Xiaomi: Can the Revival of Smartphones and the Booming Car Business Truly Redeem Its Reputation?

Xiaomi Group (1810.HK) released its first quarter financial report for 2024 after the Hong Kong stock market closed on the evening of May 23, 2024, Beijing time, with the following key points:

1. Overall Performance: Revenue & Gross Margin Exceed Expectations. Xiaomi Group's total revenue this quarter reached 75.5 billion RMB, a year-on-year increase of 27%, outperforming market expectations (73.4 billion RMB). The revenue growth this quarter mainly came from the strong performance of the hardware business and internet services. Xiaomi Group's gross margin this quarter was 22.3%, up 1.8 percentage points year-on-year, exceeding market expectations (21.3%). The increase in gross margin was mainly driven by the recovery of the hardware business.

2. Hardware Business: Double-digit growth in smartphones & IoT business, hardware gross margin increased to 17%.

1) Recovery in Smartphone Business: The company's smartphone revenue accelerated, with a year-on-year growth of 32.9% this quarter. This was mainly driven by the increase in shipments of Xiaomi's smartphones, with the average selling price of smartphones returning to over 1100 RMB.

2) Rapid Recovery in IoT Business: The tablet, smart home appliances, and other businesses drove the year-on-year growth rate of the IoT business to over 20%, especially achieving a historical high sub-item gross margin of 19.9%.

3. Internet Services: Both volume and price increased, reaching new highs. Internet services continued to grow this quarter, remaining the most stable part of the company. Xiaomi not only increased its global MIUI user base this quarter, but also saw an increase in ARPU per user year-on-year. According to Dolphin Jun's calculation, the ARPU value of domestic users for Xiaomi this quarter was 34.59 RMB, a decrease of 3.3% year-on-year; while the ARPU value of overseas users this quarter was 5.02 RMB, an increase of 25% year-on-year. With the improving monetization capability of overseas market users, the proportion of the company's overseas internet business is expected to continue to increase in the future.

4. Automotive Business: Entering the Top Ten in China. As the delivery of the SU7 model started in April, the company's financial report for this quarter does not yet reflect the operational situation of the automotive business. However, based on the delivery situation for over a month, Xiaomi, as a new player in the industry, has performed well. From early April to the present, Xiaomi has delivered over 10,000 Xiaomi cars. Looking at the weekly delivery rankings, it is evident that the company has entered the top ten among domestic new energy vehicle brands.

Overall, Xiaomi's performance in the first quarter was good, with both revenue and gross profit margin performing better than expected. 1) The better-than-expected revenue was mainly driven by the mobile phone business, with Xiaomi's market share both domestically and internationally showing signs of recovery this quarter. 2) The better-than-expected performance in gross profit margin was mainly due to the IoT business, as well as rapid growth in tablet and major home appliances business, leading to an IoT gross profit margin of around 20%. The significant improvement in hardware business gross profit margin will solidify the company's performance base. If we include the investment in the automotive business, the core operating profit of the company this quarter will reach 7 billion RMB, a full recovery.

However, it is worth noting that the significance of the expected difference based on Bloomberg's outdated expectations is not significant. Investors should not overly focus on the expected difference when investing in Xiaomi.

Due to the good performance, Xiaomi's performance outlook for early May has already been largely revealed, with the only slight differences being that mobile phone revenue is slightly better than expected, and IoT gross profit margin is slightly higher than expected, but there is no fundamental difference. Of course, when looking at trends beyond the expected difference, Xiaomi is indeed moving up the cycle by successfully launching popular cars alongside its smartphones.

At this point, the key to investing in Xiaomi is to surpass the expected difference and separately assess the value of traditional business and automotive business:

Looking at the current operating cycle outlook: the automotive sector currently follows a supply-side logic, with a valuation of around 10 billion USD for car sales in a one-year perspective already factored in. Xiaomi's valuation elasticity will depend on the improvement in the marginal operation of traditional business in the future.

However, as the effect of the cheap inventory cycle boosting gross profit margin wears off and new inventory costs rise, there is a possibility of a decline in the gross profit margin of the mobile phone business. The key is how much market share can still be regained. The IoT business still has growth potential driven by new device updates, but the sustainability of gross profit margin is uncertain.

Based on the estimation of core business, for safety reasons, traditional business is given a PE ratio of 15 times, and for the automotive business, an optimistic valuation of 10-15 billion USD, resulting in a valuation range of 470 billion to 500 billion HKD. Above this, it is still necessary to confirm that the traditional business, specifically mobile phone market share, can continue to recover.

