Car business on fire, phone business coming back, is Xiaomi returning to the altar?

Xiaomi Group (1810.HK) released its second-quarter financial report for 2024 (ending in June 2024) after the Hong Kong stock market closed on the evening of August 21, 2024, Beijing time, with the following key points:

1. Overall Performance: Both revenue and gross profit margin exceeded expectations. Xiaomi Group's total revenue this quarter was 88.9 billion yuan, a year-on-year increase of 32%, surpassing market expectations (86.8 billion yuan). The revenue growth this quarter mainly came from the growth of traditional businesses (smartphones & AIoT) and the addition of new automotive business. Xiaomi Group's gross profit margin this quarter was 20.7%, a year-on-year decrease of 0.3 percentage points, better than market expectations (19.7%). The slight decrease in gross profit margin this quarter was mainly due to the impact of seasonal promotions and the slightly lower gross profit margin of the automotive business compared to the company's overall level;

2. Traditional Hardware Business: Double-digit growth in smartphones & IoT business, with a gross profit margin of 14.9%.

1) Recovery in Smartphone Business: The company's smartphone revenue accelerated, growing by 27.1% year-on-year this quarter. This was mainly driven by the increase in Xiaomi smartphone shipments, with the average selling price of smartphones remaining above 1,100 yuan;

2) Record High in IoT Business: The company's IoT revenue reached 26.8 billion yuan this quarter, a year-on-year increase of 20.2%. The main increase this quarter came from other IoT product businesses, including tablets, smart home appliances, and wearable products;

3. Internet Services: Accelerated Monetization on the User Side. Internet services continued to grow this quarter, remaining the most stable part of $XIAOMI-W(01810.HK). Xiaomi not only increased its global MIUI user base this quarter, but also saw a year-on-year increase in ARPU per user. According to Dolphin Jun's calculations, the ARPU value of domestic users for Xiaomi this quarter was 33.85 yuan, a 7% decrease year-on-year; while the ARPU value of overseas users this quarter was 5.28 yuan, a 20.4% increase year-on-year. With over three-quarters of the company's users being overseas, the accelerated changes in overseas user monetization are expected to further drive up ARPU values.

4. Automotive Business: Gross Profit Margin Far Exceeds Expectations. Xiaomi's automotive business achieved revenue of 6.24 billion yuan in the second quarter of 2024, meeting market expectations (6.2 billion yuan). The gross profit margin of the company's automotive business this quarter reached 15.4%, far exceeding market expectations (4.7%) , and higher than the company's overall comprehensive gross profit margin for traditional hardware business (14.9%).

Dolphin's overall view: Xiaomi's financial report is good, SU7 ignites hope

The company's revenue and profit for this quarter both exceeded market expectations. Compared to the slight increase in revenue, Xiaomi's profit for this quarter exceeded expectations more prominently. From an operational perspective, Xiaomi's core operating profit for this quarter reached 5.8 billion yuan, close to the company's historical quarterly peak (6 billion yuan), mainly benefiting from the recovery of traditional businesses, accelerated monetization of internet services, and incremental contribution from the automotive business.

Specifically: 1) In the smartphone business, although the average selling price has declined slightly, shipments and market share are steadily increasing; 2) In the IoT business, driven by tablets, major appliances, and wearables, it has reached a historical high; 3) In internet services, accelerated monetization of overseas businesses has led to a significant increase in gross profit margin; 4) In the automotive business, the first report has exceeded market expectations.

Regarding the 15.4% gross profit margin of the automotive business, Dolphin believes: ① Against the backdrop of price wars, the automotive business has provided a certain safety cushion for the company; ② The automotive business has not dragged down the company's performance, as the current gross profit margin is already higher than Xiaomi's traditional hardware (smartphones + IoT at 14.9%); ③ With further release of automotive production capacity, the gross profit margin of the company's automotive business is expected to continue to improve. Therefore, this means that the company has not only squeezed into the mid-range new energy vehicle market, but also has a certain sustainability in business development.

