The mobile phone market is recovering steadily, and high-end technology continues to advance. According to Canalys, the 2023Q4 global smartphone market also increased 8% to 320 million units, ending seven quarters of decline and showing a steady recovery trend. Global smartphone shipments in 2023 were 1.14 billion units. The decline was 4% narrower than in 2022. Xiaomi maintained a 13% market share and ranked third in the world.

In terms of shipment volume, we expect Xiaomi Group's 2023Q4 mobile phone shipments to exceed 40 million units, an increase of more than 20% over the previous year. On the ASP side, sales of the Xiaomi 14 series exceeded expectations, with sales exceeding one million in the first week of sale. We expect the ASP of the Q4 phone to increase, driven by the release of high-end models. In terms of subsequent high-end developments, the Xiaomi 14 Ultra will be released on February 22nd. With BOM cost optimization and high-end promotion, we expect the gross margin of Xiaomi's mobile phone business to remain high in 2023Q4.

Xiaomi's Pengpai OS has been upgraded and new AI features have been launched. According to Xiaomi Tablet's official Weibo, the Xiaomi Tablet 6S Pro will be released on the evening of February 22. At that time, Xiaomi will also upgrade Surge OS to launch features such as “AI Magic Picture” and “Workbench 2.0” for compatible devices. Compatible tablet devices will launch a “home control screen”, and also support the function as a car control screen to automatically invoke the Xiaomi SU7 car control interface.

The Xiaomi SU7 was unveiled, and the “whole ecosystem of people, cars and cars” officially closed the loop. The Xiaomi car is progressing smoothly. On December 28, 2023, Xiaomi held an automotive technology conference to introduce the five core technologies of the Xiaomi car: electric drive, battery, large die-casting, smart cockpit, intelligent driving, and basic configuration information of the SU7. The company maintained its mass production target for the first half of 2024.

On October 26, Xiaomi announced that the Group's latest strategy was upgraded from “mobile phone x AIoT” to “the whole ecosystem of people and cars”, and officially released the new operating system Xiaomi Surge OS. We believe that after SU7 is added, the “entire ecosystem of people and cars” will achieve a complete closed loop, and the underlying architecture of people, vehicles, and IoT will be connected in the future, or the interactive experience will be greatly enhanced. For example, the smart cockpit of a Xiaomi car can enable cross-terminal experiences between mobile phones and vehicles (mobile video playback, navigation flow, etc.), and mobile apps can be transformed into native in-vehicle applications in seconds.

Maintain a “buy” rating. We expect Xiaomi Group's 2023Q4 revenue to be 72.7 billion yuan, up 10% year on year; non-GAAP net profit of 4 billion yuan, up 175% year on year; net profit of non-GAAP core business will be 6.4 billion yuan. Looking ahead, we expect Xiaomi Group revenue of 2023-2025 to be 2704/2950/313.9 billion yuan, a year-on-year change of -3%/+9%/+6%. Non-GAAP net profit was $184/150/16 billion, a year-on-year change of +116%/-18%/+7%. Non-GAAP core business net profit was $250/252/26 billion. Based on Xiaomi's core business (excluding car building) 16x 2024e P/E, combined with investment value, Xiaomi maintained a target price of HK$20 and maintained a “buy” rating.

Risk warning: Domestic smartphone competition intensifies, AIoT progress falls short of expectations, overseas market policy risks, Xiaomi's car construction falls short of expectations, and changes in the macroeconomic environment have exceeded expectations.