The Xiaomi Group achieved revenue of 280 billion yuan in 2022 (-14.7% YoY), adjusted net profit of 8.5 billion yuan (-61.4% YoY), and gross profit margin of 17.0% (-0.7pct). Smartphone shipments fell 20% year on year due to inventory backlog and weak demand, but high-end development continued to advance. The annual smartphone ASP reached 1,111 yuan, a record high. The domestic epidemic and overseas macro-environmental pressure curtailed demand for small household appliances, wearable devices, etc., but the company's major electronics products still achieved a 40% increase in revenue over the same period last year. Looking ahead to 2023, we believe that along with the gradual reduction of pressure on inventories, exchange rates, etc., and expectations of gradual macroeconomic recovery in China, the company's revenue side is expected to gradually improve, and the profit side may achieve greater flexibility. Looking at the medium to long term, we continue to be optimistic about the company's “mobile phone × AIOT” strategy and the “technology+cost performance+coolest product” business policy. We expect the company to integrate the value of mobile phones, automobiles, and smart homes after they are fully opened, and maintain the company's “buy” rating.

Performance Overview: The profit trend is gradually improving, and investment in innovative businesses such as smart cars is accelerating. In 2022, in the face of a complex and difficult macro environment, Xiaomi Group's various businesses are also under great pressure: the company shipped 153 million smartphones worldwide in 2022 (-20% year-on-year), achieved operating revenue of 280 billion yuan (-14.7% year-on-year), and adjusted net profit of 8.5 billion yuan (-61.4% year-on-year), including the cost of innovative business expenses such as smart electric vehicles of 3.1 billion yuan, and the one-time cost impact of updating the after-sales service policy of some series of smartphones in November 2022 was about 700 million yuan. Looking ahead to 2023, we believe that along with the gradual reduction of pressure on inventories, exchange rates, etc., and the expectation that China's macroeconomy will gradually recover, the company's revenue side is expected to gradually improve, and the profit side may achieve greater flexibility. At the same time, the company's goal of officially mass-producing smart electric vehicles in the first half of 2024 remains unchanged; according to the company's statement on Investor Day, the company expects to invest more than 20 billion yuan in R&D in 2023, of which new businesses such as Xiaomi car building will invest 7.5-8 billion yuan, a significant acceleration from the investment of 3.1 billion yuan in 2022.

Smartphone business: Continuing to promote the high-end process, and inventory removal is nearing its end. In 2022, the company's smartphone revenue was 167.2 billion yuan (-20% year on year), and gross profit margin was 9.0% (-2.9pcts year on year). Under the influence of adverse factors such as macroeconomic fluctuations, repeated COVID-19 pandemics, and increased competition in the industry, the global smartphone market is generally under pressure. According to Canalys, global smartphone shipments in 2022 were 1,193 million units, down 12% year on year; Xiaomi shipped 153 million units for the year, down 20% year on year. However, as far as the shipping structure is concerned, the company has made significant progress in its high-end development. The company's share in the 4,000-5,000 yuan price range in China increased to 14.9% from 0.9% in 2019, and the Mix Fold 2/12S Ultra also achieved a significant breakthrough in the share of the 6,000 yuan or more price range; JD's praise rate for Xiaomi 13/13 Pro/Mix Fold 2 series products was above 99%, a significant increase over previous generation products. In terms of new retail, although average store traffic dropped by 46% in 2022, GMV achieved a 9% increase over the previous year. Operator entry, service product integration, membership system construction, and private traffic operation all contributed to improving store efficiency; as of February 2023, the contribution of Xiaomi 13 series phones from offline channels reached 55%. Looking ahead to 2023, it is expected that the company will further promote high-end strategies, optimize the integration of offline channels, and continue to optimize its revenue structure. At the same time, if inventory pressure gradually subsides as expected in the next few months, the company's gross margin is also expected to improve, thus bringing greater flexibility to the profit side.

