To The Moon

Bloomberg put up a strong headline news on Xiaomi’s profit beat, which prompted me to look into its financials. But alas, nothing was a surprise beat!

Xiaomi’s 4Q22 results were weak as expected. Its revenue in 4Q22 decreased by 22.8% year-on-year, mainly due to a significant decline in the smartphone segment (down 27% year-on-year), while IoT and internet services also fell by 14% and 1% year-on-year respectively. Xiaomi’s adjusted net profit (non-IFRS) dropped by a jaw-dropping 67.3% year-on-year to Rmb1.46bn in 4Q22, primarily caused by higher-than-anticipated R&D expenses in the EV business (Rmb1.1bn) and a weaker gross profit margin (GPM) in the smartphone segment due to the strong US dollar. Overall in FY22, Xiaomi’s revenue declined by 14.7% and the adjusted net profit decreased by 61.4%.

Smartphone: Still facing global demand weakness

Xiaomi's smartphone business experienced the largest decline among its business units in 4Q22. The revenue from smartphone sales decreased by 27.3% year-on-year to Rmb36.7bn, which was caused by severe decline in shipments. These declines were due to weakened demand resulting from the Covid resurgence in China and global macroeconomic headwinds, as well as efforts to clear inventory overseas. The ASP of smartphones declined by 2% year-on-year to Rmb1,121 due to inventory clearance efforts in overseas markets, but this was partially offset by an ASP increase in China as a result of premium smartphone launches.

Smartphone will likely to continue see weak demand globally due to macroeconomic headwinds as macro pressure will persist in 1Q23. Although demand in China is expected to improve in 2Q23, overseas demand remains uncertain.

While Xiaomi plans to persist with its premiumization strategy to improve blended smartphone ASP in 2023, this process has been slow and Xiaomi may face challenges in expanding its market share smoothly in premium segments due to the fiercely competitive market especially with the presence of other prominent smartphone brands such as Apple, Oppo, and Vivo.

IoT: Strong potential for rebound, but limited contribution to bottom line

IoT revenue decreased by 14.4% year-on-year to Rmb21.4bn, which was caused by weakened demand for smart TVs and certain lifestyle products, offset partially from an increase in revenue from tablets and smart large home appliances. Overseas IoT sales decreased by 23% year-on-year due to macroeconomic weakness and geopolitical tension. Similarly, China IoT sales declined by 11% year-on-year due to disruptions caused by the Covid pandemic. Nonetheless, white home appliances, tablets, and PC sales showed resilience during the Double-11 shopping festivals.

IoT business will demonstrate the fastest growth in 2023 due to a surge in China's domestic demand for IoT, including TV, tablets, and other electronics, and the expanding product line of large home appliances such as air conditioners, refrigerators, and washing machines. However, it is unlikely to have a considerable impact given its limited margin contribution. In FY22, IoT represented only 24% of the gross profit.

EV: Unlikely to be appreciated by investors

Xiaomi's long-term plans on its EV strategy, including shipments, positioning, business model and ROIC, is very unclear and may not generate any investor excitement until the company's positioning becomes clearer, particularly in the context of a weak China EV market.

Moreover, given the current scenario where China's EV demand has been slowing down and incumbents are resorting to more aggressive pricing, the challenges for Xiaomi's EV business are significant. In the next 1-2 years, R&D expenses for the EV business will continue to surge to meet its target of delivering the first EV in 2Q24F, and it will be a drag on Xiaomi's finances in the short term.

Conclusion: Murky outlook

Bloomberg’s headline news put Xiaomi in the spotlight as it amplifies Xiaomi’s profit beat, but most analysts have already revised down their expectation significantly in light of China Covid and global weak demand for consumer electronics.

To me, Xiaomi’s outlook in 2023 is lacklustre. Firstly, Xiaomi may not see significant smartphone market share gains in China due to strong competition from Honor and Apple despite the possibility of a recovery in China smartphone demand in 2023. Additionally, international demand for smartphones is expected to remain weak due to macroeconomic challenges and decreased consumer purchasing power. Although IoT may see an increase in demand in China in 2023, its profit contribution is not significant enough to make a substantial impact. Xiaomi's EV endeavours may also not provide a meaningful upside for the stock, as the domestic EV market in China is becoming increasingly competitive, and there is a weakness in end demand for automotive.

Market is no fool as well, with Xiaomi’s share price trading 3% below close.

@Daily_Discussion @TigerStars