Xiaomi: Above-Expectations Performance And Bullish Outlook Justify A Buy (Rating Upgrade)

seekingalpha08-22

Xiaomi's normalized EPS grew strongly by +19.0% YoY to RMB 0.243 in Q2 2024, as its smartphone and EV businesses performed well.XIACF's prospects are good, considering expectations of further market ...

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Justify A Buy (Rating Upgrade)\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-22 23:02 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4716461-xiaomi-above-expectations-performance-and-bullish-outlook-justify-a-buy-rating-upgrade><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Xiaomi's normalized EPS grew strongly by +19.0% YoY to RMB 0.243 in Q2 2024, as its smartphone and EV businesses performed well.XIACF's prospects are good, considering expectations of further market ...</p>\n\n<a href=\"https://seekingalpha.com/article/4716461-xiaomi-above-expectations-performance-and-bullish-outlook-justify-a-buy-rating-upgrade\">Source 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company's second quarter performance and its financial outlook.Robert Way Xiaomi Corporation (OTCPK:XIACF) (OTCPK:XIACY) [1810:HK] is now assigned a Buy investment rating. My view of Xiaomi has turned positive, considering its Q2 2024 results beat and favorable financial prospects. A comparison of Xiaomi's P/E ratio with its expected earnings growth rate suggests that the stock is trading below fair valuation. As such, I upgraded my rating for Xiaomi from a Hold to a Buy. Previously, I wrote about Xiaomi's smartphone ASP (Average Selling Price) trends and the company's investment in EVs (Electric Vehicles) in my August 30, 2023, article. The current update evaluates XIACF's recently disclosed Q2 2024 financial results. Xiaomi's shares are traded on both the Over-The-Counter market and the Stock Exchange of Hong Kong. The average daily trading values for the company's Hong Kong-listed shares and OTC shares were $200 million and $1 million, respectively for the past three months. (Source: S&P Capital IQ) Readers can choose to trade in Xiaomi's relatively more liquid Hong Kong-listed shares with US brokers like Interactive Brokers or Hong Kong brokerages such as Boom Securities. Q2 Results Beat Was Driven By The Good Performance Of Smartphone And EV Businesses Xiaomi revealed the company's most recent second quarter financial performance in its results announcement released on Wednesday, August 21. Both its top line and bottom line for Q2 2024 beat the market's expectations. The company's actual Q2 2024 revenue of RMB 88,888 million was +2.2% above the sell side's consensus estimate of RMB 87,021 million as per S&P Capital IQ data. XIACF's top line growth also accelerated from +27.0% YoY in the second quarter of 2023 to +32.0% YoY in the second quarter of this year. The smartphone business was Xiaomi's largest revenue contributor and best performing division in the latest quarter. Revenue for XIACF's smartphone business increased by +27.1% YoY to RMB 46.5 billion in Q2 2024, which represented 52.3% of the company's top line for the recent quarter. In comparison, sales for the company's IoT & lifestyle business and internet services business expanded by +20.3% YoY and +11.0%, respectively in Q2 2024. The smart EV business is newly established, so there is no YoY performance comparison available. Xiaomi's revenue growth acceleration and top line beat for Q2 2024 was largely attributable to the smartphone business' substantial increase in shipment volume and market share gains. The company's worldwide smartphone shipments rose by +28.1% YoY to 42.2 million units in the second quarter of the current year. In its earnings presentation slides, XIACF also disclosed that its worldwide smartphone market share expanded by +180 basis points YoY to 14.6% for Q2 2024. XIACF's normalized EPS or earnings per share grew by +19.0% YoY to RMB 0.243 for Q2 2024. Its second quarter non-IFRS (International Financial Reporting Standards) adjusted EPS exceeded the analysts' consensus forecast of RMB 0.199 per share by +22.1%. (Source: S&P Capital IQ). Operating margin for Xiaomi improved by +175 basis points QoQ and +63 basis points YoY to 6.62% in the second quarter of 2024. The company's actual Q2 2024 operating margin beat the market's consensus projection of 4.81% by +181 basis points based on S&P Capital IQ data. Xiaomi's operating margin and EPS beats for Q2 2024 were driven by the smart EV business' better-than-expected gross profit