Incident: The company announced its 2023 results, achieving revenue of 271 billion yuan, a year-on-year decrease of 3.2%. Among them, the company's smartphone business revenue fell 5.8% year on year, and IoT/Internet business revenue increased 0.4%/6.3% year on year, respectively. The three businesses accounted for 58%/30%/11% of revenue respectively. The gross profit margin reached a record high of 21.2% for the whole year, and non-IFRS net profit was 19.3 billion yuan, an increase of 126.3% over the previous year, corresponding to a non-IFRS net profit margin of 7.1%, of which the cost of innovative businesses such as smart electric vehicles was 6.7 billion yuan.

Smartphone gross margin increased significantly. The core strategy in 2024 is steady progress: the company's smartphone business revenue in '23 fell 5.8% year on year to 157.5 billion yuan, of which shipments reached 146 million units, down 3.3% year on year (vs global smartphone market shipments fell 4.3% year on year); ASP fell 2.7% year on year to 1,082 yuan, mainly due to 1H23 overseas clearance and 2H23 lower share of ASP shipments. Optimistically, domestic ASP increased by more than 19% year on year to record high, partially offset by a year-on-year increase in ASP The above mentioned ASP has adverse effects. The profitability of the mobile phone business increased markedly in 2023, and gross margin increased 5.6pct to 14.6% year over year. The core benefits were improved product portfolio, lower core component costs, and overseas inventory impairment provisions were recovered. Looking ahead to 2024, we think: 1) Shipments: Global smartphone shipments may show a weak recovery in the lower single digits. With breakthroughs in emerging overseas markets and a stable advantage in the European market, the company's shipments are expected to rise to around 160 million units at a rate that is clearly superior to the market. 2) ASP & gross profit margin: The company clearly adopts a “steady and aggressive” development strategy in 2024. The sales performance of the Xiaomi 14 series is proving its strength in the context of changes in the domestic competitive landscape, and the Xiaomi 14 Ultra has also started global sales. It is expected that as the high-end strategy continues to advance, the mobile phone business ASP is expected to increase year-on-year; in addition, we expect product structure optimization+supply chain management improvements to offset some of the upward pressure on BOM. It is expected that the mobile phone gross profit margin will be 12-13% for the whole year of 24.

IoT still has room to penetrate overseas, and overseas Internet monetization capacity is expected to continue to improve: 1) IoT business: Revenue in '23 increased 0.4% year on year to 80.1 billion yuan, gross margin increased 1.9 pct year on year to a record high of 16.3% year on year, and annual revenue growth of large smart appliances with high gross margins of nearly 40% year on year was the core driver. Looking ahead to 2024, we believe that a gradual recovery in overseas demand+a relatively low domestic penetration base is expected to drive IoT revenue to maintain year-on-year growth. 2) Internet business: Revenue in '23 increased 6.3% year-on-year to 31 billion yuan, and gross margin increased 2.4 pct to 74.2%. The share of advertising business+increase in gross margin drove IoT revenue and gross margin both to record highs. We expect that as the number of users in stock plus the proportion of high-end machine shipments continues to increase, Internet revenue is expected to continue to grow in 24 years. Among them, the expansion of overseas partners and the increase in monetization capacity will become the core of the growth of the Internet business.

Profit forecast, valuation and rating: Under the “equal emphasis on scale and profit” business strategy in 2023, the company's performance increased significantly, and the gross margins of the three main businesses all reached record highs. On March 28, the smart car SU7 launch conference will be officially held. The company's “launch is delivery, delivery is increase” shows confidence in product sales and production capacity. We believe that SU7 will effectively complement the important part of the “whole ecosystem of people and cars” and open up room for long-term growth for the company. At the same time, it is judged that the company will increase R&D, marketing and channel investment in the automotive business for 24 years. In summary, we expect non-IFRS net profit of 2024/25 to be 143/15.7 billion yuan (increase of 19%/15%), an increase of 26 billion yuan forecast of 17 billion yuan, and maintain the “increase” rating.

Risk warning: mobile phone shipments are under pressure; overseas market expansion falls short of expectations; Internet monetization falls short of expectations