Xiaomi Corp Class B

Xiaomi 01810 continued to be negatively affected in the first quarter by one of the weakest smartphone markets in many years and with investment into new products such as electric vehicles that are yet to launch. Mild year-on-year smartphone market share losses also contributed to the weak quarterly result. This was partly mitigated by a record quarterly gross margin of 19.5% and strong cost control. First-quarter revenue declined 17% year on year, with operating profit excluding investment revaluations down 16.5%. First-quarter research and development expenses were up 18% to CNY 4.1 billion, driven in part by spending CNY 1.1 billion on smart electric vehicles and other growth initiatives such as robotics. We retain our fair value estimate of HKD 12.40 and see the company as slightly undervalued at current levels. Management anticipates the smartphone market to improve over the year and expects full-year unit shipment declines of between 2% and 7%. Second-half market improvement might be a catalyst for the stock.