A sustainable automotive business should also enjoy corresponding valuation, however, the valuations of peers in the new energy sector in the current market have shown a significant decline. Considering the current performance of Xiaomi's automotive business, it corresponds to a valuation range of approximately 5-10 billion US dollars, with limited impact on Xiaomi's overall market value. Overall, the company's core profit for the full year is expected to exceed 20 billion. This financial report can enhance market confidence in the company, but a breakthrough in stock price still requires stronger performance (explosive growth in automotive or significant improvement in smartphones/IoT) and an overall upward shift in valuation.

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

I. Overall Performance: Revenue & Gross Profit Margin, Better than Expected

With the addition of the automotive business, Xiaomi made corresponding adjustments to this quarter's financial report, dividing the company's business into "Smartphone X AIoT" and "Automotive and Innovation Business".

1.1 Revenue End

Xiaomi Group's total revenue for the second quarter of 2024 was 88.9 billion yuan, a year-on-year increase of 32%, exceeding market expectations (86.8 billion yuan). The company's revenue growth this quarter mainly came from the growth of traditional businesses and the addition of the automotive business.

1) This quarter, Xiaomi's Smartphone X AIoT business (traditional business) achieved revenue of 82.5 billion yuan, a year-on-year growth of 22.5%. This quarter, the three major sub-businesses of smartphones, IoT, and internet services all experienced varying degrees of growth;

2) This quarter, Xiaomi's Smart Car and Innovation Business (new business) achieved revenue of 6.37 billion yuan, accounting for 7.2% of total revenue, of which approximately 6.24 billion yuan came from vehicle sales.

1.2 Gross Margin

In the second quarter of 2024, Xiaomi Group's gross margin was 20.7%, a year-on-year decrease of 0.3 percentage points, better than market expectations (19.7%).

The slight decline in gross margin this quarter was mainly due to the impact of seasonal promotions and the fact that the gross margin of the automotive business was slightly lower than the company's overall level.

1) This quarter, Xiaomi's smartphone X AIoT business (traditional business) gross margin was 21.1%, with the main smartphone business significantly affected by seasonal promotions. The gross margins of IoT business and internet services both saw significant year-on-year increases, especially the internet services gross margin reaching 78.3%;

2) This quarter, Xiaomi's smart car and innovation business (new business) gross margin was 15.4%, although still lower than the company's overall gross margin, it has already far exceeded market expectations (4.7%). Dolphin believes that considering the situation of the original hardware (phone + IoT), the company's automotive business gross margin (15.4%) is already higher than the traditional hardware gross margin (14.9%). From this perspective, this has to some extent alleviated concerns in the market about the impact of the automotive business on profits.

II. Automotive Business: Stabilizing in the Mid-range Car Market

The market is most concerned about the progress of the company's automotive business. Purely looking at the automotive business, Xiaomi achieved revenue of 6.24 billion yuan in the second quarter of 2024, in line with market expectations (6.2 billion yuan).

In terms of quantity and price, the company's automotive shipments in the second quarter reached 27,300 units, with an average price per vehicle of 229,000 yuan. Affected by previous production capacity, the company's shipments have gradually increased, with current monthly sales stabilizing at over 13,000 units. Within 3 months, the company has entered the top ten in the domestic new energy vehicle market, stabilizing in the mid-range car market.

As of June 30, 2024, the company has opened 87 sales outlets in 30 cities. The company expects to achieve the goal of delivering 100,000 SU7 series vehicles ahead of schedule in November, and is aiming for a new target of 120,000 vehicles for the whole year.

Although the company's production capacity is still ramping up, the gross margin of the company's automotive and innovation business in this quarter still reached 15.4%, far exceeding the market's expectation of 4.7%. The current overall vehicle market is still in a price war stage, and the double-digit gross margin provides the company with a certain safety cushion, which has not dragged down the company's hardware business.

