Xiaomi Group (1810.HK) released its second-quarter financial report for 2024 (ending in June 2024) after the Hong Kong stock market on the evening of August 21, 2024. The key points are as follows:
The summary of Xiaomi's 2024 second-quarter financial report conference call is as follows. For a detailed interpretation of the financial report, please refer to " Automobiles Hot, Phones Warm, Is Xiaomi Returning to the Altar? 》
I. $XIAOMI-W(01810.HK) Financial Report Highlights:
II. Details of Xiaomi's Financial Report Conference Call
2.1. Key Points from Management's Statements:
1) Business Progress
① Overall Revenue and Profit
a. In the second quarter of 2024, total revenue was RMB 88.9 billion, a year-on-year increase of 32%, reaching a historical high.
b. The gross profit margin was 20.7%, remaining at a healthy level, with adjusted net profit of RMB 6.2 billion, a 20% year-on-year increase.
② Automotive Business
a. In the second quarter, revenue from smart electric vehicles and other new businesses was RMB 6.4 billion, with smart electric vehicle sales revenue at RMB 6.2 billion.
b. The SU7 electric vehicle delivered over 27,000 units in the second quarter, with an average selling price of RMB 229,000; retail sales in July exceeded 13,000 units, ranking first in the sales list of electric cars priced at 200,000 RMB.
c. It is expected that the annual electric vehicle delivery volume will exceed 120,000 units, with the annual target of 100,000 units to be completed ahead of schedule in November.
d. The gross profit margin of the automotive business reached 15.4%, with a net loss reduced to RMB 1.8 billion.
③ Mobile Phone Business
a. In the second quarter, mobile phone business revenue was RMB 46.5 billion, accounting for 52.3% of total revenue, a year-on-year increase of 27.1%.
b. Global market share increased to 14.6%, with rankings improved in Latin America, Southeast Asia, and the Middle East markets.
c. The global monthly active users of smartphones reached 676 million, an increase of 69.8 million year-on-year, with 164 million users in the Chinese market, an increase of 15.1 million.
d. The gross profit margin of smartphones reached 12.1%, and the newly released Xiaomi Mix Fold 4 and Xiaomi Mix Flip have enhanced the brand image and market share
④ Internet of Things (IoT) Business
a. In the second quarter, IoT business revenue was RMB 26.8 billion, a year-on-year increase of 20.3%; achieving rapid growth of over 20% year-on-year for two consecutive quarters.
b. IoT gross profit margin was 19.7%, an increase of 2.2 percentage points. Mainly driven by the increase in gross profit margin of wearable devices and major appliances.
c. Achieved independent research and breakthroughs in key technologies across the entire chain in the air conditioning sector, launching the industry's first integrated disassembly, distribution, and installation service.
d. IoT products benefit from the brand effects of smartphones and electric vehicles, and will further expand into international markets in the future, enhancing IoT business growth through new retail channels.
2) Financial Performance
① Revenue and Profit
a. In the second quarter of 2024, total revenue was RMB 88.9 billion, a year-on-year increase of 32%.
b. Revenue from the Chinese market accounted for 57.2% of total revenue, while overseas revenue accounted for 42.8%.
c. Comprehensive gross profit margin was 20.7%, showing stability.
d. Adjusted net profit was RMB 6.2 billion, a year-on-year increase of 20.1%.
e. Core profit was RMB 7.9 billion, a year-on-year increase of 20.6%.
② Expenses and Cost Control
a. Overall operating expenses were RMB 12.6 billion, including RMB 2.9 billion in new business investments.
b. Core business operating expenses were RMB 9.6 billion, with an expense ratio of 11.7%, decreasing by more than one percentage point year-on-year and quarter-on-quarter.
c. Research and development expenses were RMB 5.5 billion, a year-on-year increase of 20.7%.
2.2 Analyst Q&A
Q: Regarding the electric vehicle business, the gross profit margin of your first model reached 15% this quarter. What factors contributed to this good gross profit margin? What is the future trend of the gross profit margin?
