We could still remember the first exposure to Xiaomi was by ordering online their smartphones many years ago. They managed to create a cult branding as most of their smartphones are sold within minutes during those days. It is not surprising as they have most of the features of an iPhone but yet is trading at a fifth of their price.
Source: Xiaomi Homepage
Xiaomi has since evolved from the early days and has now in their product catalogue, a mind-boggling amount of household appliances and gadgets, on top of their smartphone range. The household appliances are connected to the Mi Home and the data analytics from the usage of the products would be Xiaomi’s edge compared to their competitors.
The more prominent products in their line-up will be smartphones, smartwatches, robot vacuum cleaners, smart tv, fridge, air-conditioners, laptops and washing machines. Their products are in more than 80 markets.
Xiaomi’s vision is not to make huge profits from the sale of hardware as they have explicitly stated they would not surpass a net profit margin of 5%.
With their good value and quality products, they hope to link all the devices to their ecosystem, they would then be able to monetize from the strength of their ecosystem.
This strategy is similar to Gillette selling the shaver cheaply and earning huge margins from the sale of blades.
Source: Xiaomi Q3 Results Announcement
The 3 main divisions for Xiaomi’s business will be:
- Smartphones
- IoT and Lifestyle Products
- Internet Services
Source: Xiaomi Annual Report-iFast Compilations
Smartphones
Smartphones will still be the core focus of their business as it makes up almost 60% of the company’s revenue. There has been a year on year Q3 drop of shipment amount by 5.8% in the number of units. This is mainly attributed to the supply chain issues that have permeated industry-wide.
Nonetheless, Xiaomi’s smartphones are ranked Number 2 in the world with a 17% market share and just fall short of Samsung but ahead of Apple. They are seeing great growth- north of 50%- in Latin America, Africa and Europe. They are ranked Number 1 in India and No 2 in Europe.
With its differentiation with the MI range for higher-end users and Redmi for the mass market, it has embarked on a successful outreach based on the numbers published. Moreover, they were able to grab market share and be a beneficiary from Huawei’s decline. Their business is progressing well on the international front with 53% generated from overseas and the numbers are likely to grow further in the future.
Source: Xiaomi Q3 Results Presentation
IoT and Lifestyle Products (AIoT)
Xiaomi’s current business vision is a duo core approach to grow the business using the “Smartphones x AIOT” strategy. So the core business of smartphones and AIot would provide the business with growing revenue and profits. The internet services which is a high margin business would be the complement driving the overall growth and profitability profile.
AIot means Artificial Intelligence (AI) Internet of Things. To have a better understanding of what is the Internet of Things is, we could take the example of your air-conditioner. IoT would be communication and linkages between devices. For this analogy, it would be using your smartphone on an app to control your air conditioner at home while you are on the road.
As for Artificial Intelligence, it will be a level up, an example will be your home robot vacuum. Through their sensors and AI capabilities, they will be able to map out a cleaning route map for your daily cleaning needs at a particular time that you set.
Source: Xiaomi
Currently, Xiaomi has 400 million devices that are connected to their AloT platform making them the King of IoTs with no company that we know of close enough to dethrone them. The connection of devices saw a healthy 33% growth year on year. Their household products are wide-ranging and affordable- it is slowly invading the households with their attractive proposition. These could be illustrated through the chart above.
Internet Services
Internet services are the highest margin business for Xiaomi with gross margin netting 73%. The revenue sources are primarily from advertising and gaming.Â
They have their own smartphone operating system, the MIUI, which they have done iterations from the android open-source version to cater to the needs of their users. The global MIUI monthly active users exceeded 500 million in Q3 2021. With greater MAUs for MIUI, they are able to monetise the ecosystem through self-developed apps that would act as advertising distribution channels. The growth of the MAUs for MIUI has been fabulous and there is already a 26% increase from the end of 2020 given the latest Q3 figures.
There is also the move to e-commerce through Youpin and good take up for their tv paid subscription. Xiaomi TV has been selling really well and is number one in China currently.
Nothing is heard of moves to Fintech which promises good margins but they do have a stake in Tiger Brokers.
The internet services will be the driver to differentiate them from just a mere electronics product maker which was the argument when they IPO in 2018 at $17 HKD. Investors deem it as overvalued as they will be trading at 23x forward PE and 40x historical PE and they do not see the vision of the ecosystem. The price was bashed down to below 9 dollars before a great recovery came into place.Â
We will be looking closely at the progress and growth of their internet services business that we opine will be the moat that Xiaomi have against their competitors– to support a higher valuation.
Apple of China
Xiaomi has always been compared to Apple as it is replicating what Apple has been doing successfully. They have the MI stores which feature bright lights and a minimalist touch, and products fashioned with a sleek design.Â
However, they are getting out of this clone and trying to craft an identity of their own. They are now evolving to be the King of IoTs by trying to plant their products in every household. The number of products they carry well surpassed Apple’s few.
