Earnings Report Preview | Xiaomi's Q2 Revenue to Improve MoM, Profitability Continues to Increase

Xiaomi will release its Q2 earnings report on Tuesday, August 29th.

CITIC Securities expects that Xiaomi's revenue will gradually improve on a month-on-month basis, and the gross profit margin is also expected to remain at a high level. In the medium to long term, they have a positive outlook on the long-term strategy of "Mobile Phones × AIoT" and the business philosophy of "Technology + Cost-effectiveness + Coolest Products". They anticipate that the company will achieve integrated value across mobile phones, automobiles, and smart homes after complete integration.

Q2 Financial Forecast

CITIC Securities predicts that the revenue for Q2 will improve compared to the previous quarter, and the profitability level will continue to increase.

It is estimated that Xiaomi's overall revenue for Q2 2023 will be 64.7 billion yuan (a year-on-year decrease of 8% and a month-on-month increase of 9%), with a non-GAAP net profit of 4.3 billion yuan (a year-on-year increase of 107% and a month-on-month increase of 33%).

The month-on-month revenue growth is mainly due to the gradual increase in smartphone shipments as inventory returns to normal levels, as well as the recovery of the company's IoT and internet businesses. The improvement in profitability is mainly attributed to the decline in raw material costs, optimization of gross profit margin after the alleviation of inventory pressure, and the company's ongoing cost control measures.

Huatai Securities predicts that Xiaomi's revenue will decrease by 6% year-on-year in Q2 2023. However, due to a 6-percentage-point increase in gross profit margin and a 9% decrease in operating costs, Xiaomi's non-GAAP net profit in Q2 2023 may increase by 95% year-on-year.

Smartphone Business

According to IDC, Xiaomi's smartphone shipments in Q2 2023 were 33.2 million units (a year-on-year decrease of 16.0% and a month-on-month increase of 8.7%). Its global market share for smartphones was 12.5% (1Q23: 11.4%; 2Q22: 13.8%).

CITIC Securities predicts that the revenue from the smartphone business will be 36.2 billion yuan, with a month-on-month growth of around 3%, and both the year-on-year and month-on-month gross profit margins are expected to show significant improvement. The average selling price (ASP) of Xiaomi smartphones is expected to remain stable year-on-year and decrease slightly month-on-month.

With the normalization of inventory levels and continuous optimization of product portfolio, the company's revenue is expected to gradually improve on a month-on-month basis, and the gross profit margin is also expected to remain at a high level.

IoT and Internet Business

CITIC Securities predicts that the revenue from the IoT business will be 21.2 billion yuan (a year-on-year increase of 7% and a month-on-month increase of 26%), and the revenue from the internet business will be 7.3 billion yuan (a year-on-year increase of 5% and a month-on-month increase of 4%).

The IoT business is expected to recover from a low point, and the advertising business is showing signs of recovery. With the gradual recovery of offline activities in China and the easing of overseas inflationary pressures, the company's IoT business is gradually emerging from the trough.

Huatai Securities predicts that Xiaomi's IoT/internet revenue in Q2 2023 will increase by 1/5% year-on-year. The gross profit margin of the IoT business may increase by 1.7 percentage points year-on-year in Q2 2023.

Smart Car Business

Xiaomi continues to strengthen its research and development, enhance the quality of hard technology and intelligent manufacturing, and continuously invest in innovative businesses such as smart cars.

During the Investor Day, Xiaomi stated that they expect to invest over 20 billion yuan in research and development in 2023, with 7.5-8 billion yuan allocated to new businesses such as Xiaomi Auto. The expected research and development investment over the next five years (2022-2026) is projected to reach 100 billion yuan. The company is expected to gradually increase its investment in innovative businesses such as smart cars in 2023, following the pace set in 2022. It is projected that the investment in the second quarter will increase by 500 million yuan compared to the previous quarter.

Investment Recommendation

CITIC Securities believes in the long-term investment value of Xiaomi and considers the viewpoint that the investment in the car manufacturing business does not change the value of the mobile phone and AIOT businesses. They tend to add the expenses back to the valuation of the company's main business. They give Xiaomi a target price of HKD 16 based on a 2023E PE ratio of 20x and maintain a "buy" rating.

Huatai Securities states that the target price based on SOTP remains unchanged at HKD 20.0, which includes a valuation of HKD 3.1 per share for Xiaomi's car business. The target price corresponds to a 36x forecasted PE ratio for 2023. They maintain a "buy" rating.