Xiaomi: New retail for cars, Xiaomi aims to have 20,000 stores for Xiaomi Home within three years (24Q1 conference call)
Xiaomi Group (1810.HK) released its first quarter financial report for 2024 (ending in March 2024) after the Hong Kong stock market on the evening of May 23, 2024 Beijing time. The key points of the conference call are as follows:
The summary of Xiaomi's first quarter financial report conference call is as follows. For a detailed interpretation of the financial report, please refer to " Xiaomi: Can the mobile phone make a comeback and turn the tide? "
I. $ XIAOMI-W.HK Financial Report Highlights:
II. Detailed content of Xiaomi's financial report conference call
2.1. Key points from the management:
- Recent strategic & business developments:
① International business:
Maintained a top three position in the global smartphone market for 15 consecutive quarters, ranking top three in 63 countries and 56 markets, and top five in 67 markets.
Significant growth in emerging markets: Market share in the Middle East increased from 7.1% to 20.9%. Market share in Africa reached 10.6%, an increase of 4.5%. Market share in Southeast Asia is 16.5%. Market share in Latin America is 15.3%, an increase of 2%.
② Xiaomi's electric vehicle business:
Expected delivery volume to exceed 10,000 vehicles in June, with a target of delivering 100,000 vehicles in 2024, aiming for 120,000 vehicles.
Sales and service network covers over 80 cities, with around 50 service centers established, covering all provinces, cities, autonomous regions, and municipalities directly under the central government.
Invested RMB 4.7 billion in the ADAS field, with the team size expected to expand to 1,500 by the end of 2024 and further to 2,000 next year.
Female car owners are expected to account for 40% to 50%, with BEV owners accounting for 29%. It is anticipated that with Apple's exit from the automotive industry, more Apple users will choose Xiaomi vehicles.
The new retail business has grown to 9%, and Xiaomi plans to expand Xiaomi Stores to 20,000 by 2026. Upgrading Xiaomi Stores, relocating to prime locations, and further expanding the area. Will continue to transform the ecosystem so that our users can fully enjoy the ecosystem products we provide
Complete the high-end strategy in mainland China, occupying the market segment of 4000 to 5000 yuan. It is expected that the mobile phone and vehicle businesses will continue to drive high-end development.
Financial Highlights
Shareholder Returns: The amount of repurchased shares has reached 2.25 billion RMB, exceeding the total for the full year of 2023.
ESG:
By 2030, the main business committee will achieve 30% of the benchmark year's target.
By 2035, achieve 100% use of renewable energy.
By 2040, achieve carbon neutrality in operations and 100% adoption of renewable resources.
2.2, Q&A Analyst Q&A
Q: How will Xiaomi achieve the synergistic development of electric vehicles and ecosystems? How will the smartphone business and traditional IoT and Internet businesses support the electric vehicle business?
A: Regarding synergies, we can consider the following aspects: First, at the product and technology level, Xiaomi has already begun work in the smart electric vehicle field and has further room for growth. Secondly, from a user perspective, we have accumulated rich experience, especially with female consumers, an area that the smartphone business has not been able to reach. Thirdly, in terms of customer stickiness, the cost of user churn within the Xiaomi ecosystem is high, and users who purchase our cars often already own multiple Xiaomi products, creating significant synergies. Over time, these synergies will further strengthen, and we are confident in continuing to explore potential and achieve continuous progress.
Q: Regarding the gross profit margin of smartphones. What measures do you have to control costs and improve efficiency? What are your advantages compared to peers?
A: Regarding the gross profit margin of smartphones, it is a topic that has been discussed for a long time, but with the rise in component costs, there are concerns about whether this will affect our business. Since the third quarter of last year, core component costs have risen, but our first-quarter gross margin remains good. Xiaomi has taken multiple measures: First, we have made strategic reserves to deal with industry cost changes, especially in memory components, which are crucial for us. Secondly, as Xiaomi's scale grows, the gap between us and industry leaders is narrowing, while the gap with followers is widening, indicating that Xiaomi's efficiency is improving. Additionally, we continue to optimize our product structure, which helps mitigate the impact of cost increases. Finally, Xiaomi's business model is smartphones + AIoT + electric vehicles, and our AIoT business gross margin has significantly improved. In terms of non-smartphone businesses, we are working towards achieving consistency and synergistic development in our business.
Q: Regarding new retail, in the new year, you plan to increase stores in China. Can you provide details on the scale of the expansion plan, including directly operated and franchised stores? Additionally, which regions will be involved in overseas expansion, and from which SKUs will you start?
A: Regarding further expansion of the retail business, in 2021, we integrated our stores to improve efficiency. In the coming years, we plan to add 10,000 new stores, bringing the total number of stores to 20,000. Additionally, we will upgrade existing stores, including relocating to better locations and expanding the areaFor the new retail of electric vehicles, we currently have 59 stores this year, but due to high demand, customers sometimes need to wait for one to two hours. Therefore, we plan to expand the electric vehicle stores to over 50 cities. At the same time, we have noticed that some customers need to travel long distances to reach the stores, so we plan to add more stores. In China, we plan to expand the store size to 500 square meters to display more colors and styles of cars, such as the popular light purple model. Currently, we have over 2,000 stores in overseas markets, but compared to the Chinese market, there is still room for improvement in the construction, efficiency, and control of overseas stores.