III. Mobile Business: Increase market share through price and volume

In the second quarter of 2024, Xiaomi's smartphone business achieved revenue of 46.5 billion yuan, a year-on-year increase of 27.1%. The growth of the company's mobile business in this quarter was mainly due to the steady increase in shipments.

Dolphin Jun breaks down Xiaomi's smartphone business into volume and price:

Volume: In the second quarter of 2024, Xiaomi's smartphone shipments reached 42.2 million units, a year-on-year increase of 28.3%.

Of the over 9 million smartphones that Xiaomi grew year-on-year this quarter, the domestic market increased by approximately 1.4 million units, while the overseas market also saw an increase of around 7.5 million units. In terms of market share in the second quarter, Xiaomi continued to increase its market share both domestically and overseas.

Price: In the second quarter of 2024, the average selling price of Xiaomi smartphones was 1,102 yuan, a year-on-year decrease of 0.9%.

The year-on-year decline in the average selling price of Xiaomi smartphones this quarter was mainly due to intensified competition in mainland China and the increasing proportion of shipments to relatively low-priced overseas markets (Latin America and Africa), structurally lowering the company's average selling price. Overall, the average price is still good, stabilizing above 1,100 yuan.

In the second quarter of 2024, Xiaomi's smartphone business gross profit was 5.65 billion yuan, a year-on-year increase of 15.9%. Accounting for 30.7% of the company's gross profit.

The gross profit margin of the smartphone business this quarter was 12.1%, a year-on-year decrease of 1.2 percentage points. The decline in the gross profit margin of the company's smartphone business this quarter was mainly due to intensified competition in mainland China and the impact of seasonal promotions.

Although the gross profit margin of the company's smartphone business fell this quarter, the company's market share has increased to varying degrees, and the overall smartphone business remains in a stable upward trend.

IV. IoT Business: Emerging from a downturn and reaching new highs

In the second quarter of 2024, Xiaomi's IoT business achieved revenue of 26.8 billion yuan, a year-on-year increase of 20.2%. The IoT business continued to rebound this quarter, mainly driven by the revenue growth of major home appliances in mainland China and tablets and wearables in overseas markets.

In this quarter, the company has still not directly disclosed the data of its main IoT products (TVs and laptops). According to the financial report, Dolphin Jun speculates that the company's main IoT business is still around 4.8 billion. The main incremental revenue for the company this quarter comes from other IoT products, reaching 22 billion yuan, with a year-on-year growth rate of 25.4%.

In other IoT businesses, the company's tablet business grew by 67.6% year-on-year this quarter, smart home appliances business grew by 38.7% year-on-year, and wearable product revenue grew by 31%, contributing significantly to the company's IoT business growth.

In the second quarter of 2024, Xiaomi's IoT business gross profit was 5.28 billion yuan, a year-on-year increase of 35.1%. The gross profit margin of the IoT business this quarter was 19.7%, a year-on-year increase of 2.1 percentage points. This is due to the increase in gross profit margin of wearable and smart home appliance products.

V. Internet Services: Improved Advertising Monetization

In the second quarter of 2024, Xiaomi's Internet services business achieved revenue of 8.27 billion yuan, a year-on-year growth of 11%, accounting for 9.3% of the company's total revenue.

Specifically, the breakdown of Internet services is as follows:

1) Advertising Services: The largest component of the company's Internet services. This quarter, Xiaomi's advertising services generated revenue of 6 billion yuan, a year-on-year growth of 17.6%, mainly benefiting from the company's enhanced content distribution and monetization capabilities;

2) Gaming Revenue: Maintained stability. Xiaomi's gaming revenue this quarter was 1 billion yuan, flat year-on-year;

3) Other Value-added Businesses: Xiaomi's other value-added business revenue this quarter was 1.3 billion yuan, with financial technology business maintaining stability.

Looking at the performance of Xiaomi and Apple's value-added businesses, companies that dominate software gateways have relatively strong risk resistance. The company's Internet services business achieved record high revenue this quarter.