Below is Dolphin's specific analysis of Xiaomi's financial report:

I. Overall Performance: Revenue & Gross Profit Margin, Both Exceeded Expectations

1.1 Revenue

Xiaomi Group's total revenue in the first quarter of 2024 was 75.5 billion RMB, a year-on-year increase of 27%, exceeding market expectations (73.4 billion RMB). The company's revenue growth this quarter was mainly driven by both hardware business and internet services. The mobile phone business continued to recover, with a year-on-year growth of 32.9% this quarter.

In this quarter, the revenue distribution of Xiaomi Group's major businesses, including smartphones, IoT, and internet services, was 61.6%, 27%, and 10.7% respectively. The mobile phone business remains the largest source of revenue for Xiaomi Group

1.2 Gross Margin

In the first quarter of 2024, Xiaomi Group's gross margin was 22.3%, up 2.8 percentage points year-on-year, surpassing market expectations (21.3%).

Due to Xiaomi's hardware revenue accounting for nearly 90%, the company's gross margin is mainly affected by hardware products. The sequential increase in gross margin is mainly driven by a significant increase in IoT gross margin this quarter. Hardware gross margin remains lower than overall gross margin, while software gross margin continues to be maintained at over 70%.

2. Mobile Phone Business: Significant Recovery in Shipments

In the first quarter of 2024, Xiaomi's smartphone business achieved revenue of 46.5 billion RMB, up 32.9% year-on-year. The growth of the company's mobile phone business in this quarter is mainly due to the recovery in quarterly shipments.

Dolphin analyzes Xiaomi's smartphone business in terms of volume and price:

Volume: In the first quarter of 2024, Xiaomi's smartphone shipments reached 40.6 million units, an increase of 33.6% year-on-year.

Of the 10 million smartphones that Xiaomi grew year-on-year this quarter, approximately 1 million units were from the Chinese domestic market, while the overseas market also saw an increase of around 9 million units. In terms of market share in the first quarter, Xiaomi's market share both domestically and overseas has significantly increased.

Price: In the first quarter of 2024, Xiaomi's smartphone average selling price was 1145 RMB, a decrease of 0.5% year-on-year.

The year-on-year decline in Xiaomi's smartphone average selling price this quarter is mainly due to the increased proportion of shipments in relatively low-priced overseas markets (Latin America and Africa), structurally lowering the company's average selling price. Overall, the average selling price is still good, once again rising to over 1100 RMB.

In the first quarter of 2024, Xiaomi's smartphone business gross profit was 6.88 billion RMB, an increase of 74.9% year-on-year. It accounted for 40.9% of the company's gross profit.

The gross margin of the smartphone business this quarter was 14.8%, up 3.6 percentage points year-on-year. The increase in the gross margin of the company's smartphone business this quarter is mainly due to product structure improvements and a decrease in core component prices In fact, Dolphin believes that the shipment volume and gross profit margin of the mobile phone business are close to that of the previous quarter (the gross profit margin of the previous quarter, excluding one-time costs, was 14.7%). Relatively speaking, the good point in this financial report is the rebound in the average selling price of mobile phones.

III. IoT Business: Substantial Increase in Gross Profit Margin

In the first quarter of 2024, Xiaomi's IoT business achieved revenue of 20.4 billion RMB, a year-on-year increase of 21%. The IoT business rebounded significantly this quarter, mainly due to the growth of tablets, smart home appliances, and wearable products.

During this quarter, the company did not directly disclose the data of its main IoT products (TVs and laptops). According to the financial report, Dolphin speculates that the company's main IoT products are still around 5 billion RMB. The main increase in the company's revenue this quarter comes from other IoT products, with an expected year-on-year growth rate of close to 30%.

In other IoT businesses, the tablet business of the company grew by 70.5% year-on-year this quarter, and the smart home appliance business grew by 46%, becoming the main driver of the company's IoT business growth.

In the first quarter of 2024, Xiaomi's IoT business gross profit was 4.05 billion RMB, a year-on-year increase of 52.9%. The gross profit margin of the IoT business this quarter was 19.9%, a year-on-year increase of 4.2 percentage points. This is due to the increase in gross profit margin and proportion of tablets and wearable products.

IV. Internet Services: Volume and Price Rise Together, Setting a New Record

In the first quarter of 2024, Xiaomi's Internet services business achieved revenue of 8.05 billion RMB, a year-on-year increase of 14.5%, accounting for 10.7% of the company's total revenue.