We believe that Xiaomi's new retail model has the potential to be replicated in overseas markets, and we plan to open 10,000 Xiaomi Home stores in the next five years. This will not only support our smartphone business but also facilitate the overseas expansion of our IoT business. Currently, the mobile business and AIoT business in the Chinese market each account for about 50%, while the AIoT business in overseas markets is less than 20%. Overseas expansion is crucial for our IoT business as we currently lack efficient sales channels. Looking ahead, we also need to establish the infrastructure for Xiaomi's new retail, including buildings, etc.
Q: The overseas internet business grew by 40% in the first quarter. Could you share the reasons behind this growth?
A: This year's ARPU is about 5 RMB, and we have improved our ability to convert revenue into cash. The growth is mainly due to the continuous increase in shipments, revenue growth, and our ongoing efforts to attract new customers to our platform. The expansion of the user base is very beneficial to us. In addition, as the number of customers increases, our share in profits is also increasing. Looking ahead, we expect the overseas business to continue to grow.
Q: First of all, congratulations on your outstanding achievements. Regarding the gross profit margin of the IoT business, could you share the current situation? There are reports that you are using internet business to alleviate the 20% profit pressure on the IoT business. Is this gross profit margin sustainable? What is the ideal gross profit margin that the company expects to achieve in continuing to optimize the IoT business? In addition, regarding the expansion of overseas IoT business, such as home appliances and wearable devices, what are your deployment strategies? What are your considerations in terms of product launches and plans?
A: Regarding the AIoT business, our strategy this year revolves around people, cars, and ecosystems. We believe this is a leading strategy in the industry because our AIoT business started with our ecosystem and our team has been building on this foundation. This model allows us to deliver products quickly and has yielded good results in business development. Although we have seen some difficulties and shortcomings in this model, such as relying solely on a light asset model is not enough. Over the past few years, we have added new examples, such as laptops, and integrated them into the smartphone business. For the air conditioning business, we have transitioned from the ODM model of the ecosystem department to fully independent research and development. By leveraging these capabilities, we have achieved growth in this area. We are gradually implementing these strategies and have already achieved most of the products this year. For example, our air conditioning sales are very good, and we are able to control all key componentsThe tablet business has also performed well, utilizing 100% of wearable resources. These decisions were made three years ago, and we will continue to focus on TV business, such as new technologies like Mini LED.
Regarding gross profit margin, we do not have specific targets because the gross profit margins vary greatly among different products. We will benchmark each product based on its characteristics, for example, referencing Gree for the air conditioning business and Samsung for the TV business.
In terms of globalization, we consider two key points: product compliance, which needs to be implemented in each market, and the alignment of products with the market. We are addressing these issues and ensuring that products can be sold efficiently. Xiaomi Home and Xiaomi New Retail are important platforms. For overseas markets, AIoT has tremendous potential, and we need to focus on solving Xiaomi's issues and building our capabilities.
Q: Recently, it has been observed in the market that some orders have been allocated to other companies, indicating that Xiaomi may face challenges in obtaining orders. Have you considered strengthening market competitiveness through marketing strategies or other means to secure more orders?
A: The biggest challenge Xiaomi currently faces is product delivery. Users can see on our app that the current estimated delivery time is over 30 weeks, which means it will be after the Chinese New Year next year. The backlog of orders is severe, and our top priority is to increase production capacity and shorten delivery times. For example, our Pro version was originally scheduled for delivery at the end of May, but we are striving to complete it by mid-May to avoid overcommitting to users. We hope that the actual delivery time will be shorter than what is shown in the PPT. To address this issue, we are taking measures to improve production efficiency. Currently, the factory is operating on a three-shift system, and we are working hard to transform business processes and the factory. We expect production capacity to double by June, helping to shorten delivery times for customer orders.
Our goal is to deliver 100,000 vehicles by the end of this year, with a challenging target of 120,000 vehicles. This is an extremely challenging goal. If we can effectively solve the delivery issue, considering our current good reputation, the volume of orders is not expected to be a major problem.
Q: In the price range of 5000 to 6000 RMB, your market share has significantly increased in a short period of time. Considering the intensifying market competition, including the 6.18 promotion activities involving iPhones, what impact will this have on the company's prices and sales in the short term? What is the impact of the trend towards high-end products on the market?
A: Regarding the 6.18 sales event, we started preparing from May 20th, earlier than in previous years, as competition in the e-commerce sector is very fierce. In the 6.18 promotion activities, Xiaomi's products ranked in the top three in all categories, performing overall as expected.
