Xiaomi Earnings: Record Gross Margins Again; FVE Upgraded to HKD 16.50

Xiaomi’s third-quarter 2023 result was highlighted by another record gross profit margin, particularly from smartphones and Internet of Things and lifestyle products. Third-quarter gross profit margin of 22.7% was up 610 basis points year on year and 170 basis points sequentially from the second quarter that was also a record. Research and development expenses were up 31% year on year to RMB 5.0 billion driven in part by spending RMB 1.7 billion on smart electric vehicles, or EVs, and other growth initiatives such as robotics. However, ex-research and development operating costs declined 8.2% year on year due to a strong effort by management to reduce controllable costs. The net result was third-quarter revenue up 0.6% year on year with operating profit excluding investment revaluations up 202% from the very weak third-quarter 2022. Third-quarter underlying operating profit margin increased to 7.3% from 2.4% a year ago. Xiaomi produced operating margins at this level back in first quarter 2021, but that was when the smartphone market was much stronger and the spending on EVs was lower. We increase our fair value estimate to HKD 16.50 from HKD 14.30 based on a 12% increase in operating profit in 2023 and around 30% increase in operating profit from 2024 onward due mainly to increased gross margin assumptions for smartphones. Currency movements also added around HKD 0.20 to our fair value estimate.