from buy, and lowered its earnings estimate by 9 per cent too, citing the company’s lacklustre 2018 earnings result and disappointing dividend payout. Citi also said Gree’s first-quarter earnings would be sluggish as industry data shows its domestic air conditioner shipment volumes were slower than that of major rival Midea Group, as well as the industry average.

The rating downgrade for Gree, a bellwether company, will add to the negative mood around China’s stock market, the best performer this year globally. Sentiment has turned sour of late, with Beijing signalling it would scale back growth boosting measures, and overseas traders starting to trim holdings in favourite companies such as Kweichow Moutai amid stretched valuations.

In its earnings result for 2018 released over the weekend, Gree said its full-year net income rose 17 per cent from a year earlier and that it would allocate 48 per cent of profits to pay dividends. Its annual earnings growth rate was the slowest since 2015, while the dividend issued was less generous than previous years’, when Gree put aside at least 60 per cent of profits for dividends.

The full-year dividend payout ratio at 48 per cent will “be the key disappointment to the market”, said Mark Li and Eric Lau, analysts at Citigroup. “We believe the near-term negative catalyst would be its 1Q19 results.”

The analysts also pointed out the run-up on Gree’s share price this year, which was mostly driven by a plan by Zhuhai Gree Group, its state-owned parent, to sell most of its stakes in the company, was excessive. The Shenzhen-traded stock had surged 82 per cent through April 19.