Reiterating Xiaomi's “buy” rating: Xiaomi's 4Q23 performance was strong, with adjusted profit of RMB 4.9 billion, up 236% year over year, in line with our expectations. We expect Xiaomi's core business (smartphone, IoT, internet) profit to remain high in 2024 after adjustments and deduction of new business expenses. Delivery of the Xiaomi smart electric vehicle will begin in the near future, contributing to revenue, and it is expected that the valuation of this business will gradually be released. At the same time, we believe that Xiaomi is also a direct beneficiary of AI side-landing phones. Looking further ahead to 2025, Xiaomi's core business profit has the ability to continue to grow. In line with the increase in gross profit of the smart electric vehicle business, it is expected that Xiaomi's adjusted total profit growth will accelerate. The current target price corresponds to the adjusted profit price-earnings ratio of 16.3x and 14.9x in 2024 and 2025. The valuation is attractive, so the “buy” rating of Xiaomi is reaffirmed.
Focus on the launch and delivery of the Xiaomi smart electric vehicle: Xiaomi will hold a Xiaomi car press conference on March 28. At that time, the price of the Xiaomi SU7 will be announced, and delivery will begin at the same time. Thanks to Xiaomi's fan base, we remain optimistic about the initial demand for Xiaomi cars, focusing on the company's initial production capacity climbing and delivery capacity. Meanwhile, as Xiaomi continues to expand its stores and dealers, the delivery volume of Xiaomi vehicles is expected to continue to grow. We expect this to release the valuation of the Xiaomi car business, thereby boosting stock price performance.
Xiaomi's core business profit is expected to remain high and stable in 2024: In 2024, we believe that Xiaomi is expected to hedge against rising costs of midstream and upstream components through increased mobile phone share sales and product restructuring, thereby increasing the company's operating leverage and maintaining a stable high profit level of around RMB 26 billion. Among them, the mobile phone business is more affected by rising material costs, and profits will decline, but the IoT and Internet businesses are expected to see a simultaneous rise in revenue and gross margin. At the same time, the increase in Xiaomi's revenue led to an increase in operating leverage, driving the company's overall core business profit to remain stable this year.
Valuation: We value Xiaomi using the segmented and aggregate valuation method. We gave Xiaomi a target price-earnings ratio of 12.0x, 16.0x, and 12.0x for smartphone, IoT, and internet businesses in 2025, and a target market sales ratio of 1.5x for smart electric vehicles, and obtained a target price of HK$18.6, with a potential increase of 28%.
Investment risk: Demand recovery for consumer electronics products such as smartphones has fallen short of expectations. The cost of parts and upstream semiconductors in the mobile phone supply chain is rising too fast. Competition in the industry is intensifying, and players' profit margins are under pressure. Smart electric vehicle deliveries have fallen short of expectations.