Company Reports

Investors in Xiaomi will be hoping the company can leverage its proven ability to manufacture and market good value-for-money smartphone hardware into a sticky software ecosystem that will allow the company to increase its margins and returns. It will also try to use its "Internet of Things" products to help build this ecosystem. During its IPO in 2018 the company committed to limit its margins on hardware products (smartphones and Internet of Things) to 5%, but in 2019 it started a premiumization strategy, helped with Huawei pulling out of the market and has been increasing its mix of higher-end products ever since. We expect this pivot toward higher-end products to continue over the next four to five years as it helps revenue growth and increases gross margins.

Xiaomi’s fourth-quarter 2023 result was again highlighted by strong margins from smartphones with a smartphone gross margin of 16.4%, double that of fourth-quarter 2022 and down only slightly from the record 16.6% it reported in the third quarter of 2023. The company also continues to spend strongly on research and development, with related expenses up 16% year on year to CNY 5.5 billion, driven in part by spending on smart electric vehicles and other growth initiatives such as robotics. Fourth-quarter revenue was up 10.9% year on year, with operating profit, excluding investment revaluations, up to CNY 4.7 billion from HKD 115 million in the fourth quarter of 2022. The fourth-quarter underlying operating profit margin increased to 6.4% from 0.2% a year ago. We retain our fair value estimate of HKD 16.50 per share and the stock has a 3-star rating at these levels.

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.

Investors in Xiaomi will be hoping the company can leverage its proven ability to manufacture and market good value-for-money smartphone hardware into a sticky software ecosystem that will allow the company to increase its margins and returns. It will also try to use its "Internet of Things" products to help build this ecosystem. During its IPO in 2018 the company committed to limit its margins on hardware products (smartphones and Internet of Things) to 5%, but in 2019 it started a premiumization strategy, helped with Huawei pulling out of the market and has been increasing its mix of higher-end products. We expect this pivot toward higher-end products to continue over the next four to five years as it helps revenue growth and increases gross margins.

The highlight of Xiaomi’s second-quarter 2023 result was a record gross profit margin and large underlying operating cost reductions which more than offset continued revenue weakness in the smartphone market. Second-quarter gross profit margin of 21% was up 420 basis points year on year and 150 basis points sequentially.

Investors in Xiaomi will be hoping the company can leverage its proven ability to manufacture and market good value-for-money smartphone hardware into a sticky software ecosystem that will allow the company to increase its margins and returns. It will also try to use its "Internet of Things" products to help build this ecosystem. During its IPO in 2018 the company committed to limit its margins on hardware products (smartphones and Internet of Things) to 5%, but in 2019 it started a premiumization strategy, helped with Huawei pulling out of the market and has been increasing its mix of higher-end products. We expect this pivot toward higher-end products to continue over the next four to five years as it helps revenue growth in a sluggish smartphone market.

Investors in Xiaomi will be hoping the company can leverage its proven ability to manufacture and market good value-for-money smartphone hardware into a sticky software ecosystem that will allow the company to increase its margins and returns. It will also try to use its "Internet of Things" products to help build this ecosystem. During its IPO in 2018 the company committed to limit its margins on hardware products (smartphones and Internet of Things) to 5%, but in 2019 it started a premiumization strategy, helped with Huawei pulling out of the market and has been increasing its mix of higher-end products. We expect this pivot toward higher-end products to continue over the next four to five years as it helps revenue growth in a sluggish smartphone market.

Xiaomi 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.

Xiaomi’s 2022 result was negatively affected by one of the weakest smartphone markets in many years and continued investment into new products such as electric vehicles that are yet to launch. The volatility in this industry was highlighted with Xiaomi’s 34% revenue growth and 79% operating profit growth (ex-investment gains and losses) in 2021, followed by a revenue decline of 15% and operating profit down 72% year on year in 2022, with fourth-quarter 2022 revenue down 23%. Full-year research and development expenses were up 22% to CNY 16 billion driven in part by spending CNY 3.1 billion on smart electric vehicles and other growth initiatives such as robotics. Xiaomi is on track for its first smart EV to be mass produced in the first half of 2024.

Investors in Xiaomi will be hoping the company can leverage its proven ability to manufacture and market good value-for-money smartphone hardware into a sticky software ecosystem that will allow the company to increase its margins and returns. It will also try to use its "Internet of Things" products to help build this ecosystem. During its IPO in 2018 the company committed to limit its margins on hardware products (smartphones and Internet of Things) to 5%, but in 2019 it started a premiumization strategy, helped with Huawei pulling out of the market and has been increasing its mix of higher-end products. We expect this pivot toward higher-end products to continue over the next four to five years as it helps revenue growth in a sluggish smartphone market.

Investors in Xiaomi will be hoping the company can leverage its proven ability to manufacture and market good value-for-money smartphone hardware into a sticky software ecosystem that will allow the company to increase its margins and returns. It will also try to use its "Internet of Things" products to help build this ecosystem. During its IPO in 2018 the company committed to limit its margins on hardware products (smartphones and Internet of Things) to 5% but it has seen a drastic increase in smartphone hardware margins since Huawei pulled out of the market and has been increasing its mix of higher-end products. We expect this pivot toward higher-end products to continue over the next four to five years.

