UOBKH: Xiaomi Corp (1810 HK) – Buy Target Price HK$16.80

3Q23 Results Preview: Expect Strong Earnings Beat On Elevated Margins

Xiaomi will report its 3Q23 earnings in late-November. We expect a robust quarter with adjusted net profit reaching Rmb5b, driven by margin expansion from lower cost, less promotions, and optimisation in cost controls as well as supply chain management. We are more optimistic on the smartphone market’s recovery, and Xiaomi’s exposure to the fast-growing emerging markets. Maintain BUY. Raise target price to HK$16.80.

WHAT’S NEW

3Q23 results preview. We expect Xiaomi Corp’s (Xiaomi) revenue to grow 0.3% yoy and 5.0% qoq to Rmb70.6b, driven by a robust recovery in smartphone shipment, and a moderate growth in the AIoT and internet services segments. Margins on the other hand will likely surprise on the upside thanks to surprisingly strong pricing, low cost components, and optimisation of SKU management. We are now expecting a mild 0.4ppt qoq gross margin expansion (and +4.8ppt yoy) to another historical high at 21.4%. Opex ratio should further decline thanks to stringent cost controls and improved operating scale, and we estimate adjusted net profit to remain elevated at Rmb5b, representing a 136.1% yoy growth from a low base, and a moderate 2.7% qoq decline.

STOCK IMPACT

Smartphone segment well on track for recovery. According to IDC, Xiaomi’s smartphone shipment recovered strongly by 2.5% yoy and 25% qoq to 41.5m units in 3Q23, which is significantly higher than our expectation of 35.6m units. However, we estimate that ASP should have declined qoq as 3Q’s key sales contributor came from mid-range to low-end phones given the strength of emerging market and Redmi’s new product launches. Nevertheless, we still expect a 15.4% qoq recovery in smartphone revenue to Rmb42.2b in 3Q23, and margins could surprise on the upside at 14.0% (another historical high) given the low material costs, limited promotions (thanks to a healthy inventory in both domestic and overseas markets).

AIoT business to see benefits from cost/supply chain optimisation. Given that 3Q is usually a lower season for the AIoT business, we are now expecting a near 10% qoq decline in its revenue for 3Q23 to Rmb20b. However, we are now more optimistic on its profitability, as Xiaomi’s ongoing efforts of cost controls and supply chain optimisation should have started to contribute more meaningfully to the segment’s profitability. As such, we are now expecting more optimistic margins at 17.5% for 3Q23.

Internet services likely remained stable in 3Q23, as the recovery in advertising spending in China, and expanding monetisation in overseas market should have supported the segment’s growth during the quarter. We are expecting revenue to reach Rmb7.5b in 3Q23, and margins to remain stable at 74%.

EARNING REVISION/RISK

We raise our smartphone shipment assumptions by 8.2%/1.0%/1.6% to 145m/154m/ 162m units for 2023-25 respectively, as we factor in a faster recovery in end-demand. However, this is partially offset by a 4% lower ASP assumption as we expect higher contribution from the emerging markets which favours low-end to mid-range models. Our smartphone revenue estimates ended up at Rmb158b/175b/191b for 2023-25.

We raise our gross margin assumptions for smartphones and AIoT products for 2023-25, and our blended gross margins are lifted by 0.3ppt/0.5ppt/0.7ppt to 20.6%/20.8%/20.4% respectively.