A: This quarter, the gross profit margin of our first model reached 15.4%, which exceeded our expectations. Several factors contributed to this good gross profit margin. 1. Suppliers are optimistic about our future prospects, thus providing us with great support. This model is our first vehicle product, and although the initial volume was not large, suppliers are very positive about our future development, hence we obtained very favorable commercial terms. 2. We adopted a best-selling product strategy, focusing on a single model, and achieved significant economies of scale through mass production. For example, the SU7 model has performed very well in the market, priced above 200,000 yuan, and is leading in the market. This strategy has helped us significantly reduce production costs. 3. We also leveraged the management capabilities accumulated in the smartphone field, allowing us to operate efficiently in the early stages of the automotive business. These factors together drove our gross profit margin to a level above expectations.
Looking ahead, we expect the gross profit margin to continue to improve. On the one hand, with the increase in delivery volume, we will be able to better spread costs, thereby improving the gross profit margin. We have already collected a large number of orders, and with the expansion of scale, production costs will further decrease On the other hand, the cost pressure of the supply chain is also easing, which will further benefit the future gross margin improvement. Overall, we are confident in the future performance of gross margin and expect it to be higher than the current level.
Q: Regarding the development strategy of new retail, especially in the mobile phone and IoT business, what are your plans for the next few years? Mr. Liu has visited the Southeast Asian and European markets, can you share your overseas development plans and ideas?
A: In terms of new retail, we have been exploring how to extend this model to cover all product categories and promote it to global markets. Firstly, our new retail model has expanded to the electric vehicle business, by integrating cars with Xiaomi stores, we can provide users with one-stop service. This model not only reduces rental costs but also increases the utilization efficiency of stores, allowing us to open more large flagship stores in core shopping areas, further enhancing the user experience.
In the high-end smartphone business, the expansion of new retail provides strong support for us. The sales of high-end products often rely on brand effects, and through brand stores, we can provide users with a better shopping experience, which is crucial for enhancing user awareness and acceptance of high-end products. In addition, we have made significant progress in the IoT business, especially in this year's outstanding performance in air conditioner sales.
Regarding the expansion in overseas markets, we have launched the new retail model in multiple regions. Mr. Liu recently visited the Southeast Asian and European markets, and our expansion plans in these regions are progressing smoothly. For example, the performance of Xiaomi stores in the Hong Kong market is very good, proving the feasibility of our model in the global market. We plan to continue expanding the new retail network globally, especially by opening more stores in key shopping centers, which will be an important part of our "People × Cars × Home" strategy. Overall, we are confident in the future of the new retail model and plan to promote it to global markets, driving overall business growth through this model.
Q: Xiaomi's market share in multiple countries and regions increased significantly in the second quarter. Can you talk about the core competitiveness improvements compared to last year in 2024? Will market share continue to increase in the second half of the year?
A: We have adopted a practical strategy in the smartphone business and continuously delve into our technology. This year, we have invested heavily in the development of version 2.0 of 4S, which is an important step in enhancing our technology. In addition, we are continuously improving supply chain management to cope with the increasing market costs. Despite the complex market environment, through these strategic preparations, we can better control costs. In the past few years, we have successfully implemented a high-end strategy, especially in the Chinese market, and extended this strategy overseas, making good progress. In terms of services, we have undergone comprehensive upgrades and reforms, especially in product quality, APIs, and user operations, all of which have made significant progress. New retail is also a unique competitive advantage for us, and the efforts of these years are beginning to pay off. Overall, our core competitiveness lies in the competitive advantage of the entire supply chain, and we will continue to consolidate and enhance these advantages in the coming years Although there may be fluctuations between quarters, our global market goals and strategies will not change in the long run.
Q: Against the backdrop of intense competition in the Chinese electric vehicle market this year, what is Xiaomi's next competitive strategy for its vehicles? Will it engage in a price war to improve profit margins, or will it enhance product quality through new features and components? What are your next plans?
A: Currently, we have not considered engaging in a price war. Our focus is on delivery and increasing production capacity. We launched our first electric vehicle on March 28th this year, and after four months, the product has gained widespread attention in the market. While our delivery time has been shortened, there is still room for further improvement, so we are working hard to increase production capacity and further reduce delivery times.