Dolphin breaks down Xiaomi's Internet services business into volume and price:

MIUI User Base: As of June 2024, the monthly active users of MIUI reached 676 million, a year-on-year growth of 11.5%, with user growth picking up this quarter and maintaining a double-digit expansion rate.

ARPU Value: Combining the MIUI user base, the ARPU value for a single quarter is calculated. This quarter, Xiaomi's Internet services ARPU value was 12.2 yuan, remaining stable. The increase in ARPU value for overseas users roughly offset the decline in domestic ARPU value for Xiaomi this quarter

In the second quarter of 2024, Xiaomi's Internet service business gross profit was 6.47 billion yuan, a year-on-year increase of 17.3%. The Internet gross profit margin in this quarter increased by 4.2 percentage points year-on-year, mainly due to the continued increase in the proportion of the company's advertising business.

Compared to other companies in the advertising industry, Xiaomi, which owns the terminal entrance, continues to maintain a high gross profit margin of over 70% in the Internet business. In an era of intensified competition for existing traffic, the Internet entrance traffic track has a good structure with unique advantages. With the increase in the proportion of advertising business, the company's Internet service gross profit margin is expected to continue to rise.

VI. Overseas Market: User Growth, Accelerated Monetization

In the second quarter of 2024, Xiaomi's overseas revenue was 38.1 billion yuan, a year-on-year increase of 37.1%, with revenue accounting for 42.8%. The decrease in the proportion of overseas revenue in this quarter is mainly due to the new addition of the automotive business in the financial report.

As Xiaomi's overseas Internet business achieved a growth of 32.9% this quarter, the company's overseas hardware revenue grew by nearly 40%. Combining the 31.3% year-on-year increase in Xiaomi's smartphone shipments in overseas markets (excluding China) this quarter, Dolphin believes that Xiaomi's IoT business also achieved double-digit growth in overseas markets this quarter.

Looking at the distribution of MIUI users, by the end of this quarter, Xiaomi already had 676 million MIUI users, with 511 million coming from overseas markets. In other words, although Xiaomi originated from mainland China, now more than three-quarters of its users are from overseas. Due to the company's large overseas user base, the monetization capability of overseas Internet will directly impact the company's performance, and the ARPU value per user in overseas markets is still much lower than that of domestic users.

Dolphin estimates that the ARPU value of domestic users in Xiaomi this quarter is 33.85 yuan, a 7% year-on-year decrease; while the ARPU value of overseas users this quarter is 5.28 yuan, a 20.4% year-on-year increase, which is also the main source of growth for the company's overseas Internet business this quarter.

VII. Expenses and Performance: Stable Expenses, Steady Profit Growth

In the second quarter of 2024, Xiaomi's total expenses amounted to 12.58 billion yuan, a year-on-year increase of 23.6%. The increase in the company's expenses this quarter mainly came from different degrees of increases in the three expenses

Research and Development Expenses: 55 billion yuan in this quarter, a year-on-year increase of 20.7%, accounting for 6.2% of revenue. R&D expenses increased again this quarter, mainly due to an increase of 869 R&D personnel. The increase is mainly attributed to R&D investment in the automotive and innovation businesses.

Sales Expenses: 59 billion yuan in this quarter, a year-on-year increase of 31.8%, accounting for 6.6% of revenue. The increase is mainly influenced by overseas logistics expenses, advertising and promotional costs, and increased salaries for promotional staff.

Administrative Expenses: 11.8 billion yuan in this quarter, a year-on-year increase of 3.4%, accounting for 1.3% of revenue. Maintained relatively stable.

Adjusted net profit for the second quarter of 2024 was 62 billion yuan, a year-on-year increase of 20.1%. From an operational perspective (excluding fair value changes in investments), the company's core profit for this quarter reached 58 billion yuan, a significant increase of 45.9% year-on-year.

The company's performance improvement is mainly attributed to the recovery of hardware business, the addition of automotive business, and the increase in gross profit margin of software services. The current automotive business has not significantly dragged down the company's performance, and the overall gross profit margin is maintained around 20%, providing assurance for the company's continued profitability.