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Xiaomi Corp 01810

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Morningstar’s Analysis

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Xiaomi Produces Record Smartphone Sales and Gross Margins; FVE Raised to HKD 20.70

Dan Baker Senior Equity Analyst

Analyst Note

| Dan Baker |

Xiaomi reported a very strong first-quarter 2021 result with the rapid expansion in smartphone gross margin the main highlight. Consolidated revenue grew 54.7% year on year driven by very strong smartphone revenue which was up 70% on the back of Huawei’s retreat. The smartphone gross margin of 12.9% was up 480 basis points on the previous corresponding period. Up until third-quarter 2020 Xiaomi’s smartphone gross margins averaged 7.5% and never rose above 9% in any quarter. Fourth quarter last year these margins increased to 10.5% and then jumped to 12.9% in the first quarter. The smartphone performance drove consolidated operating profit (less investment gains) up 161% with an 8% consolidated operating margin, much better than its previous best quarterly operating margin of 6.1% in second-quarter 2019. Huawei’s retreat seems to have lifted margins across the industry with Samsung’s smartphone business and Apple’s consolidated business also reporting their best operating profit margins since 2016. We lift our fair value estimate to HKD 20.70 from HKD 16.30 previously due mainly to increased gross margin forecasts in the smartphone business as well as increased smartphone revenue growth forecasts in 2021, with the lift in the value of Xiaomi’s investment portfolio over the quarter and a slightly stronger CNY also helping. Our no-moat rating is retained as we believe Xiaomi is predominantly an electronics hardware supplier with limited switching costs with its internet services business not yet well enough developed to assign a moat to. On our estimates Xiaomi currently trades on a 2021 price/earnings ratio of 31 times. Despite Xiaomi’s growing Internet of Things and lifestyle services business revenue giving it some differentiation from other consumer electronics peers, we believe this multiple is still above what could be reasonably justified.

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Company Profile

Business Description

Xiaomi is a technology product and services company founded in early 2010, focusing mainly on smartphones and Internet of Things products and related Internet services. An early adopter of online smartphone sales, Xiaomi uses Android as its operating system but has its own customized user interface called MIUI. As competition in its home Chinese smartphone market intensified and growth has slowed, it has expanded into other markets and has become the smartphone market leader in India and is gaining market share in Europe. In 2020, from a country perspective, 50% of its overall revenue was generated in mainland China, down from 94% in 2015. The company listed on the Hong Kong market at the beginning of July 2018.

Anningzhuang Road, Xiaomi Campus
Beijing, Cayman Islands
Sector Technology
Industry Consumer Electronics
Most Recent Earnings Dec 31, 2020
Fiscal Year End Dec 31, 2021
Stock Type
Employees 22,074

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