Xiaomi: Focus On 2022 Outlook And Share Repurchases

historyiong
2022-04-24

$XIAOMI-W(01810)$

Summary

  • Xiaomi's smartphone business segment might struggle to perform in 2022 taking into account stiff competition in China and weak consumer demand.
  • The company's R&D expenses could rise sharply this year, with the increase in staff strength for its new electric vehicle business venture.
  • I continue to assign a Hold investment rating to Xiaomi; the company's 2022 outlook isn't great, but its current valuations are reasonably fair

Elevator Pitch

My Hold investment rating for Xiaomi Corporation (OTCPK:XIACF) [1810:HK] stays unchanged as permy earlier updatefor the company. In my prior article for Xiaomi, I touched on its loss of market share to Honor in the China smartphone market and the launch of new flagship smartphones.

In a nutshell, my view of Xiaomi as a potential investment candidate is mixed. On one hand, the business outlook for Xiaomi this year is negative, taking into account potential price competition and weak consumer demand for the smartphone business and higher R&D expenses incurred for the new EV business. On the other hand, Xiaomi is trading towards the low end of its historical P/E multiple range, and the company has recently announced a new share repurchase program which could potentially help to support the company's share price to some extent.

Core Smartphones Business Segment Is Expected To Be Under Pressure

The latest industry data suggests that Xiaomi is still facing intense competition from its rival, Honor. According toresearchpublished byCounterpoint, Honor's China smartphone market share grew from 9% in the fourth quarter of 2020 to 15% in Q4 2021. During the same period, Xiaomi's share of the Chinese smartphone market only increased slightly from 12% to 13%.

Xiaomi also highlighted at the company's most recentQ4 2021 resultsbriefing that the smartphone segment's 2022 gross profit margin is dependent on "what's going to happen to the competitor landscape when supply become more normalized." In other words, there is a risk of greater price competition when current supply chain disruptions in the smartphone sector are eased going forward.

Another key headwind for Xiaomi is the weak demand for smartphones in China and foreign markets. CNBC article cited comments from a number of analysts who highlighted that smartphone sales in the Chinese market are expected to drop in the second quarter of 2022 "as a resurgence of COVID cases could dampen consumer sentiment."

In international markets, demand for smartphones are very likely to be lackluster, as inflation erodes the purchasing power of consumers. In the company's FY 2021 results announcement, Xiaomi revealed that its "revenues outside mainland China are mainly from India and Europe", and these two markets are experiencing high levels of inflation. Inflation in India recently surged tothe highestin almost one year and a half; while Eurozone's inflation rate was as high as7.5%.

In summary, Xiaomi's smartphone business faces pressures relating to intense competition and lackluster demand this year. I stressed that Xiaomi has "to grow its market share in smartphones and cross-sell more high-margin internet services to its users or customers" to improve its future profit margins. In other words, a potential slowdown in Xiaomi's smartphone segment this year might also hurt the growth prospects of its internet services business segment to some extent as well.

New Electric Vehicle Venture Will Be Negative For Company's 2022 Profitability

I mentioned in my article for Xiaomi that the company has a goal of having "its first electric vehicle model enter mass production in the first half of 2024." In that article, I also warned that the new electric vehicle venture might "be a significant drag on its earnings & cash flow in time to come."

Xiaomi revealed at its fourth-quarter earnings call that the company now has more than 1,000 employees working in the research & development team for the electric vehicle business. The company also added that the "new growth area like electric vehicles" is where it will "continue to put more R&D (Research & Development) dollars" in 2022.

Share buybacks are one of the indicators of undervaluation, and let's see if this is the case for Xiaomi.

Xiaomi's valuations appear to be undemanding on a historical comparison. Since the company listed its shares on the Hong Kong Stock Exchange on July 9, 2018, Xiaomi has traded between 10.6 times and 47.9 times consensus forward next twelve months' P/E according to historical valuation data sourced fromS&P Capital IQ. The market currently values Xiaomi at 12.2 times consensus forward next twelve months' P/E, which is at the lower end of its historical valuation range.

But Xiaomi seems more fairly valued, if one compares its forward P/E multiple with its key financial metrics. The sell-side analysts forecast that Xiaomi's normalized earnings per share will grow by a CAGR of +12% for the FY 2022-2024 period as perS&P Capital IQ, which translates into a P/earnings-to-growth or PEG ratio of around 1.0 times.

From a qualitative perspective, Xiaomi is still very much a hardware company with its core smartphone business segment generating a substantial proportion of its overall revenue and earnings as highlighted earlier. This limits the valuation multiple expansion potential for the stock, as the market is typically only willingly to assign higher valuation multiples to listed companies which earn most of their top line from asset-light, recurring revenue streams.

Bottom Line

Xiaomi is a Hold. Its valuations are fair but not exactly cheap based on the PEG valuation metric, and there is a good chance that the company's 2022 financial performance might not meet market expectations considering various headwinds (e.g., increase in R&D expenses, the smartphone business' weakness, etc.).

Resource:SeekingAlpha

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

  • skyyyyy2001
    2022-04-26
    skyyyyy2001
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    2022-04-26
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    2022-04-25
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    2022-04-25
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    2022-04-24
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    2022-04-24
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    Add value to shareholders
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