Reiterating Xiaomi's “buy” rating, maintaining the target price of HK$23.6, with a potential increase of 26%.

Reiterating Xiaomi's “buy” rating: Xiaomi's two major business segments, mobile phones x AIoT and smart electric vehicles, are in a steady and strong growth trend, respectively. First, Xiaomi's smartphone shipments and share have maintained a good growth momentum, both domestically and overseas, and high-end smartphones are growing strongly. This not only provides a basic methodology for IoT product growth, but also accumulates users for the Internet business, especially high-end users. As a result, mobile phones x AIoT are growing strongly. Second, Xiaomi revealed for the first time that the gross margin of the smart electric vehicle business segment reached 15.4%, which greatly exceeded market expectations. This was mainly due to the scale effect of deliveries exceeding expectations, support from suppliers, and contributions from automotive peripheral products. Taken together, Xiaomi phones, automobiles, IoT, etc. are all C-side products within Xiaomi's unified architecture, and have potential and room for long-term growth. Therefore, we are optimistic about Xiaomi's long-term business growth.

Xiaomi's outlook for the second half of 2024: By business sector: 1) Smartphones: We expect shipments to reach 0.166 billion units this year. Affected by rising upstream costs, mobile phone gross margin is expected to bottom out in the third quarter of this year and begin to recover upward in the fourth quarter. Strategies such as high-end, globalization, and new retail for the mobile phone business continue to be implemented. 2) IoT: There is strong growth in many categories, including major appliances (such as air conditioning), and gross margins are expected to remain high. Through strategic changes such as internal self-development, the Xiaomi IoT category has expanded in an orderly manner. 3) Internet: This business segment directly benefits from the growth of the user base of mobile phones, IoT, etc., especially the high-end user base.

Furthermore, the growth in the user base brings about a scale effect, which is expected to maintain high gross margin performance. 4) Smart electric vehicle: The success of the Xiaomi SU7 exceeded expectations, laying a solid foundation for next year's new car.

While delivery volumes have repeatedly reached new highs, the company's automobile gross margin performance was impressive, and it is expected to increase further in the third and fourth quarter of this year. Taken together, we believe Xiaomi has the ability to unleash profits and raise Xiaomi's profit forecasts for 2024 and 2025.

Valuation: We value Xiaomi using the segmented and aggregate valuation method. We gave Xiaomi a target price-earnings ratio of 12.0x, 15.0x, and 12.0x for smartphone, IoT, and internet businesses in 2025, and a target market sales ratio of 2.0x for smart electric vehicles. We obtained a target price of HK$23.6, with a potential increase of 26%.

Investment risk: Demand for consumer electronics products such as smartphones did not grow as expected. The cost of supply chain components such as mobile phones and upstream semiconductors continues to rise. Competition in the industry is intensifying, and the company's profit margins are under pressure. Delivery volume and gross margin of the smart electric vehicle business fell short of expectations. Large investment in new businesses has dragged down profit performance.