Specifically, the situation of various sub-items of Internet services:

① Advertising Services: The largest component of the company's Internet services. This quarter, Xiaomi's advertising services achieved revenue of 5.5 billion RMB, a year-on-year increase of 25%. The company improved its content distribution and monetization capabilities, with overseas advertising revenue growing by 39% year-on-year;

② Game Revenue: Maintained stability. This quarter, Xiaomi's game revenue was 1.2 billion RMB, slightly down year-on-year;

③ Other Value-added Services: This quarter, Xiaomi's other value-added services revenue was 1.3 billion RMB, with financial technology business maintaining stability.

Looking at the performance of Xiaomi and Apple's value-added businesses, companies that occupy the software entrance have relatively strong risk resistance. The company's Internet services business continued to set new records this quarter

Dolphin King splits Xiaomi's Internet service business by volume and price:

MIUI User Base: As of March 2024, the monthly active users of MIUI reached 658 million, a year-on-year increase of 10.6%. This quarter, the growth rate of MIUI users continued to decline, but the number of users still maintained a double-digit expansion rate.

ARPU Value: Combining the number of MIUI users, the ARPU value for a single quarter is calculated. This quarter, Xiaomi's Internet service ARPU value was 12.2 yuan, showing a year-on-year increase. The increase in ARPU value for overseas users offset the decline in ARPU value for domestic users this quarter.

In the first quarter of 2024, Xiaomi's Internet service business gross profit was 5.98 billion yuan, a year-on-year increase of 17.6%. This quarter, the Internet gross profit margin increased by 1.9 percentage points year-on-year, mainly due to the increase in the proportion of the company's advertising business this quarter.

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

V. Overseas Market: Business Recovery, Accelerated Monetization

In the first quarter of 2024, Xiaomi's overseas revenue was 37.9 billion yuan, a year-on-year increase of 40.3%, and revenue accounted for a rebound to 50.2%.

Due to the 39% growth in Xiaomi's overseas Internet business this quarter, the company's overseas hardware revenue also increased by 40%. Combining the 42.3% year-on-year increase in Xiaomi's smartphone shipments in overseas markets (excluding China) this quarter, Dolphin King believes that Xiaomi's IoT business also experienced double-digit growth in overseas markets this quarter.

From the distribution of MIUI users, Xiaomi has already had 658 million MIUI users by the end of this quarter, with 498 million coming from overseas markets. In other words, although Xiaomi originates from mainland China, overseas users now account for 3/4 of the total.

Due to the company's large overseas user base, the monetization capability of overseas internet users will directly impact the company's performance, and the ARPU value per overseas user is still much lower than that of domestic users.

According to Dolphin Jun's calculation, the ARPU value of domestic users in this quarter is 34.59 yuan, a year-on-year decrease of 3.3%; while the ARPU value of overseas users in this quarter is 5.02 yuan, a 25% year-on-year increase, which is also the main source of growth for the company's overseas internet business this quarter.

Six. Expenses and Performance: A stable performance foundation

In the first quarter of 2024, Xiaomi's total expenses amounted to 12.16 billion yuan, an increase of 30.1% year-on-year. The increase in expenses this quarter mainly came from the improvement in all three expense categories.

Research and development expenses: 51.6 billion yuan this quarter, a 25.4% year-on-year increase, accounting for 6.8% of revenue. R&D expenses decreased slightly this quarter, mainly due to a reduction of over 300 R&D personnel. Due to the new automotive business, a portion of the expenses was used for R&D related to innovative businesses such as smart cars, with innovative automotive expenses reaching 2.3 billion yuan this quarter;

Sales expenses: 54.8 billion yuan this quarter, a 33.6% year-on-year increase, accounting for 7.3% of revenue, mainly influenced by increased advertising and logistics expenses;

Administrative expenses: 15.2 billion yuan this quarter, a 34.2% year-on-year increase, accounting for 2% of revenue. Administrative expenses increased, mainly due to the increase in credit loss provisions for accounts receivable and expenses related to automotive administrative personnel salaries. The company added over 1,000 employees this quarter.