AIoT: Product innovation and upgrades continue to advance, waiting for demand to recover. In 2022, the company achieved IoT business revenue of 79.8 billion yuan (-6.1% year on year) and gross profit margin of 14.4% (+1.4pcts year on year). The domestic epidemic and overseas macro-environmental pressure have dampened demand for some categories. In terms of television, the company continues to cultivate high-end, large-scale and high-quality brands, and has achieved impressive breakthroughs in the international market. It has achieved a 0.6% year-on-year increase against the backdrop of a 5.6% decline in global market shipments overall. In terms of Baiji, sales of Mijia Air Conditioner 618 increased 57% year on year, and sales of Double 11 increased 49% year on year; Mijia refrigerators maintained high growth, and sales of large refrigerators above 500L increased by more than 200% year on year; Mijia zoning washing machines ranked first in the zonal category in the month they were launched, and Mijia mini washing machines achieved the highest sales volume in the industry in 2022. Judging from offline sales in 2022, the company's TVs increased 20% + year on year, washing machines increased 30% + year on year, refrigerators increased 50% + year on year, air conditioners increased 90% + year on year, and offline channel capacity was prominent. In terms of ecological chain, as of Q4 2022, the AIOT platform had connected more than 589 million devices, +35.8% year on year; 11.6 million users owned 5 or more Xiaomi AIOT devices, +32.5% year on year. Looking ahead, with the gradual recovery of the macroeconomic economy, the company's continued rich IoT product matrix is expected to unleash greater flexibility.

Internet: Overall performance remains steady, and overseas Internet business continues to grow at a high rate. In 2022, the company achieved Internet business revenue of 28.4 billion yuan (+0.4% year on year) and gross profit margin of 71.8% (-2.3pcts year on year).

Although the domestic Internet market is under great pressure, the company's advertising and gaming business has achieved steady growth driven by the increase in the number of MIUI users and the continuous penetration of high-end devices: the company's advertising business revenue in 2022 was 18.5 billion yuan (+2.1% compared to the previous year), and overseas pre-installation and overseas performance & brand advertising revenue in the fourth quarter both reached record highs; in 2022, the company's game business revenue was 4.1 billion yuan (+4.4% year on year), achieving steady growth against the backdrop of a 14.4% decline in the mobile game market. The company actively expanded the TV Internet scene. Relevant revenue bucked the trend by 25% in 2022, and the number of TV Internet paying users increased 23% over the same period last year to 6 million. In terms of overseas internet, the company's revenue increased 35% year-on-year to 6.8 billion yuan in 2022, and overseas app stores grew rapidly, with plans to expand to 28 markets in 2023. Looking ahead to 2023, with the resumption of version approval and macroeconomic recovery, we expect the company's Internet business to continue to grow steadily.

Risk factors: The risk that domestic smartphone competition will further intensify; the risk that the company's offline channel sales will not meet expectations; the risk of the company's inventory backlog; the risk that the company's high-end mobile phone sales will not meet expectations; the risk that the company's overseas AIOT growth falls short of expectations; the risk that the company's overseas AIOT growth falls short of expectations; the risk that AIOT network security incidents will not meet expectations; the risk that the company's advertising business falls short of expectations; the risk that the company's equity incentive plan will not meet expectations The risk; the risk that the company's smart car mass production is later than expected; the risk that the company's investment in building cars is higher than expected, etc.

Investment advice: We continue to be optimistic about the company's “mobile phone × AIOT” strategy and the “technology+cost performance+coolest product” business policy, and look forward to the value of the company's integration after mobile phones, automobiles, and smart homes are fully completed. Considering that it will take time for demand to pick up, as well as the impact of exchange rates and the release of profit elasticity after inventory pressure weakens, we adjusted the company's 2023-2024 performance forecast and added the 2025 forecast: it is estimated that the company will achieve operating income of 2831/3082/332.1 billion yuan in 2023-2025 respectively (the original 2023-2024 forecast was 2963/3235 billion yuan), and it is estimated that the company will achieve non-IFRS net profit of 102/119.132 billion yuan in 2023 to 2025, respectively (the original 2023-2025 forecast was 2963/3235 billion yuan) -2024 forecast is $101/118 billion). We are optimistic about the company's medium- to long-term investment value. Considering the view that investment in the car building business does not change the value of the mobile phone and AIOT business, we tend to add its expenses back to the valuation of the company's main business, refer to the comparable company Apple's current stock price corresponding to 23x PE valuation in 2023 (Bloomberg's unanimous forecast), and based on the high certainty of the company's performance growth and an appropriate 15% discount on the competitive position of the industry, we give the company 2023E 20x PE, corresponding to the target price of 16 Hong Kong dollars, and maintain the “buy” rating.