Xiaomi’s third-quarter result continued to be negatively affected by the weak smartphone market with global smartphone shipments down 9.7% year over year, representing the fifth consecutive quarter of decline for global smartphone shipments. Xiaomi managed to maintain its market share and position as the third-largest smartphone producer, but third-quarter revenue still fell 9.7% year on year with operating profit (ex-investment gains and losses) down 74% year on year.

Xiaomi’s second-quarter result was hurt by some factors largely outside of its control and which will likely normalize in the mid to long term, including increased logistics and transportation costs, COVID-19 lockdowns in China, and inflation, which all contributed to a weak smartphone market. Second-quarter revenue fell 20% year on year with operating profit (ex-investment gains and losses) down 72% year on year. Despite the weaker macroeconomic environment, Xiaomi continued to invest in research and development to drive future growth, maintaining its confidence in the long-term future. R&D expenses were up 23% to CNY 3.8 billion, driven in part by spending CNY 611 million on smart electric vehicles and other growth initiatives such as robotics. Xiaomi plans to invest CNY 3.3 billion in autonomous driving research and development in the first phase with a self-developed full stack approach to autonomous driving technology. We reduce our fair value estimate to HKD 17.30 from HKD 19.00 previously, based on heavily downgraded revenue and margin forecasts in 2022 with some flow on to 2023 and 2024 forecasts, and CNY weakness. With the pullback in share price over the past 18 months and sentiment hit by many short-term factors, we see Xiaomi as undervalued at current levels.

Investors in Xiaomi will be hoping the company can leverage its proven ability to manufacture and market good value-for-money smartphone hardware into a sticky software ecosystem that will allow the company to increase its margins and returns. It will also try to use its "Internet of Things" products to help build this ecosystem. During its IPO in 2018 the company committed to limit its margins on hardware products (smartphones and Internet of Things) to 5% but it has seen a drastic increase in smartphone hardware margins since Huawei pulled out of the market and has been increasing its mix of higher-end products. We expect this pivot toward higher-end products to continue over the next four to five years.

Xiaomi’s first-quarter result was negatively affected by some factors largely outside of its control and which will likely normalize in the mid to long term including component shortages, increased logistics and transportation costs, COVID-19 lockdowns in China, global economic concerns, and falling market prices for investments. However, Xiaomi’s smartphone business was also negatively affected by a resurgent Honor (ex-Huawei brand) which we believe could well be more long-lasting. First-quarter revenue fell 4.6% year on year with operating profit (ex-investment gains and losses) down 53% year on year. The company’s global smartphone unit market share fell to 12.7% in first-quarter 2022 from 14.1% in the full-year 2021 in an overall smartphone market that fell by 9%.

Investors in Xiaomi will be hoping the company can leverage its proven ability to manufacture and market good value-for-money smartphone hardware into a sticky software ecosystem that will allow the company to increase its margins and returns. It will also try to use its "Internet of Things" products to help build this ecosystem. During its IPO in 2018 the company committed to limit its margins on hardware products (smartphones and Internet of Things) to 5% but it has seen a drastic increase in smartphone hardware margins since Huawei pulled out of the market and has been increasing its mix of higher-end products. We expect this pivot toward higher-end products to continue over the next four to five years.

Investors in Xiaomi will be hoping the company can leverage its proven ability to manufacture and market good value-for-money smartphone hardware into a sticky software ecosystem that will allow the company to increase its margins and returns. It will also try to use its "Internet of Things" products to help build this ecosystem. During its IPO in 2018 the company committed to limit its margins on hardware products (smartphones and Internet of Things) to 5% but it has seen a drastic increase in smartphone hardware margins since Huawei pulled out of the market and has been increasing its mix of higher-end products. We expect this pivot toward higher-end products to continue over the next four to five years.

Xiaomi’s 2021 results were strong despite being negatively affected by component shortages, increased logistics and transportation costs, and falling market prices for investments. Full-year revenue grew 33% year on year with operating profit (ex-investment gains and losses) up 79% year on year. The company increased global smartphone market share to 14.1% in 2021 from 11.5% in 2020 to attain a clear number three ranking by volume. In the absence of Huawei, the company’s smartphone market share grew faster than any of the other five major smartphone brands. Fourth quarter did see a slowdown with revenue growing at 18.4% year on year and operating profit up 63% year on year but down 33% sequentially. In the fourth quarter, the company also invested in sales and marketing expenses (up 23% year on year) and research and development expenses (up 24% year on year). Smartphone gross margins fell to 10.1% in the fourth quarter from 10.5% in fourth-quarter 2020 and an average of 12.5% over the first nine months of 2021, but were likely affected by the sales in this quarter, particularly Double 11 in China.

Investors in Xiaomi will be hoping the company can leverage its proven ability to manufacture and market good value-for-money smartphone hardware into a sticky software ecosystem that will allow the company to increase its margins and returns. It will also try to use its "Internet of Things" products to help build this ecosystem. During its IPO in 2018 the company committed to limit its margins on hardware products (smartphones and Internet of Things) to 5% but it has seen a drastic increase in smartphone hardware margins since Huawei pulled out of the market and has been increasing its mix of higher-end products.

Xiaomi’s third-quarter results were negatively affected by component shortages, increased logistics and transportation costs, and falling market prices for investments. Despite this, the company managed to grow revenue by 8.2% and operating profit (ex-investment losses) by 45.4%. Despite the weaker 0.5% growth in smartphone revenue, smartphone gross margin was 12.8%, up from 8.5% in the same period in 2020.