Xiaomi (1810.HK): Waiting for a recovery in demand in the smartphone industry

浦銀國際 ·  03/30  · Researches

Reiterating Xiaomi's “buy” rating, the target price was raised to HK$15.4, a potential increase of 27%.

Reiterating Xiaomi's “buy” rating: Affected by weak short-term smartphone demand, Xiaomi's performance is expected to remain under pressure in the first half of this year. However, we think Xiaomi will benefit from a gradual recovery in consumer electronics demand such as smartphones in the second half of the year, leading to a double increase in revenue and gross margin. Furthermore, entering 2024, the company's smart electric vehicle business will increase revenue, thereby increasing valuation space. At present, Xiaomi's own and the secondary market's expectations for the company have bottomed out. Therefore, we reaffirm the Xiaomi “buy” rating.

The forecast for global smartphone shipments was lowered, but high-end models and folding screens are expected to drive steady growth in high-end demand: compared with the forecast in the Technology Outlook in December last year, we lowered our forecast for global smartphone shipments in 2023 to 1.18 billion units, down 2.4% from the previous year. However, we expect global intelligence to enter a slow recovery path in the second half of this year. A return to healthy levels of channel inventories, an improvement in the external macro environment, and a boost in terminal consumer confidence will all drive marginal improvements in the second half of the year. Also, we are concerned that the rapid growth of folding screen models is expected to maintain the steady growth of high-end models.

Xiaomi is expected to see significant profit growth and performance release in 2024: Xiaomi's operating profit for the fourth quarter was under pressure, mainly due to high investment in the electric vehicle business. We expect the associated cost investment to continue in 2023. However, entering 2024, Xiaomi's old business (mobile phones, IoT, Internet) is expected to see an increase in profits as the scale and profit strategy shift.

At the same time, the revenue contribution brought by new energy vehicles will also bring valuations and market value additions.

Valuation: We use the segmented plus total valuation method to value Xiaomi. We gave Xiaomi target price-earnings ratios of 18.0x, 25.0x, and 18.0x for its smartphone, IoT, and internet businesses in 2024, respectively, and gave other businesses (mainly smart electric vehicles) a target price-earnings ratio of 2.5x to obtain a target price of HK$15.4, with a potential increase of 27%.

Investment risk: Demand for consumer electronics products such as smartphones did not recover as expected, and growth was weak in the second half of the year. The speed at which mobile terminals and supply chains are being removed from inventory is weaker than expected, dragging down mobile phone brands' shipments. Competition in the industry has once again intensified, and players' profit margins are under pressure. Overseas macro-environment fluctuations affect overseas consumer electronics demand. The progress of new energy vehicles is not as good as expected.

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