Smartphone shipments likely troughed
- Xiaomi’s 2Q22F adj. net profit likely fell 67% yoy due to 26% smartphone shipment decline and lower smartphone and Internet services GPM.
- We revise down our smartphone shipment forecasts to 165m units in FY22F, to reflect weak China smartphone demand outlook.
- Reiterate Add. TP cut to HK$18.34 due to 20%/8% EPS cuts in FY22F/23F. Xiaomi trades at an attractive 13.6x FY23F P/E, in our view.
2Q22F net profit likely fell 67% yoy on weak smartphone sales
We estimate Xiaomi’s 2Q22F smartphone segment operating profit fell over 44% yoy (- 14% qoq) due to lower shipments, ASP and GPM, no thanks to China’s pandemic control measures which caused supply chain issues and production disruptions. In addition to the weak advertising income in the Internet services segment due to China’s pandemic measures and decreased IOT product sales in the EU due to the Russia-Ukraine war, we estimate 2Q22F revenue declined 20% yoy (-4% qoq) and adjusted net profit (non-IFRS) fell 67% yoy (-27% qoq) to c.Rmb2.08bn, 11%/13% below our/Bloomberg consensus estimates. 1H22F adjusted net profit likely formed only 27% of our previous FY22F forecast due to lower-than-expected GPM in smartphones and Internet services. We cut our FY22F/23F adjusted EPS forecasts by 20%/8% as we lower our smartphone shipment forecasts and GPM assumptions for smartphones and Internet services.
Smartphone shipment should resume growth from 3Q22F
According to Counterpoint, Xiaomi’s smartphone shipments fell 26% yoy to 39.5m units (39m units in 1Q22) in 2Q22F, down 23% yoy in China and c.20% yoy in EU. Moreover, we estimate ASP fell 5% yoy (-8% qoq), given the lack of new high-end model launches, and GPM fell 280bp yoy (-90pb qoq) due to large discounts during the 618 festival and inventory clearing. We expect Xiaomi’s smartphone shipments to recover from 3Q22F, supported by Mi12 Ultra launch and a recovery in the smartphone market globally. We now project 165m/200m (-13% yoy/+21% yoy) smartphone shipments in FY22F/FY23F, reflecting the weak China demand and slower-than-expected global market recovery.
Internet services could see 8% yoy revenue growth in FY22F
We believe the IOT segment was resilient in 2Q22F, supported by strong demand for white goods in China and lower LCD TV panel prices. Monthly active users (MAU) likely saw steady growth (net add 18m-20m qoq) in 2Q22F; however, we estimate Internet services revenue was flat yoy at Rmb7bn due to weak advertising income. With lower income from pre-installed apps due to a fall in sales of high-end smartphones, we estimate Internet services GPM fell to 69% (-500bp yoy, -180bp qoq) in 2Q22F. We expect Internet services revenue to accelerate in 2H22F, as China’s economy potentially recovers. We project Internet services to see 8% yoy revenue growth in FY22F despite the weak 1H22F.
Reiterate Add; target price cut to HK$18.34
We believe Xiaomi trades at an attractive c.19x/14x FY22F/23F P/E, given its smartphone shipments are set to recover in FY23F/24F. We lower our TP to reflect our EPS cuts, still based on 20x FY23F P/E, on par with its closest China Internet peers. Re-rating catalysts: smartphone shipments resuming growth and smartphone and Internet services GPM stabilising. Risks: continuing weak smartphone demand in China and supply chain issues.