India's looting, Huawei's birth, can Xiaomi rise again?

Xiaomi Group (1810.HK) released its second quarter earnings report for 2023 (ending June 2023) after the Hong Kong stock market closed on the evening of August 29, 2023. The key points are as follows:

1. Overall Performance: Revenue and gross profit margin exceeded expectations. Xiaomi-W.HK's total revenue for this quarter was 67.4 billion yuan, a 4% decrease compared to the same period last year. The decline in revenue was mainly due to the drag from the smartphone business. Xiaomi Group's gross profit margin for this quarter was 21%, a 4.2 percentage point increase compared to the same period last year. The increase in gross profit margin was mainly driven by the recovery of gross profit margin in the smartphone and IoT hardware sectors.

2. Smartphone Business: Pressure from both internal and external sources, difficult to achieve growth. Xiaomi's smartphone business achieved revenue of 36.6 billion yuan this quarter, a 13.4% decrease compared to the same period last year, in line with market expectations (36.5 billion yuan). Xiaomi's global smartphone shipments decreased by more than 6.2 million units compared to the same period last year, with Dolphin Research estimating that the Chinese market saw a decrease of approximately 2 million units and the Indian market saw a decrease of approximately 2.5 million units. The average selling price of Xiaomi smartphones this quarter was 1,112.3 yuan, a 2.9% increase compared to the same period last year.

3. IoT Business: High growth in major appliances. Xiaomi's IoT business achieved revenue of 22.3 billion yuan this quarter, a 12.3% increase compared to the same period last year. The recovery of the IoT business this quarter was mainly driven by the high growth of smart appliances, with a year-on-year growth of over 70%.

4. Internet Services: Advertising reaches a new high. Xiaomi's internet services business achieved revenue of 7.4 billion yuan this quarter, a 6.8% increase compared to the same period last year, in line with market expectations (7.3 billion yuan). The quarterly revenue and gross profit margin of the internet services business continued to stabilize at over 70% and 70%, respectively. Dolphin Research estimated that the ARPU value of Xiaomi's domestic users this quarter was 36.39 yuan (a 3.2% decrease compared to the same period last year), while the ARPU value of overseas users was 4.39 yuan (a 5% increase compared to the same period last year).

Overall, Xiaomi's earnings report this time is quite good. The company's revenue and profit both exceeded market expectations. After Xiaomi's heavy blow in the Indian market, the market has already lowered its expectations for Xiaomi. And this better-than-expected performance is not from smartphones, but mainly from the IoT business and the recovery of gross profit margin.

In addition to the performance, the most surprising aspect of this earnings report is the inventory. Xiaomi's inventory continued to decrease by nearly 4 billion yuan this quarter, and the current inventory has reached a relatively low level. With the release of new products in the second half of the year, Xiaomi may start to accelerate its shipments. Although the current smartphone market is relatively weak, the performance of smart home appliances in the IoT sector continues to show high growth.

This impressive earnings report will boost the stock price in the short term. However, smartphones still remain Xiaomi's largest source of revenue. It is worth noting the pressure Xiaomi faces in the Indian market and the competition in the domestic smartphone market. The market once again doubts the competitiveness of Xiaomi's smartphones, which to some extent limits the company's upward potential.

To further unlock growth potential, attention needs to be paid to Xiaomi's performance in the automotive business after its launch.

Here is Dolphin Research's specific analysis of Xiaomi's earnings report:

I. Overall Performance: Revenue & Gross Margin Exceed Expectations

1.1 Revenue

Xiaomi Group's total revenue for the second quarter of 2023 was 67.4 billion yuan, a 4% decrease compared to the same period last year. The decline in revenue this quarter was mainly due to the drag from the smartphone business. The smartphone business declined by 13.4% this quarter, which was the biggest drag on the company.

In this quarter, the revenue composition of Xiaomi Group's major businesses was 54.3% for smartphones, 33% for IoT, and 11.1% for internet services. Although the smartphone business is relatively sluggish, it still remains Xiaomi Group's largest source of revenue.

1.2 Gross Margin

Xiaomi Group's gross margin for the second quarter of 2023 was 21%, a 4.2 percentage point increase compared to the same period last year.

