Xiaomi’s strong results overshadowed by falling prices

The smartphone maker’s third-quarter profit beat expectations, but its average smartphone price fell below 1,000 yuan for the first time in nearly four years

Key Takeaways:

• Xiaomi’s smartphone shipments rose in the third quarter and it gained market share for a third consecutive period, even as global smartphone shipments fell 
• The company’s forward price-to-earnings (P/E) ratio is more than 20 times, valuing it more highly than other Chinese tech giants

By Bai Xin Rui

As Hong Kong’s stock market looks set to fall for a fourth consecutive year, blue chip smartphone maker Xiaomi Corp. (1810.HK) stands out as a bright spot in an otherwise bleak setting. While most companies have fallen this year, Xiaomi’s shares are up more than 40% year-to-date as it gains market share, even as the broader global smartphone market contracts. 

Xiaomi shipped 41.8 million smartphones in the third quarter, up 4%, year-on-year, lifting its market share by 0.5 percentage points to 14.1%, according to its latest quarterly report released last week. That was its third consecutive quarterly gain in market share after several years of declines, and helped the company’s adjusted quarterly profit nearly triple to about 6 billion yuan ($840 million) – well ahead of market expectations for 4.7 billion yuan.

Xiaomi’s gains contrasted with a 1% drop in smartphone shipments worldwide in the third quarter, which included an 8.5% decline for market leader Samsung (005930.KS) and a 5.5% drop for No. 2 brand Apple (AAPL.US), according to data from Canalys. 

But the news wasn’t good enough for investors. Xiaomi’s shares slumped by 4.9% the day after the announcement as investors worried about falling prices and revenue for the company’s core smartphone business. Xiaomi’s average selling price for the last quarter fell 5.8% year-on-year to just 997 yuan, dipping below the 1,000 yuan mark for the first time since the fourth quarter of 2019. Its smartphone revenue fell 2% year-on-year to 41.6 billion yuan for the period.

Record gross margin 

Despite pricing pressure on its smartphones, Xiaomi was able to strongly lift the gross margin for its smartphone business by 7.7 percentage points year-on-year to a record 16.6% in the quarter, thanks to upgrades of its product portfolio, reductions in inventory impairment provisions, and falling prices for its core components. That helped to lift the gross profit for its smartphone business by 83.1% to 6.93 billion yuan, more than enough to offset the impact of declining smartphone revenue and lower selling prices.

Despite its falling smartphone revenue and selling prices, the company’s strong gross margin and overall sales made Xiaomi President Lu Weibing optimistic on the outlook for next year. At a meeting to discuss the results, he said Xiaomi believes the global smartphone market could return to growth in the fourth quarter after the relatively mild 1% decline in the third quarter. He predicted the growth momentum would continue into next year, forecasting global smartphone shipments would rise 5% for all of 2024.

Impressive sales for its recently launched Xiaomi 14 and its record gross smartphone margin made a Xiaomi believer of TF International’s Ming-Chi Kuo, a leading Apple analyst. He praised the company for its strong brand recognition and international nature of its business operation, which he believes make the brand more competitive than its Chinese peers. He projected double-digit growth for Xiaomi’s smartphone shipments next year, and said he expects the company to beat market expectations for its profit in the fourth quarter and next year.

Electric vehicle drive 

While smartphones are its bread-and-butter, Xiaomi is taking a big gamble by producing its own electric vehicles (EVs) that are expected to debut in the first half of 2024. The highly anticipated EVs will be powered with FinDreams batteries from BYD (1211. HK; 002594.SZ) and ternary lithium batteries from CATL (300750.SZ), according to information filed by Xiaomi with China’s Ministry of Industry and Information Technology. 

The vehicles have entered small-scale trial production, are set for mass production in December, and will be available for sale next February, according to media reports. Despite its late arrival to the EV game, Xiaomi still harbors big ambitions, aiming to become one of world’s top-five car brands in the next 15 to 20 years, Lu said.

Xiaomi Chairman Lei Jun was already eying the EV business as much as a decade ago, as part of his broader vision for creating an ecosystem of interconnected high-tech devices. In 2013 he met with Tesla (TSLA.US) CEO Elon Musk twice, and later bought Tesla EVs and invested in a number of new EV makers, including China’s own Nio (NIO.US; 9866.HK) and XPeng (9868.HK; XPEV.US). In the power field, Xiaomi has invested in battery and energy storage system maker Svolt Energy, as well as battery maker Ganfeng Lithium (1772.HK; 002460.SZ). It has also invested in next-generation solid-state batteries and battery raw materials.

Fierce competition 

But Xiaomi will be entering an EV market that is already fiercely competitive. Tesla has been trying to grab more market share with successive price cuts. Li Auto’s (2015.HK; LI.US) MEGA model has been a hit. And BYD boasts a complete EV industrial chain with tremendous cost advantages. One of the biggest threats could come from Huawei, Xiaomi’s perennial smartphone rival, which recently unveiled its own EV model S7 and has said it’s willing to sell the vehicles at a loss. 

Xiaomi’s valuation isn’t cheap either. The company currently trades at a forward price-to-earnings (P/E) ratio of 21 times and projected return on equity (ROE) of just 10.6%. That compares with lower forward P/E ratios of 18.5 for Tencent (0700.HK), 8.6 for Alibaba (BABA.US; 9988.HK) and 9.7 for JD.com (JD.US; 9618.HK), which have higher ROEs of 16.3%, 12.3% and 11.1%, respectively. Given its high valuation and likely need for big spending in the early stages of its EV foray, Xiaomi’s stock may be set for a breather after its strong recent performance.  

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