To The Moon

$XIAOMI-W(01810)$ Q3 financial report released yesterday was the best in recent years, but why did the stock price plummet despite the good report?

The highlight of Q3 was the improvement in profit margin. Although Lei Jun had previously set a target of 5% net profit margin for smartphones, he did not mention that the overall profit margin would be so low. Therefore, the increase in revenue from services, such as game advertising, could achieve good results. Of course, the more important aspect is that Xiaomi now focuses on both the low-end and high-end smartphone markets. By maintaining profit in the low-end segment and creating service revenue through ecosystem maintenance, Xiaomi competes with top competitors in the high-end smartphone market. This strategy has proven effective in Q3, and the successful sales in Q4 are also expected to result in decent performance.

The gross profit margin of smartphones has been adjusted. During a conference call, the company mentioned that the gross profit margin of smartphones reached 16% due to a correction of a 0.8 percentage point impairment from last year. The correction resulted in a net increase of 1.6 percentage points. In reality, the profit margin is around 14%, which aligns with Xiaomi's disclosed situation of increased shipments and decreased average selling price (ASP) in the European, Indian, and Latin American markets (as these markets mainly focus on cost-effectiveness).

Will investors sell off heavily due to this detail?

Obviously, it is not that simple. Personally, I believe there are several reasons for the significant drop:

1. "Sell The Fact." Because the market had high expectations for Q3 performance before the financial report (or some investors knew that the report would be good), the stock price had already risen more than 30% in advance. The current drop is simply profit-taking. These investors are not too concerned about whether the gross profit margin is adjusted by one or two points.

2. Weight adjustment of the $HSTECH(HSTECH)$ The recent outstanding performance of Xiaomi Group has exceeded the 8% weight limit of the Hang Seng Tech Index (reaching over 11%), so it needs to be reset. Just the outflow of passive funds will amount to $480 million USD, based on the average trading volume of the past three months. Not to mention that active funds will also need to rebalance due to this.

3. Suspension of share buybacks. Xiaomi Group conducted a large number of intensive share buybacks from late September to early October, with a daily maximum of 49 million shares. The buybacks this year accounted for 0.36% of the outstanding shares. However, there have been no buybacks since October 6th (there is also a silent period during the financial report release). At the current price, the company may feel that there is no need for further buybacks in the short term.

In the short term, there may be some impact from points 2 and 3 on the market situation, but this does not change the fundamentally positive situation for Xiaomi.

Investors also know that car manufacturing requires a significant cash flow and has a considerable impact on profit margins (Q3 adjusted profit was RMB 6 billion, excluding RMB 1.7 billion in car manufacturing expenses). However, although Xiaomi's entry into the car market may be delayed, the initial impression of its appearance is good based on released images. The company also stated that it is operating at a normal pace and will deliver cars in H1 2024. This has generated some anticipation.

There may be short-term fluctuations, but Xiaomi shareholders do not need to rush to sell.