Since hardware revenue accounts for nearly 90% of Xiaomi's total revenue, the company's gross margin is mainly influenced by hardware products. The increase in gross margin is mainly attributed to the improvement in gross margin for smartphones and IoT hardware. The hardware gross margin is still lower than the overall gross margin, while the software gross margin can still be maintained at over 70%.

The reduction in inventory and the reversal of inventory impairment have also contributed to the increase in the company's gross margin this quarter.

II. Smartphone Business: Internal and External Pressure, Difficult to Increase Volume

In the second quarter of 2023, Xiaomi's smartphone business achieved a revenue of 36 billion yuan, a 13.4% decrease compared to the same period last year. The decline in the company's smartphone business this quarter was mainly due to a decrease in shipments. Xiaomi's smartphone shipments in both domestic and international markets experienced a double-digit decline this quarter. Dolphin Research has conducted a volume and price breakdown of Xiaomi's smartphone business:

Volume: In the second quarter of 2023, Xiaomi's smartphone shipments reached 32.9 million units, a YoY decrease of 15.9%.

In terms of market segmentation in the second quarter, both domestic and overseas demand for Xiaomi was not optimistic, and market share declined to varying degrees YoY.

Price: In the second quarter of 2023, the average selling price of Xiaomi smartphones was 1,112 yuan, a YoY increase of 2.9%.

Under Xiaomi's strategy of focusing on high-end products, the average selling price of their smartphones has stabilized around 1,100 yuan, compared to the previous average of around 1,000 yuan. The YoY increase in average selling price was mainly driven by a decline in shipments in the relatively low-priced Indian market, which led to a structural increase in the average selling price.

In the second quarter of 2023, Xiaomi's smartphone business achieved a gross profit of 4.88 billion yuan, a YoY increase of 33.1%, accounting for 34.4% of the company's total gross profit.

The gross profit margin of the smartphone business in this quarter was 13.3%, a YoY increase of 4.6 percentage points. The second quarter is traditionally a promotional season, and the gross profit margin usually experiences a MoM decline. However, in this quarter, the gross profit margin increased instead, mainly due to a decrease in inventory impairment and a decline in the prices of core components, which drove the gross profit margin of the smartphone business to rebound.

In addition, Dolphin Research believes that:

Third, IoT Business: High-growth major appliances

In the second quarter of 2023, Xiaomi's IoT business achieved a revenue of 22.3 billion yuan, a YoY increase of 12.3%. The growth of the IoT business in this quarter was mainly driven by the high growth of smart major appliances.

Xiaomi's main IoT products mainly include televisions and laptops. In the second quarter of 2023, the revenue of the main IoT products reached 4.7 billion yuan, a YoY decrease of 11.3%, mainly due to the decline in revenue from smart TVs and laptops in overseas markets.

In the second quarter of 2023, Xiaomi's other IoT products achieved a revenue of 17.6 billion yuan, a YoY growth of 21%, mainly driven by the strong performance of the smart home appliances business. Thanks to the significant increase in domestic smart air conditioner shipments, the YoY growth of the smart home appliances business in the second quarter exceeded 70%.

In the second quarter of 2023, Xiaomi's IoT business gross profit reached 3.91 billion yuan, a YoY growth of 38.3%.

The gross profit margin of the IoT business this quarter was 17.6%, an increase of 3.3 percentage points YoY. This is due to the decrease in the prices of some components and the increase in sales of high-margin products in the IoT segment.

Fourth, Internet Services: Advertising reaches a new high.

In the second quarter of 2023, Xiaomi's Internet Services business achieved a revenue of 7.4 billion yuan, a YoY growth of 6.8%, accounting for 11.1% of the company's total revenue.

Specifically, the breakdown of Internet Services is as follows:

① Advertising Services: It is the largest component of the company's Internet Services. This quarter, Xiaomi's advertising services achieved a revenue of 5.1 billion yuan, a YoY growth of 13.3%. Based on refined operations in the advertising business and the growth of high-end smartphone users, both domestic and overseas advertising achieved record highs.

② Gaming Revenue: Continues to grow. This quarter, Xiaomi's gaming revenue reached 1 billion yuan, a YoY growth of 7.5%, mainly due to the company's new operational strategies and refined management of paying users.

