The Xiaomi Group released the production version of the Xiaomi Mi 15 series and the Xiaomi SU7 Ultra. On October 29th, the Xiaomi Group held a new product launch conference for the Xiaomi Mi 15 series and Xiaomi Surge OS 2 in Beijing. A total of 16 new software and hardware products were released at the press conference: Xiaomi 15 series phones, the Xiaomi Surge OS2 system, the Xiaomi SU7 Ultra mass production version, the Xiaomi Tablet 7 series, the Xiaomi Watch S4, the Xiaomi Mi Band 9Pro, the new high-end Pro series of major appliances, smart door locks, Wi-Fi 7 routers, etc.

Mobile phones: The market grew steadily in Q3, and the gross margin of Xiaomi phones is expected to pick up in the future. According to IDC data, 2024Q3 global smartphone market shipments reached 0.3161 billion units, up 4.0% year on year, and continued to achieve steady growth. Among them, the global shipment volume of Xiaomi phones in 2024Q3 was about 42.8 million units, with a market share of 13.5%, ranking among the top three in the world.

In terms of gross margin, the previous Q2 gross profit margin of Xiaomi phones was 12.1%, mainly due to rising costs of core components. We expect Q3 mobile gross margin to hit a short-term low. In the future, as the rise in screen costs and memory costs basically comes to an end, the gross margin of mobile phones may continue to improve.

AIoT: Domestic benefits from trade-in, and overseas expansion continues. On the AIoT side, in August of this year, 4 departments including the Ministry of Commerce issued the “Notice on Further Accomplishing the Trade-In Work of Home Appliances”, which introduced consumer purchase subsidies for 8 categories of household appliances, with a maximum subsidy of 2,000 yuan for a single product. According to the Ministry of Commerce's National Appliance Trade-In Data Platform, as of October 15, more than 20 million consumers have applied and more than 10 million consumers have purchased 14.624 million units of 8 types of household appliances and enjoyed a central subsidy of 13.17 billion yuan, driving sales of 69.09 billion yuan. We expect Q3 to benefit from 1) the trade-in of domestic appliances and 2) the expansion of overseas IoT layouts, and the company is expected to see an increase in AIoT revenue growth.

The delivery capacity of Xiaomi cars continues to improve. Since the release of the Xiaomi SU7, orders have far surpassed expectations. The monthly delivery volume of the Xiaomi SU7 exceeded 10,000 units in July-September of this year, and successfully exceeded 20,000 units in October. We expect Xiaomi cars to hit the target of 0.12 million vehicles delivered throughout the year.

In terms of intelligent driving, the City Pilot Assist, which can be used by Xiaomi cars all over the country, will be fully promoted in batches starting October 30. After that, the company will fully access the large end-to-end model. It is expected to launch targeted invitation closed beta at the end of November and launch the pioneer version at the end of December.

Reiterate the “buy” rating. We expect 2024-2026:1) The company's revenue will be 347.8/434.5/504.3 billion yuan, yoy +28%/+25%/+16%. 2) The main non-GAAP net profit was 31.7/35.4/40.5 billion yuan, yoy +18%/+12%/+14%. 3) Auto net profit/loss was -7.2/-2/3.4 billion.

Based on Xiaomi's core business (excluding innovative business expenses such as car building) 15x 2025e P/E and automobile 2x2024e P/S, we believe that the Xiaomi Group's reasonable target price is HK$31, reaffirming the “buy” rating.

Risk warning: Domestic smartphone competition intensifies, AIoT progress falls short of expectations, overseas market policy risks, Xiaomi's car construction falls short of expectations, and changes in the macroeconomic environment have exceeded expectations.