Regarding cost control, we have achieved some positive results at our first factory, and there is still great potential for cost reduction in the future. We are developing new vehicle models internally, which are currently confidential, but we are confident in their competitiveness. User operations will be an important focus for us in the future, and we will gradually provide more personalized services based on user feedback and demands, making Xiaomi cars not just a means of transportation, but a more fun and personalized product. Overall, our strategy is to enhance product competitiveness through economies of scale and technological advancements, rather than participating in price wars.
Q: Electric vehicle gross profit margin has performed well. Will the full-year gross profit margin target be adjusted upwards? Can you provide a more specific guidance on the gross profit margin for the smartphone business in the second half of the year?
A: Regarding the gross profit margin of electric vehicles, it reached 15.4% in the first quarter, which is quite good. For the third and fourth quarters of 2024, we expect the gross profit margin to steadily increase. Although I cannot provide specific numbers, the trend is positive, and we are confident in this trend. As for the gross profit margin of the smartphone business, in the second half of the year, we face two main challenges: 1. Competition pressure from Apple, as they will launch some AI smartphones in the second half of the year. Although the specific performance and market feedback of these new products are not clear yet, we will closely monitor market trends and adjust our strategies. 2. Trends in component prices, especially the rise in memory costs. In the third quarter of this year compared to the same period last year, memory costs have almost doubled, but we believe it has peaked and expect prices to start decreasing, so there won't be significant changes.
Q: Apple will launch AI smartphones in the second half of the year, which may attract users to try new products. How will you respond to this challenge? Will the trend in component prices in the second half of the year differ from the original forecasts?
A: Regarding Apple's upcoming AI smartphones, we currently do not have specific product details and changes in user experience, making it difficult to accurately predict their impact on the market. However, we are very confident in our own new product, MIX Flip, which has already attracted 42% of former iPhone users since its release. In addition, in recent years, through benchmark testing and experience enhancement of our products, **we are not only targeting iPhone users but also striving to attract users from other brands, including Huawei This year, we have added 15 million net users in the Chinese market, showing outstanding performance. As for the trend of component prices, especially memory and screen costs, we believe that the price increase has reached its peak and prices will begin to fall, thus alleviating overall cost pressures.
Q: In the second quarter, Internet revenue reached a historical high, with a remarkable gross profit margin. What are the reasons for the increase in gross profit margin for Internet business? Looking ahead to the third quarter, what are the trends for Internet business?
A: The increase in gross profit margin for Internet business is mainly due to several reasons: 1. Continuous expansion of scale is crucial. Our global user base has increased by tens of millions year-on-year, making development in various areas stronger, thereby positively impacting the gross profit margin. 2. Improvement in product structure has also played an important role. With the introduction of more high-end models, Internet revenue has increased. 3. The proportion of overseas Internet revenue continues to increase, and the gross profit margin in overseas markets is usually higher than in the Chinese market, which also contributes to the overall increase in gross profit margin.
Looking ahead to the third quarter, we believe these trends will continue. The overall increase in sales volume, expansion of high-end product proportion, and increase in the proportion of overseas business will continue to drive the gross profit margin for Internet business. However, although the gross profit margin is currently at a relatively high level, we do not expect a significant increase, so please do not be overly optimistic.
Q: How do you view the prospects of AI smartphones? What are your thoughts on AI products in your plans?
A: Regarding the prospects of AI smartphones, I believe that currently, the so-called AI smartphones on the market are not truly AI smartphones. They only use AI technology to develop some functions that run on the phone, so they should be called "AI feature phones" rather than "AI smartphones". True AI smartphones should have the ability to run AI technology at the operating system level, which will bring a completely new user experience. We are developing a new product that is expected to be launched in the coming months, and it will offer users a different experience.
Furthermore, it is worth noting that the increase in Internet gross profit margin is also influenced by the rise in the proportion of advertising revenue. Advertising revenue has a relatively high gross profit margin, especially in this quarter, where the proportion of advertising revenue has significantly increased, further supporting the growth of the Internet business's gross profit margin.