③ Other Value-added Services: This quarter, Xiaomi's other value-added services revenue reached 1.3 billion yuan, with a contraction in the financial technology business.

Dolphin Research has conducted a volume-price breakdown of Xiaomi's Internet Services business:

MIUI User Base: As of June 2023, the monthly active users of MIUI reached 606 million, a YoY growth of 11%. The growth rate of MIUI users continued to decline this quarter, but the user base still maintained a double-digit expansion rate. ARPU Value: The ARPU value for a single quarter is calculated based on the total number of MIUI users. The ARPU value for this quarter's Xiaomi Internet Services is 12.3 yuan, a 4% decrease compared to the same period last year. The decrease in Xiaomi's ARPU value this quarter is due to...

In the second quarter of 2023, Xiaomi's Internet Services business achieved a gross profit of 5.52 billion yuan, an 8.4% increase compared to the same period last year. The gross profit margin for Internet services increased by 1.5 percentage points compared to the same period last year.

Compared to other companies in the advertising industry, Xiaomi, with its terminal entrance, continues to maintain a high gross profit margin of over 70% for its Internet business. In an era of intensified competition for existing traffic, the Internet entrance traffic track has a good structure and unique advantages.

V. Overseas Market: Declining Market Share in India

In the second quarter of 2023, Xiaomi's overseas revenue was 27.8 billion yuan, a decrease of 18.3% compared to the same period last year, accounting for a decreased share of 41.2%.

Among them, Xiaomi's overseas Internet revenue still achieved a growth of 19.7% this quarter. However, the double-digit decline in the company's overseas revenue this quarter mainly came from the hardware business. In this quarter, the global macroeconomic instability directly affected Xiaomi's exports of smartphones and IoT products.

Part of Xiaomi's success comes from globalization, with nearly half of its revenue coming from overseas markets. Although the "globalization strategy" can to some extent diversify Xiaomi's risks, the instability in multiple regions directly affects Xiaomi's business development. This quarter, Xiaomi's global shipments decreased compared to the same period last year, mainly due to ① weak domestic market and declining market share, and ② regulatory measures by the Indian government and the decline in market share in India. ③ Other markets: Considering the Chinese and Indian markets together, overall, Xiaomi experienced a comprehensive decline in the global market this quarter.

Due to Xiaomi's business model of "hardware + software," although overseas smartphone sales have declined by double digits, the number of overseas users for software remains in a growth trend (the number of new purchases exceeds the number of replacements). Looking at the distribution of MIUI users, Xiaomi has already reached 606 million MIUI users by the end of this quarter, with 456 million coming from overseas markets. In other words, although Xiaomi originated from mainland China, the number of overseas users has now exceeded three-quarters. **

Due to significant user differences both domestically and internationally, this quarter Xiaomi's Internet service ARPU value was 12.28 yuan, a 4% YoY decrease. The main reason for this is:

VI. Expenses and Performance: Overall stable expenses, significant profit release

In the second quarter of 2023, Xiaomi's total expenses amounted to 10.17 billion yuan, a 2.3% YoY decrease. The decrease in expenses this quarter was mainly due to control measures implemented on sales and management expenses.

① Research and development expenses: 4.55 billion yuan this quarter, a 21% YoY increase, accounting for 6.8% of revenue. The increase in research and development expenses is mainly attributed to the rise in R&D spending related to innovative businesses such as smart cars.

② Sales expenses: 4.48 billion yuan this quarter, a 16% YoY decrease, accounting for 6.6% of revenue. During the market downturn, the company made significant reductions in sales expenses. The decrease in sales expenses had a certain impact on market share but also led to an improvement in profitability.

③ Management expenses: 1.14 billion yuan this quarter, a 13.1% YoY decrease, accounting for 1.7% of revenue. Administrative expenses decreased mainly due to cost control measures resulting in a reduction in staff compensation.

In the second quarter of 2023, the adjusted net profit was 5.1 billion yuan, exceeding market expectations of 4.1 billion yuan. From the perspective of the company's operating performance (excluding fair value changes in investments), although the company's mobile phone business remains sluggish, the growth in IoT is promising. The increase in gross profit margin ultimately led to a significant improvement in the company's profitability.