
Wen | Caihua Society
( 01810.HK)The results released in the third quarter of 2023 show that the overall gross profit margin, the gross profit margin of smartphone business and the gross profit margin of IoT (Internet of Things) and consumer products business all reached record highs. At the same time, the adjusted profit after deducting non-core funds increased by 1.83 times year-on-year, reaching 5.99 billion yuan (RMB, the same below). However, its share price plummeted by nearly 5% after the results were announced. Is Xiaomi’s performance a surprise or a joy?
In the third quarter of 2023, Xiaomi’s quarterly revenue increased slightly by 0.60% year-on-year to 70.894 billion yuan.
The quarterly revenue of the smartphone segment decreased by 2.04% year-on-year to 41.649 billion yuan, which is in line with the current global mobile phone consumption trend. The revenue of IoT and consumer goods segment increased by 8.47% year-on-year to 20.673 billion yuan; Driven by advertising revenue, the Internet service segment grew by 9.75% year-on-year to 7.756 billion yuan, of which game business revenue increased by 5.6% year-on-year to 1.1 billion yuan, while advertising revenue increased by 15.7% year-on-year to 5.4 billion yuan, as shown in the following figure.
Although the quarterly revenue growth only increased slightly, the gross profit margin has been greatly improved, among which the gross profit margin of the smart phone business segment has the largest increase, rising by 7.74 percentage points year-on-year to 16.64%; The gross profit margin of IoT and consumer goods also increased by 4.34 percentage points year-on-year to 17.83%; Due to the higher proportion of advertising revenue, the gross profit margin of the service segment also increased by 2.36 percentage points year-on-year to 74.41%.
Comparing the above figure with the following figure, although the revenue growth is not large, the gross profit scale of each business segment is very conspicuous, which is much higher than the past quarterly performance.
At the performance conference, the management explained the main reasons for the record high gross profit margin of mobile phone business as follows: 1) optimization of product mix; 2) Supply chain cost reduction — — Comprehensive factors such as falling raw material prices.
However, we are more concerned about whether Xiaomi’s inventory impairment provision decreased in the third quarter due to its large amount in previous quarters, which is an important factor affecting the gross profit margin.
Caihuashe noted that Xiaomi’s inventory impairment reserve expenditure in the third quarter of this year was 794 million yuan, down by 65.27% and 9.88% respectively compared with 2.286 billion yuan in the same period last year and 881 million yuan in the last quarter. According to Caihua Society’s estimation, the proportion of inventory impairment reserve in product income in the third quarter of this year also decreased from 3.71% in the same period of last year to 1.27%, which should play a certain role in boosting the profitability of its hardware products.
The management mentioned at the performance conference that the decrease in inventory impairment is not the main reason for the increase in gross profit margin. CFO said that in the third quarter of 2023, the impact of this factor on Xiaomi’s gross profit margin was about 0.8 points, plus 0.8 points last year, making a total of 1.6 points.
However, it should be noted that during the period, the average selling price of smartphones, Xiaomi’s main source of income, dropped by 5.78% year-on-year, falling below 1,000 yuan to 997 yuan, compared with 1,058.2 yuan in the same period of last year and 1,151.6 yuan and 1,112.2 yuan in the first two quarters of this year, as shown in the figure below.
Xiaomi explained that the decrease in the average price (ASP) of smartphones was mainly due to the strong growth of shipments in emerging markets with low ASP in Latin America, Africa and the Middle East, which was partially offset by the increase in ASP in China. According to this, it may be inferred that the lower cost is the main reason to promote its profit.
As mentioned by the management, the optimization of supply chain has reduced the procurement cost, or it is a very important reason, but the provision for impairment of inventory in the early stage has increased significantly, effectively reducing inventory, and making the net inventory drop sharply. As shown in the figure below, since September 2021, Xiaomi’s inventory impairment provision has been rising continuously, reaching a peak in March 2023, and then declining. By these two quarters, Xiaomi’s net inventory has dropped significantly.
It is estimated that the promotion of gross profit margin brought by the decline of inventory cost can last for several quarters.
Affected by the improvement of overall gross profit margin, Xiaomi’s gross profit in the third quarter of 2023 increased by 37.43% year-on-year to 16.11 billion yuan.
At the time when Xiaomi was listed on the Hong Kong Stock Exchange, in order to boost traffic, Xiaomi’s sales and promotion expenses always accounted for a large proportion of expenses. However, in recent years, Xiaomi has invested more resources in R&D to build the future with technology, so the proportion of R&D expenses is increasing. Caihua Society noticed that since the fourth quarter of 2022, R&D expenses have accounted for more than marketing and promotion expenses.
In the third quarter of 2023, Xiaomi’s R&D expenditure increased by 22.03% year-on-year to 4.966 billion yuan, accounting for 7.01% of revenue from 5.77% in the same period of last year; The sales and promotion expenses decreased by 3.00% year-on-year to 4.736 billion yuan, accounting for 6.68% of the total revenue from 6.93% in the same period of last year, as shown in the following figure.
Although its operating expenses have increased, they are still effectively controlled — — At the very least, the growth rate was much lower than the gross profit growth, so it turned losses into profits. In the third quarter of 2023, it recorded a quarterly net profit of 4.874 billion yuan, compared with a net loss of 1.476 billion yuan in the same period last year. Excluding non-core funds such as changes in fair value of investment, Xiaomi’s adjusted net profit in the third quarter actually increased by 182.89% year-on-year to 5.99 billion yuan.