In terms of competition, we discussed the high-end strategy last September and anticipated its results. Currently, Xiaomi's market share has shown significant growth. Based on MIS and first-quarter data, we have noticed that the market share of three brands is declining, while three companies, including Xiaomi, are on the rise. Faced with competitive pressure, we believe Xiaomi's market share will continue to increaseWe believe Xiaomi can cope with the impact of the external environment. Looking back at last year's budget, we found that the actual progress was faster than expected. For the second quarter, we expect that business operations will not be affected by promotional activities, everything is within expectations.
Q: Compared to the same period last year, there has been a significant increase in inventory. Is this due to strategic inventory reserves in response to rising component prices? What is the inventory situation for finished products and core components?
A: Inventory growth is mainly due to four factors: 1. We strategically reserved raw materials based on market predictions to cope with possible price increases. 2. Since April, we have started selling cars, including 5000 units of the Founder's Edition model. These vehicles have been produced but not yet sold, and are already included in the inventory as of March 31. 3. As air conditioning and other products enter the peak sales season, we are preparing inventory for the second quarter sales peak. 4. In preparation for the 6.18 sales event, we have started stocking up inventory to ensure delivery and sales performance on that day. These strategic measures have collectively led to the increase in inventory.
Q: In the smartphone business, the Middle East region achieved a growth of 113.3%. Could you please elaborate on the factors behind this growth? For other overseas markets that we have paid less attention to in the past, could you share some key success experiences?
A: Due to the impact of the pandemic, our face-to-face communication has been interrupted in the past few years. To address this, our headquarters began instructing teams to travel and visited over 20 countries. During this period, we made significant human resource adjustments in important countries such as Western Europe, Latin America, and Southeast Asia, and optimized team execution strategies, which significantly improved performance. In addition, the strategies we formulated from 2018 to 2019 have continued to this day, and we have been continuously making adjustments in human resources and strategies. Based on these adjustments, we believe that the speed of our market development will accelerate. These efforts are also the reason for our outstanding performance in the first quarter.
We see huge market potential. Taking Saudi Arabia as an example, the current market share is only single digits, but based on our experience, there is potential to reach a market share of 20% to 30%. In the Middle East, Central America, including Mexico, as well as South Africa and other regions in Africa, our business is growing rapidly, and market share is expected to further increase.
Q: In the field of artificial intelligence, Xiaomi has made significant progress in large-scale model development recently. Could you elaborate on your views on AI technology and Xiaomi's long-term vision in this area?
A: In the AI field, Xiaomi has its own principles and long-term vision. We do not delve into general large models, but focus on developing end-to-end specific areas, which is developing rapidly. We also continue to launch products related to generative large models with partners. Currently, so-called AI smartphones on the market are actually more smartphones with AI functions rather than true AI smartphones. We believe that true AI technology will drive significant progress in the futureFirst of all, in terms of cloud technology, we are adapting and hoping to leverage AI and cloud services. We will invest in ourselves and collaborate with different companies to utilize the best models here. Secondly, we will also focus on the integration of AI with humans and automobiles. For example, we will research how to use AI more in the ADAS field and note the differences in this area. Additionally, we are considering how to adopt a hybrid mode in our products so that people can enjoy the good life brought by technology. Finally, we will continue to introduce measures to improve company efficiency using AI. For example, how to apply AI to our smart manufacturing plants and how to optimize material usage with these AI technologies.
Q: Regarding the IoT channel strategy, the North American and Japanese markets have a significant impact. If the overseas market share increases to 50%, are there plans to expand cooperation platforms? Also, considering the differences in growth and profit between Xiaomi and other Chinese brands, does Xiaomi intend to expand into new markets and channels?
A: Xiaomi has a clear strategy in the AIoT field. We operate effectively through Xiaomi Home and our own channels, as well as cooperate with different distributors to actively expand channels and markets. We adhere to the principles of high cost performance and value for money. For example, in Japan, we focus on the online Xiaomi network rather than offline channels. This is different from some global companies that pursue high profit margins and need to pay multiple fees, as their product competitiveness is usually lower, which is not Xiaomi's strategy. We operate well in Xiaomi networks in each core country, and also perform well on global e-commerce platforms such as Xiaomi Home and Amazon. In addition, we also cooperate with some local e-commerce platforms in certain countries. In Europe, we have established good relationships with many partners, and our brand is widely recognized. These strategies differentiate us from competitors in the AIoT field.
Q: Can you share the gross profit margin of the electric vehicle business, as well as the gross profit margin target and production growth plan for the next year?
A: Regarding the gross profit margin of smart electric vehicles, the announced target growth rate is 5% to 10%. Currently, we need time to achieve this target. We expect to have more accurate and precise profit margin data by the end of June. Gross profit margin is usually influenced by several factors, including scale and the cost of core components. We have set a delivery target to increase from 70,000 vehicles to 120,000 vehicles, which will significantly change the scale. Additionally, from this year to next year, the cost of core components will also determine our procurement costs, which are crucial to profit margins. Currently, we have not set specific gross profit margin targets.
Regarding the product portfolio and its potential impact, we plan to separately disclose the revenue and profit of the electric vehicle business in the second quarter financial report, so that the market can see more clearly the gross profit margin of the electric vehicle business relative to other raw material departments. We expect to provide more detailed information in the performance announcement in August.
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