Daiwa Lifts XIAOMI-W TP to $13.5, Rating Outperform
Daiwa wrote in a report that while smartphone sales of $XIAOMI-W(01810.HK$ re meager, its earnings growth in 2Q23 is expected to be stronger than current expectations given a better-than-expected recovery in Internet of Things (IoT) sales and advertising, as well as improved margins.
Daiwa noted that XIAOMI's China market share fell to 13% YoY due to competition from Huawei $Huawei Hongmong(BK0795.SH$ , and its changing strategy in India continued to weigh on its 15% market share there. However, XIAOMI's share in overseas markets remains resilient. Although the broker expected the group's smartphone revenue to decline to RMB35.8 billion with average selling price being flat YoY, smartphone gross margin may reach 12% in 2Q, which is higher than expected due to the decline in bill of materials costs. The broker expected XIAOMI's smartphone shipments to reach 140 million units.
In addition, Daiwa predicted growth in Internet revenue to be supported by a revival in China's advertising budget, mainly performance advertisements for e-commerce, games and internet services, as well as pre-installation revenue from shipment growth. The broker forecasted the gross margin of internet business to recover to 73%.
Daiwa wrote that XIAOMI's cost control and improved business gross margins will help it continue its earnings growth momentum this year. Excluding investments in electric vehicles, artificial intelligence and other new areas, the group expects to maintain a core operating margin of more than 7% this year, compared with 4% last year. The broker cut the group's revenue forecast by about 3% in 2023-25 on an expected decline in smartphone shipments, but raised its earnings forecast by 7%-16% due to higher gross margins.
Daiwa reiterated its Outperform rating and raised its target price from $12 to $13.5.
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