4Q23 smartphone sales revenue increased 6%/21% year over year to 44.2 billion yuan, while average sales price increased 10% month-on-month, driving the sector's gross margin higher than expected, reaching 16.4% (8.2% in 4Q22).
The smart electric vehicle business will drag down the Group's profitability in 2024; focus on the sales trend of electric vehicles after pricing was officially announced on March 28.
Maintaining the “hold” rating, the target price was raised to HK$15.00, based on 20 times the 2024-25 P/E.
The English version of this Hong Kong Stock Connect report was released by Huaxing Securities (Hong Kong) at 1 p.m. on March 20, 2024. The Chinese version was reviewed by Wang Yiming (Securities Analyst Registration Number: S1680521050001) of Huaxing Securities. If you would like to further discuss the views expressed in this report, please contact your sales representative at Huaxing Securities.
4Q23 performance review: Xiaomi 4Q23 achieved sales revenue of 73.2 billion yuan (up 3%/11% year-on-year, respectively), which is basically in line with expectations. The Group's gross margin remained above 20% for three consecutive quarters, thanks to the fact that the smartphone business's gross margin was higher than expected, mainly due to: 1) continued focus on the high-end market to drive a month-on-month increase in the average sales price of smart phones; 2) lower upstream component costs; and 3) previous inventory depreciation was reversed. R&D expenses increased 16% year over year to 5.5 billion yuan, a record high, mainly due to continued investment in the development of new energy vehicles. Including expenses related to the NEV business and other innovative businesses of 2.4 billion yuan, net profit after 4Q23 adjustments still reached 4.9 billion yuan (up 236% year over year), 7%/30% higher than our forecast/Bloomberg consensus forecast, mainly benefiting from non-operating income.
By business: 1) Smartphones: Revenue of 44.2 billion yuan, up 6%/21% year over year, returning to positive year-on-year growth after seven consecutive quarters of decline. 4Q23 smartphone shipments increased 24% year over year to 40.5 million units, higher than the 8% growth rate of global smartphone shipments (data from Canalys); 2) IoT and consumer products: revenue fell 2%/5% year over year to 20.3 billion yuan due to the decline in smart TV and laptop shipments; 3) Internet services: revenue hit a quarterly high of 7.9 billion yuan (2%/10% year-on-year increase), and segment gross margin increased 4.2 percentage points year over year to 75.7% year on year.
The high-end and internationalization strategy is beginning to bear fruit: Xiaomi's long-term strategy of penetrating the high-end market is beginning to bear fruit. This can be reflected in the fact that the average sales price of smartphones in the Chinese market increased by more than 19% year on year in 2023, mainly due to strong market demand for Xiaomi's flagship models. Management emphasized that 4Q23 high-end smartphone models (priced over 3,000 yuan) accounted for about 28% of the company's total smartphone shipments, and that during the same period, Xiaomi had the largest share of the domestic smartphone market in the 4,000-6,000 yuan price range (28.2%, compared to 7.7% in 2022). Management pointed out that overseas markets will continue to be an important growth driver for the smartphone and IoT business in 2024, and it is expected that Xiaomi will further expand its market share in the overseas smartphone market, supporting a positive performance outlook for 2024.
Profit forecast update: We have raised our 2024/25 gross margin forecast to reflect expectations for the smartphone business's gross margin expansion.
We lowered our 2024/25 adjusted net profit forecast by 5%/12% to reflect the impact of continued investment in the NEV business.
Maintaining the “hold” rating, the target price was raised to HK$15.00: Our new target price is based on 20 times the price-earnings ratio 2024-25 (previously 20 times the 2024 price-earnings ratio). Although we note that Xiaomi has achieved good results in all business lines in 2023, we are still wary of continuing to invest heavily in its NEV project (pricing is scheduled to be officially announced on March 28). We believe that the recent outstanding performance of the stock price has reflected most of the favorable factors, so we maintain the “hold” rating.
Risk warning: Upside risk — smartphone market recovery; increased market share; increased monetization of Internet users; automotive business progressed faster than expected. Downside risk — loss of smartphone market share; automotive business not progressing as expected.