1Q22: Results In Line But Headwinds To Persist
Xiaomi’s 1Q22 results were in line with our and consensus estimates. As expected,
sales of smartphone and IoT slowed due to poor end-demand, chip shortage,
competition and logistics issues, which in turned negatively affected its domestic
internet service business. Going forward, visibility remains low amid the UkraineRussia war and China’s lockdowns, and a significant recovery seems unlikely in the
near term. Cut target price to HK$14.20. Maintain BUY.
RESULTS
• 1Q22 results largely in line with our and consensus estimates. Xiaomi’s 1Q22 revenue
of Rmb73.4b (-4.6% yoy, -14.3% qoq) was slightly above our estimates; Gross margin was
largely in line at 17.3% (-1.1ppt yoy, +0.2ppt qoq), while net profit of Rmb2,859m was also in
line with both our and consensus estimates. However, operating expense ratio of 13.6%
(+3ppt yoy and +0.2ppt qoq) was higher than our estimates, which was partially offset by a
higher-than-expected interest income.
• Smartphone segment disappointed on margins. Shipments of smartphones were
impacted by intensifying competition in China, chip shortage for the lower-end smartphones,
and poor demand and logistics issues amid the Ukraine-Russia war and China’s lockdown.
However, ASP of Rmb1,189 was actually higher than our estimates, thanks to higher
contribution from the premium (Rmb4,000-6,000) phones. As such, revenue of Rmb45.8b
(-11.1% yoy, -9.3% qoq) was slightly better than our expectations. However, as Xiaomi
launched more promotions in 1Q22 to clear up inventory, margins disappointed at 9.9%
(-3.0ppt yoy, -0.2ppt qoq). On the bright side, Xiaomi registered robust performance on both
yoy and qoq basis in Latin America and Southeast Asia, and also gained market share in
Middle East and Africa on a yoy basis. This partially offset the sluggish performance in
China, India and Europe.
• IoT business beat our expectations on top-line and margins. The IoT business’ revenue
reached Rmb19.5b (+6.8% yoy, -22.3% qoq), better than our expectations, as we expected
worse impact from the abovementioned events. The margin of 15.6% (+1.1ppt yoy, +2.6ppt
qoq) was also significantly better than expected, primarily thanks to lower TV panel prices.
• Internet services segment disappointed due to domestic market. The internet services
segment’s revenue of Rmb7.1b (+8.2% yoy, -2.2% qoq) was below our estimates, primarily
due to the domestic market’s underperformance. The domestic market was plagued by
sluggish sales and pre-installation revenue declined yoy as a result. This was partially offset
by the domestic market’s monthly active users growth, thanks to the success in its strategy
to target a wider demographic. The overseas business was in line with our estimates, with
growth primarily driven by robust MAU growth. Margin of 70.8% (-1.6ppt yoy and -5.3ppt
qoq) was also largely in line with our expectations.
STOCK IMPACT
• Chip shortage to improve sequentially in 2Q22 but visibility is still lacking in 2Q22.
Management believe the chip supply for low-end (primarily 4G) phones will improve in 2Q22,
and the 618 sales event should support China’s sales. However, management expressed
concerns about the macro economy, primarily the COVID-19 situation in China and the
Ukraine-Russia war, which are both likely to continue impacting Xiaomi in terms of logistics,
supply chain, and sales of smartphones and IoT going forward.
• Specifically for smartphones, management has reiterated its emphasis in improving the
efficiency of offline stores; its offline expansion has contributed to the brand’s
premiumisation (~50% of premium sales comes from offline stores). However, the store
ramp-up will also be impacted by lockdown measures as they will be forced to temporarily
shut if there is a COVID-19 outbreak. Furthermore, we believe all smartphone brands will
provide fierce discounts in the coming promotional events in 2Q and 4Q in order to attract
more sales, so we are not expecting meaningful improvements in margins for smartphones
going forward.
• For internet services, we reiterate our view that domestic sales will remain flattish, given the
deteriorating pre-installed app revenue amid slowing smartphone sales. Growth will be
primarily driven by overseas business, although we believe that will also be impacted by the
Ukraine Russia War as Europe is one of the key growth drivers for Xiaomi’s Internet service
segment.
• More clarity on EV expenditure, but costs still ramping up. Xiaomi’s R&D expense of
Rmb3.4b is higher than our estimates of Rmb3.1b. Of this amount, Xiaomi spent Rmb425m
in R&D for EV and other new initiatives, which almost contributed to all of the yoy increase in
R&D expenses (1Q21: Rmb3b). Management stated that as Xiaomi is still ramping up its EV
business, the R&D expense into EV is likely to continue growing, going forward.
EARNING REVISION/RISK
• Cut our 2022-24 adjusted net profit forecasts by 18%-27% to Rmb14,059m,
Rmb16,229m and Rmb18,590m respectively. We have factored in a) a lower smartphone
sales figure for 2022-24 by 8.7%/9.8%/5.8% to 175m/198m/224m due to the deteriorating
macro environment, b) a lower gross margin assumption for both smartphones and internet
services, and c) higher operating expenses in 2022 due to increased logistics costs,
advertising costs, as well as investments towards EV.
VALUATION/RECOMMENDATION
• Maintain BUY, and cut target price to HK$14.20, based on a lower 2022 net profit
estimates and unchanged 20.5x 2022F PE, on a par with historical mean. While Xiaomi’s
valuation is currently attractive at 1SD below mean (16.4x), we remain cautious on Xiaomi’s
outlook given the intensifying competition, a deteriorating smartphone market, and lack of
visibility regarding the Ukraine-Russia war and COVID-19 lockdowns in China.