Xiaomi Corp: Encouraging Growth Outlook and Competitive Edge

Date: 5 November 2024

Broker: OCBC Investment Research

Introduction

Xiaomi Corp, a prominent player in the Information Technology sector in China, has been making significant strides in the global and domestic markets. This comprehensive analysis delves into Xiaomi’s growth prospects, strategic initiatives, and financial performance, providing a detailed overview of the company’s competitive edge and market position.

Global Smartphone Market Performance

In 3Q24, global smartphone shipments witnessed a 5% year-on-year (YoY) increase, reaching 309.9 million units, marking the strongest third-quarter performance since 2021. This growth was driven by aggressive product launches with strong value propositions, encouraging consumers to upgrade amid a favorable refresh cycle and positive consumer sentiment. Demand remained steady in emerging markets, while early signs of a replacement cycle appeared in North America, China, and Europe.

Xiaomi’s Market Position

Xiaomi retained its third place in the global smartphone market with 42.8 million units shipped and a 14% market share in 3Q24. The company benefited from strategic inventory positioning for new releases in key markets. In China, the smartphone market continued to recover, bolstered by summer and back-to-school sales, with 3Q24 shipments rising 4% YoY to 69.1 million units. Xiaomi advanced to fourth place with a 15% market share, shipping 10.2 million units and achieving 13% YoY growth.

Investment Thesis

Xiaomi operates a distinctive business model that combines affordably priced, high-quality smartphones with a smart Internet of Things (IoT) hardware product ecosystem and Internet services-based monetization. The company’s strong cash flow should support its electric vehicle (EV) foray. However, Xiaomi is likely to encounter headwinds from overall macroeconomic weakness and stiffer competition.

Investment Summary

Xiaomi’s global smartphone shipments saw a fourth consecutive quarter of growth. The company’s ecosystem strategy, “Human x Car x Home,” has helped attract a broader and more stable consumer base. With strategic inventory positioning and favorable market conditions, Xiaomi is well-positioned to maintain its market share and achieve its EV shipment goals.

Electric Vehicle (EV) Growth

Xiaomi is on track to achieve its EV shipment goal of 120,000 units in FY24. Based on Car.Yiche’s estimate, Xiaomi delivered 39.8 thousand EVs in 3Q24, with October shipments reaching 20,000 units. The company appears on track to meet its goal of 100,000 units by early November and 120,000 units by FY24. Sequential margin improvements in its EV business could lead to a smaller net loss this quarter. Despite Xiaomi’s share price outperformance, the company’s improved earnings visibility, smartphone market share growth, margin recovery, and EV deliveries with potential average selling price (ASP) growth following the SU7 Ultra and SUV launches in 1Q25 remain positive indicators.

ESG Updates

In October 2024, Xiaomi’s ESG rating was upgraded due to improvements in corporate governance and expanded recycling efforts. With 89% of its revenue from business lines commonly involved in clean technology, Xiaomi’s environmental score ranks above the industry average. However, its social score ranks below its peers due to heavy reliance on outsourced manufacturing, exposing it to supply chain labor risks. Allegations have been made regarding Xiaomi’s indirect involvement in employing ethnic minorities through coercive state-sponsored labor-transfer programs. Additionally, Xiaomi’s smart device apps handle personal user data, exposing the company to data breach risks. To mitigate these risks, Xiaomi provides staff training, oversees suppliers for data security, and obtains external security certifications.

Potential Catalysts

• Better-than-expected shipments of smartphones and IoT devices.
• Faster-than-expected recovery in advertising demand-supply dynamics.
• Monetization of users outside of China could see a spike in top-line growth.

Investment Risks

• Margin deterioration.
• Intense competition in the highly competitive smartphone space.
• Trade issues and potential sanctions could impact hardware production as key components are sourced from US companies.
• Possible slump in smartphone momentum in China.
• Supply chain bottlenecks.

Valuation Analysis

Company Overview

Xiaomi Corporation was founded in April 2010 and listed on the Main Board of the Hong Kong Stock Exchange on 9 July 2018 (1810.HK). Xiaomi is a technology company with smartphones, IoT products, and internet business at its core. As of 2Q23, Xiaomi ranked among the top three in the global smartphone market in terms of smartphone shipments, according to Canalys. The company has also established the world’s leading consumer AIoT (AI+IoT) platform, with 655 million smart devices connected to its platform, excluding smartphones, tablets, and laptops, as of 30 June 2023. Xiaomi products are present in more than 100 countries and regions around the world.

Financial Performance

Income Statement

For the fiscal year ending 31 December 2023, Xiaomi reported revenue of CNY 270,970.1 million, a slight decline from the previous year’s CNY 280,044.0 million. The cost of revenue also decreased to CNY 213,493.9 million from CNY 232,466.8 million. Gross profit increased to CNY 57,476.2 million from CNY 47,577.2 million. Operating income improved significantly to CNY 20,008.7 million from CNY 2,816.5 million in the previous year. Net income available to common shareholders was CNY 17,475.2 million, a substantial increase from CNY 2,474.0 million in 2022.

Profitability Ratios

Xiaomi’s return on common equity improved to 11.36% in FY23, up from 1.76% in FY22. The return on assets also increased to 5.85% from 0.88%. The operating margin rose to 7.38% from 1.01%, reflecting better cost management and increased profitability. The net income margin improved to 6.45% from 0.88% in the previous year.

Credit Ratios

Xiaomi’s total debt-to-EBIT ratio improved to 2.04 in FY23 from 4.29 in FY22, indicating better debt management. The net debt-to-equity ratio also improved to -0.47 from -0.29, reflecting a stronger balance sheet. The EBIT-to-interest expense ratio increased to 12.70 from 5.37, indicating improved profitability and better interest coverage.

Conclusion

Xiaomi Corp has demonstrated resilience and growth in the global smartphone market, supported by its innovative ecosystem strategy and strong financial performance. Despite facing challenges such as intense competition and potential trade issues, the company’s strategic initiatives in the EV market and continuous improvements in corporate governance and sustainability practices position it well for future growth. Investors should consider both the potential catalysts and risks when evaluating Xiaomi as an investment opportunity.