The upward trend of automobiles continues, and high-end and exports are boosting long-term prospects. Maintaining the “purchase” rating based on IoT revenue and vehicle gross margin exceeding expectations, we raised the adjusted net profit for 2024-2026 from 20.3/22.7/21.9 billion yuan to 21/28.2/33.3 billion yuan, with a year-on-year growth rate of 9%/34%/18%. The current stock price of HK$19.1 is equivalent to 21.1/15.7/13.3 times PE in 2024-2026. Strong profits from the main business are expected to provide sufficient cash flow. High-end and export strategies are expected to boost the mid-term growth of the main business. The launch of the Xiaomi 15 flagship high-end model and the launch of the second new car product cycle in 2025 are expected to boost market confidence and maintain a “buy” rating.

2024Q2's net profit exceeded expectations, stemming from IoT business revenue and Internet and automobile gross margin exceeding expectations of 6.2 billion yuan in 2024Q2, up 20% year-on-year, exceeding our expectations, mainly due to IoT business revenue exceeding expectations, and gross margin of the Internet business and automobile business exceeding expectations: (1) Mobile phone revenue increased 27% year over year, and gross margin fell to 12.1% from 14.8% in 2024Q1, due to rising costs of memory and other components. (2) IoT revenue increased 20% year over year, driven by increased revenue from major appliances, tablets and wearable products. The gross profit margin of 19.7% was basically stable from month to month. Due to the increase in the share of major appliance businesses with high gross margins, the impact of the 618 promotion price reduction was hedged. (3) Internet revenue increased 11% year-on-year, with a gross profit margin of 78.3%, an increase of 4 percentage points year-on-year, mainly due to the increase in the gross margin of the advertising business and the expansion of the share of the Internet business. (4) The 2024Q2 SU7 delivered 0.027 million vehicles. Innovative businesses such as smart cars achieved revenue of 6.4 billion yuan, and the gross profit margin exceeded our expectations by 15%, mainly due to supply chain cost support, scale effects, and dividend releases brought about by shifting mobile phone management capabilities.

The main mobile phone and IoT business is rising steadily, and the upward trend of automobiles continues to strengthen (1) 2024H2 is expected to continue to increase slightly month-on-month with the release of new Xiaomi phones and the expansion of overseas regions. We expect the company's mobile phone shipments to be close to 0.17 billion units in 2024. Considering that mobile phone memory costs tend to peak, we expect 2024Q3 to be the low gross margin in 2024, and the gross margin of the 2024Q4 mobile phone is expected to rise steadily. (2) IoT business revenue may be affected by normal seasonality in 2024Q3, and there will be no change in the upward trend in the share of major appliances.

(3) The gross margin of the 2024H2 automobile business is expected to continue to rise month-on-month. Considering that the rise in factory production capacity brings about scale effects, supply chain cost support, and increased revenue from optional products with higher gross margins; the subsequent release of the second new car is expected to further strengthen the upward trend of automobiles.

Risk warning: Prices in the upstream supply chain have exceeded expectations, IoT overseas trips have fallen short of expectations, and automobile shipments have fallen short of expectations.