In the first quarter of 2024, the adjusted net profit was 6.5 billion yuan, a significant year-on-year increase. From an operational perspective (excluding fair value changes in investments), the company mainly benefited this quarter from the recovery of the hardware business and a significant increase in gross profit margin. The hardware gross profit margin has now increased to 17%, significantly boosting profitability and providing the company with a stable performance foundation

Dolphin Investment Research Xiaomi Group historical article review:

Financial Report Season

March 19, 2024 Conference Call "Xiaomi: Aiming to Become One of the Top Five Global Car Brands (4Q23 Conference Call Summary)"

March 19, 2024 Financial Report Review "'Mediocre' Xiaomi: Can Only Tell a New Story Through Cars"

November 20, 2023 Conference Call "Xiaomi Management Talks About the Source of Gross Margin Improvement (3Q23 Conference Call Summary)"

November 20, 2023 Financial Report Review "Xiaomi Strikes Back"

August 29, 2023 Conference Call "Inventory Clearance Completed, Impairment Reversal Boosts Profit (Xiaomi 2Q23 Conference Call)"

August 29, 2023 Financial Report Review "India Plundered, Huawei Survived, Can Xiaomi Rise Again?"

May 25, 2023 Conference Call "Investing in Chips, a Long-Term Strategic Must for Xiaomi (Xiaomi 23Q1 Conference Call Summary)"

May 24, 2023 Financial Report Review "Reduced Inventory, Lost Market Share, Where Does Xiaomi Go?"

March 25, 2023 Conference Call "Effective Inventory Clearance, Demand Recovery Not Yet in Sight (Xiaomi 22Q4 Conference Call)"

March 24, 2023 Financial Report Review "Xiaomi: Fallen to the Bottom, When Will It Rise Again"

November 23, 2022 Conference Call "Inventory Digestion Begins, Supply and Demand Moving Towards Balance (Xiaomi 22Q3 Conference Call)"

November 23, 2022 Financial Report Review "Xiaomi Has Been Down for Too Long, Finally Seeing the 'Light'"2022 年 8 月 19 日电话会《Management's Explanation After the Comprehensive Decline in Financial Reports (Xiaomi 22Q2 Conference Call)》

2022 年 8 月 19 日财报点评《Layoffs Can't Save Xiaomi from Deep Troubles (Xiaomi Financial Report Review)》

2022 年 5 月 19 日电话会《Xiaomi in Dilemma, What Does Management Say? (Xiaomi 22Q1 Conference Call)》

2022 年 5 月 19 日财报点评《Internal and External Challenges, Xiaomi is Not the Best Choice (Xiaomi Financial Report Review)》

2022 年 3 月 22 日电话会《Xiaomi Group: What Does Management Say After the Mediocre Financial Report? (Conference Call Summary)》

2022 年 3 月 22 日财报点评《Mediocre Xiaomi: Tasteless, Pity to Abandon (Xiaomi Financial Report Review)》

2021 年 11 月 30 日电话会《Launching Pure Electric Models Before and After Xiaomi, How Does Li Auto Compete? (Meeting Summary)》

2021 年 11 月 23 日电话会《Shortage Causing Decline in Phone Sales? Listen to Xiaomi Management's Explanation (Xiaomi Conference Call)》

2021 年 11 月 23 日财报点评《Ups and Downs, Where is Xiaomi Heading?》

2021 年 8 月 26 日电话会《Xiaomi Group: What Did Management Discuss After the Outstanding Performance?》

2021 年 8 月 25 日财报点评《No More Doubts, Xiaomi Ascends Again》

2021 年 5 月 26 日财报点评《Impressive Performance, Is Xiaomi Ready for the Davos Double Hit?》March 25, 2021 conference call "Shortage of Chips, Slow Internet/IoT, Car Manufacturing? Xiaomi's Response!"

March 24, 2021 financial report review "Such a Huge Gap in Expectations that Makes You Doubt Life, What's Really Going on with Xiaomi?"

In-depth

December 7, 2023 "Consumer Electronics 'Climbing out of the Pit': Xiaomi Recovers, Apple Hangs Tough"

December 1, 2022 "Xiaomi: The 'Three Arrows' of Reversing the Dilemma"

June 17, 2022 "Consumer Electronics 'Matured', Apple Stands Firm, Xiaomi Struggles"

December 1, 2021 "Honor's Siege, Xiaomi Faces Another 'Life and Death Crisis'"

November 24, 2021 "Behind Xiaomi's Sharp Decline, Where Did Things Go Wrong?"

June 11, 2021 "2021, Xiaomi 'Reborn' | Dolphin Investment Research"

March 16, 2021 "Dolphin Investment Research | Turning the Tide, Is Xiaomi Finally Getting Rid of Bad Luck?"

Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure