Incident: The company released its semi-annual performance report. 24Q2 achieved revenue of 88.89 billion yuan, +31.9% YoY/+17.5% month-on-month; adjusted net profit of 6.18 billion yuan, +20.1% YoY/-4.9% month-on-month; gross profit margin of 20.7%, -0.3 pct/month-on-month. The gross profit margin of the automobile business was disclosed for the first time. The revenue of innovative businesses such as 24Q2 smart electric vehicles was 6.4 billion yuan, with a gross profit margin of 15.4%, and an adjusted net loss of 1.8 billion yuan. Our review is below.

Revenue in a single quarter reached a record high, with adjusted net profit +20%. The company's 24Q2 revenue was 88.89 billion yuan, +31.9% /month-on-month, increasing for four consecutive quarters; adjusted net profit was 6.18 billion yuan, +20.1% /month-on-month -4.9%, including 1.8 billion yuan for innovative businesses such as smart electric vehicles; gross profit margin of -0.3 pct month-on-month and 1.6 pct, of which the mobile phone Xalot division's gross margin was 24q2 The overall operating expense ratio was 14.2%, -1.0pct; R&D investment continued to increase, 24Q 221.1%, and the gross profit margin of innovative businesses such as smart electric vehicles was 15.4%. The company continued to show results in cost reduction and efficiency. R&D expenses were 5.5 billion yuan, +20.7% /month-on-month +6.6%. By the end of 24Q2, the number of R&D personnel reached 0.0183 million, an increase of 5.0% over the end of 24Q1. Benefiting from high growth in the main business, the company's 24Q2 cash reserve was 141 billion yuan, and abundant cash flow provided a solid foundation for core business and new business expansion.

Smartphones: 24Q2 revenue continued to increase year over year, and gross margin was under phased pressure; high-end and global layout results are still remarkable. 24Q2's smartphone business revenue was 46.52 billion yuan, +27.1% month-on-month; gross profit margin was 12.1%, -1.2% YoY/-2.7% month-on-month. The decline in gross margin was mainly due to increased competition in the domestic market and rising prices of core components. In terms of shipment volume, 24Q2 Xiaomi's global smartphone shipments reached 42.2 million units, +28.1%. It was the brand with the fastest year-on-year shipment growth rate among the top five in the world, ranking in the top three in the world for 16 consecutive quarters. The company's high-end strategy continued to advance, and 24Q2 continued to increase the share of high-end smart phones in mainland China. Among them, the market share of smartphones with 3k-4k/4k-5k/5k-6k price bands was 16.8%/20.1%/8.9%, respectively, +5.4pct/3.5pct/2.3pct; July '24 The Xiaomi MixFold4 and Xiaomi's first small-folding Xiaomi MiXFlip were released, and product capabilities continued to be deepened. Mainland China's shipping share has returned to the top five, and the global layout has achieved remarkable results. 24q2's smart +0.8/2.1/3.1/4.1/3.1 PCT to 14.2%/18.6%/17.2%/21.2%/11.7%. The market share of mobile phones in mainland China, Latin America, Southeast Asia, the Middle East, and Africa declined year-on-year in 70 countries, mainly due to increased domestic competition and increased sales volume in emerging markets with low ASP. In terms of ASP, 24Q1ASP was -0.8% compared to the same period. Networking: Revenue reached record highs in 24Q2, and profitability remained strong. In terms of the LOT business, 24Q2 revenue reached a record high of 26.76 billion yuan, +20.3% YoY; gross profit margin 19.7%, plus: 1) Strong growth in smart appliances, with 24Q2 revenue +38.7% YoY, mainly due to domestic air ice washing +2.2pct month-on-month. Revenue growth was mainly driven by increased sales of major smart appliances, tablets and wearables; 2) Tablet revenue was +67.6% year-on-year, mainly driven by a 106.4% year-on-year increase in Q2's global tablet shipments; 3) Wearable revenue was +31.0% year over year, mainly due to increased shipments of smartwatches and TWS headsets. The gross margin of the LoT business remained high for 2 consecutive quarters, fully reflecting the improvement in the company's product structure and cost control improvements brought about by increasing core self-research capabilities. In terms of the Internet business, 24Q2 revenue reached a record high of 8.27 billion yuan, a record high of +11.0%/month-on-month +2.7%; gross profit margin was 78.3%, +4.2% y/month-on-month +4.1%; mainly due to increased advertising revenue, which led to a year-on-year improvement in gross margin. The company's overseas Internet business continued to expand healthily. Overseas Internet business revenue in the second quarter was +32.9% year-on-year to 2.7 billion yuan, reaching a new high.

Automobile: The 24Q2 gross margin has greatly exceeded expectations. It is expected to improve quarterly in the second half of the year. We are optimistic about the company's medium- to long-term automobile business growth space. 24Q2's innovative businesses such as smart electric vehicles had revenue of 6.4 billion yuan, accounting for 7.2% of total revenue; gross profit margin was 15.4%, operating expenses were 2.9 billion yuan (including R&D, sales promotion, and administrative expenses), and an adjusted net loss of 1.8 billion yuan. Among them, smart electric vehicles earned 6.2 billion yuan, delivered 0.027 million new vehicles, high support from chain partners, scale effects brought about by Xiaomi's explosive product strategy, and Xiaomi's long-term ASP 0.229 million. The gross margin performance exceeded expectations, mainly benefiting from the rapid rise in the company's production capacity and the comprehensive management advantages accumulated by supplying and cultivating the consumer electronics sector. In the future, along with the gradual completion of early high-discount order deliveries, and the decline in cost sharing and BOM due to the start of scale, the gross margin of the automobile business is expected to increase steadily in the second half of the year. In terms of delivery, the Xiaomi car factory began double-shift production in June, and production line adjustment and maintenance was carried out in July. We expect the company's production capacity delivery to increase rapidly from August, and to achieve the goal of delivering 0.1 million vehicles for the whole year and 0.12 million units for the whole year ahead of schedule in November; in the next two or three years, various models will be released to complete the product matrix. Looking at the medium to long term, we believe that Xiaomi is expected to use its core advantages in various fields such as ecological barriers, brand foundation, supply chain, and marketing networks to become the first echelon of new forces in sales, and strive to advance towards the goal of entering the top five global car manufacturers in 15-20 years, and is optimistic about the room for the company's medium- to long-term market value increase.

Investment advice: As the world's leading mobile phone brand, the company is actively promoting high-end strategy and international expansion. We are optimistic about the company's future mobile phone share expansion and product structure optimization. At the same time, the company has the world's largest ALot smart hardware platform and a huge number of high-loyalty users, and the ALot and Internet business are expected to continue to grow steadily; the gross margin performance of the first smart electric vehicle in 2024 exceeded expectations, and production capacity will continue to rise. With the further improvement of the matrix of subsequent models and the synergy of the ecological chain, we believe that the company is expected to enter the first tier of new domestic forces and strive towards In 15-20 years, the goal of entering the world's top five car manufacturers is to enter. We forecast the company's total revenue for 24/25/26 to be 344.8/404.5/464.9 billion yuan, adjusted net profit of 20.2/23/26.1 billion yuan, and the current market value corresponding to PE is 19.8/17.4/15.3 times. Upgraded to “Highly Recommended” rating, optimistic about the company's medium- to long-term market value growth potential.

Risk warning: The macroeconomy falls short of expectations, the risk of raw material price increases, the risk of high-end development falling short of expectations, the risk of overseas business falling short of expectations, and the development of smart electric vehicles falling short of expectations.