To The Moon

Over the past few quarters, the$Apple(AAPL)$ $XIAOMI-W(01810)$ mobile phone industry has faced the double pressure of volume cuts and price declines. Xiaomi's revenue growth rate also continued to decline for 6 quarters, and there was even a loss in net profit from the mother in Q3 2022, but the trough period was finally overcome.

According to the 2023 Q3 earnings report, Xiaomi's revenue was 70.89 billion yuan, up 0.6% year on year. Although the growth rate was not high, this was also the first correction in six quarters, and net profit returned to the same period in Q3 2020. While profits are picking up, the gross margin of Xiaomi phones also rose to 16.6% from 8.9% last year, and the Group's overall gross margin reached 22.7%.

The slight increase in revenue and the sharp increase in profit were mainly due to the smooth clean-up of Xiaomi's inventory in the past few quarters. By the third quarter, overall inventory had decreased by 30.5% year-on-year to 36.8 billion yuan, the lowest level since the 11th quarter. At the same time, benefiting from falling prices of upstream raw materials, Xiaomi's overall gross margin has also increased dramatically.

The stability of the basic mobile phone is particularly important for Xiaomi today, because building a car is really expensive. The investment in automobile-related R&D in the third quarter was 1.7 billion yuan. Before the automobile business generated profits, all investment must be supported by the mobile phone business.

However, the automobile business like$NIO Inc.(NIO)$ $XPeng Inc.(XPEV)$  will also bring a new valuation and pricing to Xiaomi. With mobile phones, the Internet of Everything, and the imagination of intelligent cars, Xiaomi's future valuation should be over 450 billion dollars.

Just keep the phone steady

In October 2023, before Xiaomi's new product launch, Lei Jun had already preheated “This product is very strong, very strong” on Weibo. As a result, the starting price announced at the press conference was only 3,999 yuan. As soon as it was announced on the first launch on the night it was announced, it was immediately overwhelming.

I can't help but sigh that Xiaomi is still the same Xiaomi it used to be. Obviously, what Xiaomi needs to do now is stabilize its market share.

Using hardware as a traffic port to run an Internet business is the core of Xiaomi's business model. In fact, high end is not about making hardware profits, but about getting high-end users, and high-end users are corresponding to higher ARPU values. Consumption capacity per capita is certainly important in the Internet model, but in the current decline in global smartphone sales, how to stabilize market share is even more important.

Over the past year, Xiaomi's inventory clean-up has been quite smooth. Although this has caused the overall average price to fall below 1,000 yuan, the global market share has stabilized for the time being. The sales volume of Xiaomi phones in the third quarter was 41.8 million units, an increase of 4% over the previous year. It is the only brand with the second largest growth among the top five manufacturers.

In Xiaomi's revenue structure, mobile phones contribute more than 58% of revenue, IoT accounts for 29.16% of revenue, and 10.94% of Internet revenue. Therefore, the sales volume of mobile phones not only determines the stability of revenue, but also the growth of MIUI's monthly activity and internet revenue. It is important to know that service revenue is the final closed loop of Xiaomi's profit.

Internet revenue in the third quarter was quite steady, with an overall increase of 9.7% to 7.8 billion yuan, of which advertising revenue was 5.4 billion yuan and game revenue was 1.1 billion yuan. The 15.7% growth rate of advertising also validates the strong risk resistance of hardware traffic ports in the current environment.

In terms of internationalization, Xiaomi has been relatively successful. Its global market share remained stable in the top three for many quarters, and overseas internet revenue increased 35.8% to 2.3 billion yuan in the third quarter.

Although the current increase in smartphones has basically peaked,However, as a manufacturer with the third largest market share in the world, the annual net profit is around 15 to 20 billion dollars. Even with a valuation of 20 times, the final corresponding market value is as high as 300-400 billion, including IoT。

New expectations for car construction

After the penetration rate of new energy vehicles exceeds 30%, the entire industry has entered a stage of heated competition. From Tesla's price cuts to most companies in the entire industry falling into losses, the price war in the industry has intensified, yet Xiaomi is likely to succeed.

First, Xiaomi is rich. Building a car is an absolutely expensive business. Because huge capital is required to develop intelligent and autonomous driving that is about to be realized in the future, according to Xiaomi's financial report, there is 127.6 billion yuan in cash reserves on the Q3 account.

Second, Lei Jun is reliable. From the launch of Jinshan to the success of Xiaomi, Lei Jun's vision and management ability have been verified many times. As far as Xiaomi's corporate culture is concerned, large-scale corruption is unlikely to occur at present. Although this phenomenon may exist in some departments, the whole thing should be manageable.

The main losses of new energy vehicles are currently too high. First, R&D investment is too high, second, sales expenses are too high, and third, costs that cannot be clearly explained are also too high。 For example, a manufacturer in the industry still has huge expenses even though it is already heavily indebted.

Speaking of costs, I mainly want to say that after building a car, Xiaomi should be profitable soon. Having experience in integrating the mobile phone supply chain, Xiaomi should be able to do a better job in controlling costs.

Then there is intelligence and internationalization. In the mobile phone field, Xiaomi has been deeply involved in the development of software and system UI for many years, and has a deeper understanding of user needs, so it shouldn't be too bad at the car engine system of Xiaomi cars. Furthermore, the internationalization of overseas travel. The experience and management ability of Xiaomi phones successfully going overseas also shows that Xiaomi has a certain competitive advantage in going overseas.

Therefore, if the automobile sector shows expectations based on monthly sales of 15,000 units and net profit correction within two years, then the final corresponding valuation should be at least 100 billion dollars。

The future of the automotive industry

Over the past few years, everyone should be able to clearly feel the rise of independent brands. The Chinese automobile manufacturing industry is very likely to replicate the success of the mobile phone industry. The market share of foreign brands will be replaced by independent brands one after another, and Xiaomi is likely to break into the top five and become an important manufacturer of Chinese automobile manufacturers going overseas.

The automobile industry will also give birth to the mobile phone industry's Huawei, Xiaomi, OV, and Honor, so in the future, there will be companies with a supermarket market value in this industry.

First, the automobile market space is large enough. The Japanese automobile industry accounts for about 10% of GDP, and the German automobile industry is also the largest manufacturing pillar. However, domestic sales last year also reached 26.86 million units. Most of these are still mainly foreign brands.

Second, the image of independent manufacturers has changed. With the improvement in quality and user experience of independent brands$Li Auto(LI)$ over the past few years, people's stereotypes about domestic production have changed qualitatively. In the new energy sales list, with the exception of Tesla, the rest are independent brands.

Looking back at the development of the mobile phone industry, Nokia, Motorola, and Samsung were among the top five mobile phone manufacturers in 2012. Mainstream manufacturers also included HTC, Sony, and LG. However, as the technology of the industry continues to mature, the rise of independent brands has also gradually replaced overseas brands. So far, there is only one Apple foreign manufacturer among the top five domestic manufacturers, with a market share of 16% in Q3 in 2023.

If more than 80% of domestic automobile sales are replaced by independent brands in the future, this will also be a huge incremental market.

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