margin. XIACF's smart EV business registered a gross margin of 15.4% in the recent quarter. This was much higher than the company's prior EV business gross profitability guidance in the 5%-10% range according to an earlier April 23, 2024, Reuters article citing the CEO's comments. Stock Is Undervalued In View Of Favorable Prospects XIACF's outlook is positive, and the company's shares are attractively valued. The current consensus FY 2023-2027 normalized net profit CAGR forecast for Xiaomi is +27% as per data sourced from S&P Capital IQ. I think it is reasonable that the market is anticipating strong earnings growth for XIACF in the future. The key factors that supported Xiaomi's Q2 2024 bottom line beat are likely to remain as major drivers of the company's future financial performance. The increase in the number of physical outlets and the introduction of new products will likely put Xiaomi's smartphone business in a good position to gain market share going forward. In its Q2 2024 results announcement, Xiaomi highlighted its \"new retail strategy for 2024\" involving the growth of \"offline retail stores in Mainland China.\" As a reference, XIACF's share of the Mainland Chinese offline smartphone segment rose by +1.4 percentage points QoQ to 10.4% in Q2 2024. (Source: earnings presentation) In the past, Xiaomi was more focused on the sale of its smartphones through online channels. The company's new approach of placing a greater emphasis on offline sales channels will most probably boost its smartphone business' future revenue growth. On the other hand, XIACF has the potential to increase its smartphone market share with new offerings. At its Q2 2024 earnings call, Xiaomi shared that around 42% of its recently launched foldable phone MIX Flip's buyers had previously been using Apple Inc.'s (AAPL) phones. This serves as a good illustration of how XIACF has been able to expand its user base with new products. It is speculated that the company's new smartphone series (Xiaomi 15) will be available in the market in early-Q4 2024, and this could spark a new round of share gains for XIACF's smartphone business. Separately, the financial prospects for Xiaomi's new smart EV business, which will introduce its first EV (Xiaomi SU7) towards the end of March 2024, are good. The company's smart EV business registered a delivery volume of 27,307 units in Q2 2024, and it has guided for a full-year 2024 delivery volume of 120,000 units. (Source: earnings presentation slides) In other words, Xiaomi sees its EV delivery volume ramping up significantly with expectations of delivering 92,693 units in 2H 2024 (or more than 46,000 units per quarter in Q3 2024 and Q4 2024). XIACF also stressed at its Q2 2024 results briefing that the smart EV business' \"future gross margin will definitely be better than the current level (15.4% for the second quarter).\" At the company's most recent quarterly earnings briefing, Xiaomi noted that its \"costs will come down\" with \"such big volume\" and mentioned that \"some cost pressures\" related to the \"supply chain\" affected its Q2 performance. In other words, positive operating leverage effects and a potential decrease in supply chain-related expenses going forward will likely allow Xiaomi's smart EV business to report higher gross margins in the subsequent financial periods. The market is now valuing Xiaomi at 17 times consensus next twelve months' normalized P/E. (Source: S&P Capital IQ) As mentioned above, the sell-side's projected FY 2023-2027 earnings CAGR for the company is +27%. This implies that Xiaomi's PEG (Price-to-Earnings Growth) valuation metric is an appealing 0.63 times. Key Risks Investors should consider certain risk factors before contemplating a potential investment in Xiaomi. The first key risk is that the company's smartphone business underperforms because its new products fail to gain traction with consumers. The second key risk is that Xiaomi's smart EV business isn't able to meet its delivery volume guidance. This might translate into weaker sales contribution and lower-than-expected gross margin (as a result of negative operating leverage) for the EV business. Conclusion I have turned bullish on Xiaomi. The company's Q2 results surpassed expectations, and its financial outlook is positive. More importantly, the stock is undervalued, considering the rule of thumb that a 1 times PEG ratio is indicative of fair valuation.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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