Another difference would be their strategy of having more Mi Stores to penetrate the rural areas where customers preferences for sales experience could be different. In contrast, Apple tends to have just a few but iconic Apple Stores carefully selected around the globe at the best locations.
Xiaomi also has also their own self-designed apps and gaming division to drive further profit growth.Â
In the latest Q3 numbers, the research and development to revenue for Xiaomi have also increased to 17% from 14% last year which signifies the great transformation is still ongoing. Apple’s figure for this metric is just 7%.
On the same note, they are both venturing into the electric vehicle market where Dyson decided to put a stop after economic considerations.
Ambitious Plans and Concerns
Xiaomi has recently announced 2 ambitious and strategic plans which could be a downer if they do not pan out.Â
The first plan would be a move into electric vehicles and they intend to commit US $10 billion (Xiaomi current finances will be able to stomach this amount even if it is a dud) to this venture over the next 10 years.
Lei Jun has explicitly stated he would be focusing on this venture and would be the swansong to his career. He has in recent times resigned from many of the companies boards which we hope is due to his focus change rather than political issues.
China’s recent regulatory policies would be one of our main concerns, but so far, it seems Xiaomi’s have been able to navigate it well. However, big data is one of their core assets, if China’s authority decided to clamp down on it and impose restrictions, it will be a big blow to the company’s business model.
Also, geopolitical problems could submerge- US, India and Europe relations with China- and could have an effect on the sales of Xiaomi’s products.
The second plan will be to have 30000 stores primarily in china in the next 2-3 years. Currently, their store count is at 10000. The first thing to come to our mind will be the CAPEX and recurring costs to manage the stores. It would be both an online and offline model that they would be embarking on, likely the new stores would be able to showcase their electric vehicles in the future.
The target would be doable as it is all about the willingness to farm out funds for the store opening. In recent times, they managed to open 1000 stores in a day.
Financial Metrics
| Stock/Symbol | Price Earnings | Price to Book | Debt to Equity | Dividend Yield | Return On Equity | Return on Invested Capital | Market Cap US$ |
| Xiaomi 1810:HK | 16 | 2.9 | 15% | Nil | 20% | 17% | 60 Billion |
Source: Reuters
Looking at the financial metrics, we have the view that we are getting Xiaomi at a reasonable valuation with the growth potential of their network effect crystalizing with sustainable growth in their internet services business.
Their execution has been on track so far but the move to EV being a potential game-changer would be arguable. However, there could be opportunities to cut losses if things go awry as only RMB 10 billion have been deployed so far.
Source: Xiaomi Q3 2021 ResultsÂ
Xiaomi, like many of China’s behemoths- Tencent and Ali Baba- is also a big venture capitalist. They would usually invest in their vendors so they have better alignment with these companies to create a win-win situation. So far the total investments plus cash in their balance sheet is in the tune of around 25 billion US dollars which constitutes 40% of their market capitalisation.Â
The financial strength of Xiaomi will be strong enough to weather any storms coming their way as they have 12 billion US dollars cash in their coffers.
On the whole, current valuation will be deemed reasonable given the analysis of their financial metrics and strong financial position.
Charting Point Of View
Source: moomoo- Weekly Chart of Xiaomi
Looking at the charts, the downtrend is still intact. We hope to see consolidation around the 17-18 levels by forming a base that will give us confidence in accumulating. $17 would be critical support as that is the IPO price in 2018.
Upside targets, for now, will be $20-$21 followed by $25.
Summing Up
Xiaomi is currently the undisputed King of IoT with more than 400 million devices connected to their ecosystem. With their value proposition products, the growth of their ecosystem would be on a consistent uptrend. They have not been able to step into US shores due to geopolitical concerns.Â
Nonetheless, their products have been well-received worldwide with more than 50% of their revenue from overseas. Their internet services which is the huge growth component for their business model have seen consistent growth through the quarters and their overseas growth for the latest quarter was at 110% YoY.
With valuations not looking steep and at a PE of 15X, it looks good value given the potential growth ahead.
Nonetheless, the move into the Electric Vehicle business and the embracement of the offline distribution on a huge scale –10000 stores to 30000 stores– would not be easy to access if such moves would be successful.
Their financial metrics are sound and with 40% of their market capitalisation backed by investments and cash, it provides a margin of safety. Their track record for their investments has been stellar with their return on invested capital coming in at 17% and Return on Equity netting 20%.
Charting aspect wise, it is trading near their IPO price of $17 which should provide a psychological support level and we certainly hope it consolidates at current levels- form a base and move up from here. A breach of $17 would be detrimental to the chart structure.
In light of all the factors, we find Xiaomi at its current levels is reasonably priced and looks attractive given the growth catalysts embedded.
Disclaimer:
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