The difference in expectations in this in-depth report of the Xiaomi Group is an analysis of the Xiaomi Group's strategy, business model, organizational structure adjustments and results.

High-end exploration, and the changes in business model and governance management behind it. 1) The Xiaomi process in recent years can be roughly divided into several major stages, from 2010 to 2014, 2015-2016, 2017-2021H1, 2021H2-2023Q3, and 2023Q4. 2) Some key background environments and iconic products are the keys supporting the above division. For example, the internet and smartphone penetration rate increased high before 2014, and offline channels were the key after that. Examples include the smartphone penetration rate situation in the first phase and the emergence of Redmi, the second phase of establishing Xiaomi Home and Lei Jun personally managing the supply chain, the third phase of establishing the Chinese channel sinking, the success of the fifth phase of the Xiaomi SU7, and Group President Lu Weibing also serving as the president of the mobile phone department. 3) The core idea of Xiaomi's development should be: also developing explosive products. The first stage is low price and cost performance, and the second stage is high-end. In order to support this transformation, there must be matching changes in management, governance and retail channels, and investors have also seen many twists and turns. 4) Events supporting the progress of management and governance include partnership systems, new pyramid structures, high-end strategic working groups, and the establishment of key committees. Important events supporting retail channels include the establishment of Xiaomi homes and specialty stores, Lei Jun personally managed the supply chain in 2016, offline channels sank in 2018 and established in China in December, offline stores surpassed 0.01 million in October 2021, improved efficiency and integration of stores in 2024, re-expansion of offline stores in 2024, and the merger of automobile sales services into China in October. 5) Investors should understand and predict the above process from the perspective of industry and management. If the transformation is basically completed, the success rate of Xiaomi's subsequent high-end explosions will increase, and financial parameters such as growth rate, profit margin, R&D, and valuation multiples will also change in a consistent manner.

The Xiaomi 3C business is on the right track. In 2023, Xiaomi's mobile phone shipment volume is 0.146 billion, third in the world; driven by the mobile phone business, tablet and air ice washing shipments all reached record highs, and revenue from the major appliances business increased by 40% in 2023.

From MIUI to Hyper OS, we insist on the combined development of software and hardware, and collaborate with the strategic ecosystem of people and car manufacturers. 2023 merges the bottom layer of the operating system into Hyper OS, injecting key technology Xiaomi HyperMind, large models, and operating frameworks.

The Xiaomi SU7 has invested ten times to accelerate cutting-edge research and development such as end-to-end smart driving, and build the strength of the world's top five car manufacturers. Xiaomi is changing the marketing model of the automotive industry through a billion-level 3C user base and marketing funnel. The SU7 sold over 10,000 units for 5 consecutive months, with a delivery target of 0.12 million units in 2024. The automobile factory has built six core workshops. We estimate the production capacity of the first phase of the factory is about 0.19 million units, far exceeding the design production capacity.

Covered for the first time, giving a buy rating. We expect Xiaomi Group's overall revenue for 2024-2026 to be 347.4/413.7/455.6 billion yuan, respectively, or +28%/+10% YoY; adjusted net profit to mother will be 24.3/26.2/28.4 billion yuan, respectively, +26%/+8%/+9% YoY. We are using the SOTP segment valuation method for the Xiaomi Group.” The “Smartphone x AIoT” division is already in a stable operating period. Based on the 2025E adjusted net profit of 33.2 billion yuan excluding the EV business, 22x target PE was given, and the target valuation was 716.5 billion yuan. Innovative business segments such as smart electric vehicles are still in a period of continuous investment and rapid growth. Based on the 2025E revenue of innovative businesses such as smart electric vehicles, the 2025E revenue was 72.8 billion yuan, giving a target PS of 0.9x, and a target valuation of 67.4 billion yuan. The 2025E target market value is 783.9 billion yuan (HK$847.5 billion), corresponding to the target price of HK$33.9 per share, with 21% upside.

Risks: 1) Market competition risk; 2) New product word-of-mouth falls short of expectations