Xiaomi Q3 Financial Report Review: Strong Performance, Focus Shifts to Premium Smartphones and Electric Vehicles

On November 20th, Xiaomi's Q3 performance was strong, benefiting from the increase in gross profit margin and year-on-year revenue growth in all product departments (mainly smartphones). JPM released a financial report on November 21st, maintaining its buy rating and stating that Xiaomi's focus will shift to premium smartphones and electric vehicles.

Stock Rating: Buy

Target Price: HK$23.00

Closing Price: HK$15.06 (11/27/2023)

JPM expects that Xiaomi's year-on-year growth in its core hardware business will continue to accelerate in the coming quarters due to the increase in market share in the smartphone market, continued high-end trend resulting in better ASP, and wider AIoT portfolio. Overall, JPM predicts that Xiaomi's smartphone sales will grow by 15% in 2024, and AIoT sales will grow by 20%. Due to better product positioning and cost savings from component costs, the gross profit margin is also likely to stabilize at a higher level in 2024. The sales growth of Xiaomi 14 is also fast, driving the smartphone portfolio to achieve better ASP and gross profit margin in 2024.

JPM believes that Xiaomi may launch its first electric vehicle model in 1Q24, and initial sales expectations are expected to remain strong, serving as a short-term catalyst for the stock.

Xiaomi's hardware revenue is expected to accelerate year-on-year growth in the next 3-4 quarters due to the increase in market share in the smartphone market (especially overseas markets), the improvement of overall ASP, and the expansion of the AIoT portfolio. Overall, JPM predicts that Xiaomi's smartphone sales will grow by 15% in 2024, and AIoT sales will grow by 20%.

Xiaomi has successfully executed its high-end strategy through continuous technological development (operating system, camera, SoC, display panel, etc.). In the past 2-3 years, its active offline store expansion has begun to take effect, driving a higher proportion of China's high-end smartphones. Xiaomi is expected to gain market share in overseas markets (LATAM, Africa, EU, Middle East, etc.) ahead of continued high-end and dual-brand strategies.

Xiaomi is expected to continue to expand its AIoT product portfolio (large household appliances, flat-screen TVs, air conditioners, etc.), maintain a high market share in China, and continue to gain market share in international markets because of its stronger cost-performance ratio.

Xiaomi's gross profit margin is expected to stabilize at a higher level in 2024, driven by better product positioning (higher proportion of high-end/high-end smartphones) and sustained cost savings from components (memory, display panels, etc.). The expected gross profit margins for smartphones and AIoT in 2024 are 13-14% and 17%, respectively, both higher than historical trends.

JPM believes that initial delivery volume may exceed expectations: recent news reports have shown details of Xiaomi's new electric vehicle model (starting with a sedan), and believe its rich features and attractive price structure may help deliver 50-100k units in the first year. The competition in China's electric vehicle market is fierce, and Xiaomi may lose money in this field in the first few years, but the market may focus on the unit sales growth in the first few quarters after the launch of electric vehicles.

Xiaomi's core hardware business is gradually recovering and is expected to continue growing in 2024, thanks to:

(1) Better positioning in China's high-end market, driving strong ASP growth;

(2) Most of the loss of market share in India has passed, which will drive growth in overseas markets such as Europe, the Middle East, and Latin America;

(3) The AIoT business turns losses into profits, with a wider product portfolio, sales growth of new products such as air conditioners, and more overseas growth.

In addition, Xiaomi's gross profit margin seems to be increasing to a higher level due to the high-end trend in the smartphone industry and the higher proportion of white goods and overseas income in the AIoT business. In the first half of 2024, the market may expect Xiaomi to launch an electric vehicle, with the potential to sell 50-100k units in its first year, bringing potential upside to the stock. Although the electric vehicle business may put pressure on Xiaomi's profitability before it reaches scale, it is expected to be a positive driving factor for stock price growth in the initial delivery phase.