After the performance reporting period in the third quarter of 2023, Xiaomi has several major events worthy of attention:
1) In October, 2023, Xiaomi announced a brand-new strategy of upgrading from "mobile phone X AIoT" to "people, cars and homes are all ecological", and released a brand-new operating system "Xiaomi surging OS".
2) In October 2023, atApple (AAPL.US)In the gap between Huawei’s release of new mobile phones, Xiaomi also released the Xiaomi 14 series in the Mainland.
3) Xiaomi Auto appeared on the website of the Ministry of Industry and Information Technology, which also made everyone have a substantial imagination about Xiaomi’s "people and cars".
At the performance conference, Lu Weibing, president of Xiaomi, insisted on several aspects of Xiaomi’s future development: high-end, internationalization, firm investment in the future, investment in technology, continuous change and upgrading of management, and the most long-term and sustained high-quality growth — — The transition from flow to quality, andTencent (00700.HK)Exactly the same.
In the first three quarters of 2023, Xiaomi’s overseas business income decreased by 16.42% year-on-year to 89.435 billion yuan, accounting for 45.2% of Xiaomi’s total income from 50%.
According to Canalys data used by Xiaomi, in the third quarter of 2023, its global smartphone delivery volume was the only positive growth among the top four suppliers, with a year-on-year increase of 2.4% to 41.5 million units, and its market share increased from 12.9% in the previous quarter to 14.1%. However, Caihua Society also noticed that Transsion, another smartphone in China, grew very rapidly, with a year-on-year increase of 39.5%.
In recent years, Xiaomi’s main achievements in overseas markets include: 1) diversified categories; 2) Expand the geographical market; 3) The global environment is not very good, and the environment it faces is complex, so Xiaomi is urged to establish a safe platform, which has gradually produced results. The map of globalization continues to expand and differentiate. For example, Africa doubled its share from last year to this year, and achieved a year-on-year growth of 40% in Latin America. Europe also experienced double-digit growth in the third quarter. Although the Indian market that everyone cares about is under pressure, its performance in the third quarter has greatly improved compared with that in the second quarter.
On the whole, the management thought at the performance conference that overseas markets have a lot of room for development. His reason is that Xiaomi has done well in some markets, such as Spain, and has achieved 32% market share, but it still has a small share in some other markets, which means there is a lot of room for expansion.
In addition, with the penetration of its mobile phones and smart home products in overseas markets, the monthly active user scale (MAU) of Xiaomi Eco has expanded, and the stock has driven the value of its Internet value-added services, which is also a big boost for Xiaomi’s service revenue to achieve a year-on-year growth of 9.75% in the third quarter.
For the future, the management indicated that it would expand the service types of overseas business, and constantly attract partners to serve global users.
Xiaomi, which has always taken the economic route, has put forward high-end changes in recent years, and Xiaomi 14 series may drive its high-end product revenue share after the fourth quarter.
However, the management admits that the high-end of Xiaomi is still in the investment period, and there is no obvious difference between the high-end and the low-end. There is a lot of room for improvement of the high-end in the future, and the scale has not yet reached the level of quantitative change to qualitative change. There is still a gap between Xiaomi’s 4000 yuan mobile phone and Samsung and Apple in the world. This is also a challenge and an opportunity for Xiaomi, and it is necessary to tap the future high-end potential.
In 2023, Xiaomi announced the latest strategy to upgrade "mobile phone XIAOT" to "the whole ecology of people, cars and homes".
The management said that the global smartphone market share will become more concentrated in the future, which may mean that some brands will quit and some brands will further expand their share. The head brand will meet the needs of different customer groups through omni-channel, all-customer service and product attraction segmentation. Xiaomi’s concept of "people, cars and homes" is to export product experiences and solutions to users in the way of driving other products to consume with a strong brand like smart cars through customer group classification, and the bottom of the solution is supported by the system of "people, cars and homes", which is the logic of its development of this concept to complete the ecological closed loop.
For the details of Xiaomi Automobile, the management said that it is not convenient to disclose it, but it roughly outlines its role in "the whole ecology of people, cars and homes":
1) People and cars are all ecological, and cars will play an indispensable role in the whole ecological chain of Xiaomi. In the future, customers will buy Xiaomi products, not single products, but product combinations, lifestyles and solutions;
2) Xiaomi automobile will cooperate with the existing mobile phone and consumer electronics products and service ecology, and the great integration of automobile and consumer electronics will drive the chemical reaction of the whole ecology, and the automobile will be fully integrated into the product and service ecology.
On the whole, Xiaomi delivered an unexpected performance in the third quarter of 2023, and also put forward the strategy and growth potential for future development. Then why did the stock price fall instead of rising after its performance?
Caihuashe believes that short-term investors take advantage of favorable shipments to make profits or a reason. As shown in the figure below, Xiaomi’s share price has continued to climb since October, and it has risen by more than 36% on the eve of the announcement of quarterly results.
Secondly, Xiaomi’s "people, cars and homes are all ecological" sounds beautiful, but it will affect its profitability in the short term, especially considering the high cost of building cars. Now "new forces" are still struggling to reach double digits for gross profit margin. Xiaomi is involved in this highly competitive track, and the short-term profit predictability is not high.