Q: The growth rate of the Internet of Things was very fast in the second quarter, with an improvement in the gross profit margin of major appliances and good shipment performance. The growth rate of pet-related products was also rapid. Do you have any development plans for the future? Are there any plans for overseas expansion?
A: The Internet of Things business has been one of our important strategies in recent years. We have adopted two strategies: first, an internationalization strategy, and second, in the early stages, we mainly relied on the production chain model, producing through partners to ensure quality, and then selling through our channels. However, as the business has developed, we realized the limitations of this model in pursuing high-end development Therefore, for some important categories, we have gradually transitioned from a production chain model to a self-operated model, such as wearable devices, large home appliances, air conditioners, washing machines, refrigerators, door locks, and routers. This shift has allowed us to make significant investments in these categories, master core technologies and supply chains, leading to significant growth in sales volume, revenue, and gross profit margin.
Currently, these businesses are just beginning to show results. This year marks the first year of delivering these results, and in the coming years, we will see more business improvements and expansions. At the same time, we have adopted the same strategy in the global market, selling products globally, with the scale continuously expanding. Our overseas layout has made good progress, with astonishing growth in overseas markets this year. With the help of new retail, our IoT business will develop in a better way. In the future, we are confident that the IoT business will continue to improve in terms of sales growth, average selling price increase, revenue growth, and profit margin enhancement.
Q: In the smartphone sector, the growth rate in the price range of 3000 to 6000 RMB is fast. Do you plan to focus on the price range above 6000 RMB? Any successful strategies to share?
A: In the price range of 3000 to 6000 RMB, we are already very strong, especially in the lower price range, but we do face some challenges in the 6000 to 10000 RMB or higher price range. We have launched three product models in the low-end market, including the Xiaomi series and a large mid-range series. These products have continuously improved in reputation over several generations, with outstanding performance in annual model releases and increasing sales year by year, so we are very confident in our performance in this range.
For the price range of 6000 to 8000 RMB, we have found successful strategies, especially with our small foldable screen models performing very well. However, in the high-end price range of 10000 RMB and above, we still need to make further efforts, as there are still some gaps to fill in this price range. Nevertheless, I am very confident in the 6000 to 8000 RMB price range and will continue to strive for breakthroughs in higher price ranges (10000 RMB and above). Meanwhile, our electric vehicle business will also support the development of the smartphone business, enhancing overall efficiency and effectiveness. This cross-category synergy is just beginning to show, and will bring more opportunities and growth in the future.
Q: Regarding the vehicle business, in the second half of the year, you plan to focus on the smart electric vehicle strategy, with delivery being key. Besides improving vehicle production lines, what other factors can increase delivery volume? Will this further increase the demand for after-sales service, and how will you address it?
A: Our focus in the vehicle business is on increasing production capacity and delivery capability. Initially, we planned to produce 70,000 to 80,000 vehicles, but now we need to increase capacity by adding manpower and implementing two shifts. Additionally, we are actively considering the increase in demand for after-sales service. To address this challenge, we are collaborating with third parties in sales networks and under-covered areas, and have authorized them to ensure customer experience is guaranteed So far, we have not received any major dissatisfaction in after-sales service, and the feedback from customers and users is relatively satisfactory.
Q: Regarding the impact of smart manufacturing and smart factories, especially in IoT business and best-selling products, do you plan to implement intelligent production?
A: The construction of smart factories depends on specific business needs and environmental conditions. For example, in the production of smartphones, we will gradually move towards high-end products in the future, which requires higher manufacturing quality and close interaction with partners. Therefore, we plan to establish smart factories in this area. We will independently control 20% of the production capacity, while the rest will be handed over to partners. However, all partner production must be fully integrated with our platform for end-to-end management and control to ensure product quality and delivery accuracy.
For IoT major products such as refrigerators, air conditioners, and washing machines, which have high added value, we may also consider implementing intelligent production in these categories. However, for categories with low added value, we may not invest in smart factories. Therefore, our strategy is to decide whether to adopt intelligent production based on the characteristics of each category.
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