The “whole ecosystem of people and cars” is closed, and the core business is growing steadily. Xiaomi is a consumer electronics and smart manufacturing company with smartphones, smart hardware, and IoT platforms as its core. It was formally established in 2010, MIUI was launched in 2010, Xiaomi launched in 2011, Redmi launched in 2013 and began deploying IoT in 2013, and listed on the Hong Kong Stock Exchange in 2018. In October 2023, the company announced a new strategic upgrade, from “mobile phone x AIoT” to “the whole ecosystem of people and cars”. In March 2024, Xiaomi's first model, the Xiaomi SU7, was officially released, and the company's “Full Ecosystem for People and Cars” strategy officially closed the loop. As the business expanded, the company's revenue grew from 66.811 billion in 2015 to 270.97 billion in 2023, with a CAGR of 19.13%.

Demand side: The entire AI ecosystem builds core barriers, and automobiles create a new growth curve. This year, end-side AI ushered in a series of substantial developments: Apple, Huawei, and Honor have released artificial intelligence systems. AI agents have completed complex tasks as needed, and the company also officially unveiled the Xiaomi 15 series phones with strong AI performance and the surging OS 2.0 system restructured based on the AI big model at the October new product launch conference. We believe that the company's traditional core business is expected to continue to benefit the entire AI ecosystem: 1) consumers are increasingly interested in AI functions, and the company may benefit from a new global wave of rotary switches driven by end-side AI; 2) the AI ecosystem built on a huge user base may stimulate new momentum for the growth of value-added services; 3) the all-ecosystem AI intelligent assistant “Super Xiaoai” has automated full-device scenario management capabilities, which can greatly improve the convenience of users' lives. It is a key part of the company's future AIoT experience, or will continue to be promoted The IoT sector saw growth. In the automotive business, the company's launch of its first model, the SU7, was a huge success. The leading electrification, intelligent technology and exquisite exterior design are popular among consumers, and it is expected that 100,000 deliveries will be completed ahead of schedule in November.

Supply side: Automobiles have differentiated advantages, and store expansion digs deep into channel moats. In terms of automobile business, comparing the parameter data of the Xiaomi SU7 and Youshang electric vehicles of the same type, we found that the Xiaomi SU7 of the same price model has leading advantages in terms of range, maximum power, total motor power, 100 acceleration, and maximum speed. In terms of the mobile phone business, the DRAM index and NAND index have both declined since May of this year. We believe that the time when the sharp rise in storage prices had the biggest impact on the company has passed, and it is expected that the subsequent decline in storage prices will repair part of the gross profit margin. In terms of marketing channels, the company is also speeding up the layout of Xiaomi Home and Xiaomi Auto offline stores to build a moat.

Investment advice: The company is expected to achieve revenue of 348.303/442.79/564.934 billion yuan in 2024-2026 and adjusted net profit of 21.741/24.648/31.103 billion yuan. According to the segmented valuation method, the expected reasonable value of the company in 2025 is 812.843 billion yuan. The first coverage gives it a “buy” rating.

Risk warning: Market demand falls short of expectations, raw material prices fluctuate, industry competition intensifies