summary
- Xiaomi ’s push for premiumization in its products may improve its brand image.
- Xiaomi faces a number of year-over-year and QoQ challenges that may slow the company's growth rate in the near term.
- The company is entering the smart electric vehicle and humanoid robot markets, and plans to become an industry leader in the field of smart electric vehicles by 2024.
- Xiaomi’s investment and market expansion will increase the company’s revenue and profitability. Combining my analysis and valuation, I rate the stock a Buy.
Xiaomi Corporation
Investment Thesis on Xiaomi
Xiaomi (OTCPK: XIACY) is currently facing near-term headwinds similar to those faced by companies in the industry. The company's revenue fell year over year. I still believe these are just short-term headwinds facing businesses due to high inflation, weak consumer spending, high interest rates, a stronger dollar, etc. However, I do think now is the right time for investors to invest in Xiaomi, and here are the reasons why:
- Enhance its brand image by premiumizing its products.
- significant IoT services and overseas growth.
- expands the smart EV market through autonomous driving technology.
- has the potential to increase its global market share.
- improve its profitability and profit margins.
Although there are many factors and risks associated with these claims, I believe these performance, improvements and innovations will help Xiaomi grow in the technology market. Given that prices are near their lows over the past year, I think this is an appropriate time to buy Xiaomi stock, assuming market conditions ease in the coming months and even years.
Complications faced by Xiaomi
Similar to most, if not all, companies in the world, Xiaomi's company faces some complications. Macroeconomic headwinds and other complex factors contribute to global inflation, foreign exchange fluctuations. These headwinds will greatly impact Xiaomi's sales and growth rate, especially in the IoT overseas market expansion they have been doing in the past few quarters (which I will discuss in detail in the next section). The following are some of the challenges Xiaomi faces in its IoT and overseas markets:
Challenges faced by Xiaomi IoT in overseas markets
Transportation costs
Xiaomi faces significant challenges in its IoT services and overseas markets. According to Drewry, the World Container Index cost per 40-foot container was approximately $2,000 (pre-pandemic costs) in 2019-2020. However, the current shipping cost is about $6,000-$9,000 per 40 feet, a freight increase of 200-350%. According to Xiaomi's second quarter results:
"... IoT and lifestyle product revenue in overseas markets are affected by global inflation and other macroeconomic factors as demand for discretionary items such as scooters and robot vacuum cleaners increases year by year. down.
- Xiaomi's second quarter results
The high logistics costs may be caused by COVID-19 and global geopolitical issues, which affect crude oil prices, are expected to increase in the coming months. In addition to costs, Alain, Vice President, Chief Financial Officer and Chief Executive Officer of Airstar Digital Technology Lam also said that macro factors have had an impact on overseas markets:
"... Some of the macro factors we talked about, including high inflation, high interest rates, etc., have indeed affected the consumption of many of our users in overseas markets. So they cut back on some of their discretionary electronic spending, like our robot cleaners, scooters, etc.
- Xiaomi 222 second quarter financial report conference call
Having said that, high logistics costs and macro factors (affecting consumer spending) have affected Xiaomi's overseas market expansion. This can be seen in the decline in the company's revenue:
Xiaomi's second quarter results
In the company's second quarter results, its overseas market's year-on-year performance fell by 22% year-on-year, and its first-half performance fell by 12% compared with the previous year. %.However, even if Xiaomi faces these headwinds, I still believe that the decline in sales of IoT lifestyle products such as robot cleaners and scooters will not affect the company's long-term performance once the macro situation improves, as it accounts for approximately 1% of the company's revenue. 48-49%. Will
high-end affect Xiaomi’s profit margin?
Data from Xiaomi’s Q2 222 results
Author – Data from Xiaomi’s Q2 222 results
During the Q2’22 earnings call, Xiaomi mentioned that they are investing in their high-end by releasing higher quality phones strategy, such as Xiaomi MIX Fold 2 (using Xiaomi’s self-developed Micro Waterdrop hinge and flexible ultra-thin glass, enabling a 5.4 mm width expansion and a weight of 262 grams), Redmi K50 Ultra and Xiaomi 12S series and Xiaomi Buds 4 Pro (improved sound quality, noise reduction and dimensional audio so that users can experience an immersive Realistic sound like Xiaomi Mi Watch S1. Pro (with exquisite appearance, full range of fitness modes and multiple health functions).
Xiaomi gross profit margin
I think Xiaomi’s premiumization strategy is good, and the impact of premiumization will not be immediately apparent due to short-term headwinds ( I will mention them below) However, I believe that once the global economy stabilizes, consumer demand will increase. l17, Logistics costs will become cheaper However, the company's quarter-on-quarter profit margin will be 3.21% (17.33% in the first quarter of 2022). 16.77% in the second quarter of 2022), the gross profit margin fell by 2.81% year-on-year (17.26% in the first quarter of 2021, 16.77% in the second quarter of 2022), I think the gross profit margin will rise in the next few months or even in 2023 The decline continues in the first half of the year because of the holiday season in the second half of the year, And working hard to clear inventory impairment.
Xiaomi's gross margin declined due to the 618 shopping festival, China's second largest and most important shopping festival, and the strong dollar, I think, due to Diwali, Double-11 event, Black Friday, Christmas. and other activities, the company's gross profit margin will continue to decline in the second half of the year compared with the same period last year. Increasing One thing I would like to see is the increase in the company's inventory impairment. This may mean that their products are already below the book value of , but are still considered salable products. Xiaomi's inventory impairment is 1.3 billion. yen, increased to 2.4 billion yen, and inventory impairment increased by 88%. Xiaomi has cleared some inventory from its 618 incident. However, I don't think the company can remove them all in the second half of 2022. Management said this was due to lower overseas consumption and a stronger U.S. dollar, but said it was not a problem and could be cleared with adequate measures. Xiaomi will have to spend more on marketing and advertising campaigns to clear inventory or sell these items. Xiaomi invests in smart electric vehicles Enhance competitiveness – Xiaomi invests in R&D
In addition to smartphones and IoT lifestyle products, Xiaomi also hopes to expand in the smart electric vehicle market and the artificial intelligence robot market. According to Prempence Research, smart electric vehicles are valued at approximately US$1.2 billion in 2021 and are expected to reach approximately US$15.92 billion by 2030, with a compound annual growth rate of 33.28%.
In August 2022, Xiaomi announced that it would adopt independently developed self-driving technology and planned to invest 3.3 billion yen in the first phase. With a team of 500 world-class professionals, 140 test vehicles and management, we aim to become the industry leader in smart electric vehicles by 2024. Becoming an industry leader by 2024 is very ambitious for the company. I don't think they'll be able to pull off such a feat anytime soon, but I do like the idea of expanding in the smart EV market. In the absence of further updates and announcements from management, I'm optimistic about this change.
However, if they do want to enter the smart electric vehicle market, the company will need to invest more in R&D and invest more in high-cost equipment, and selling these vehicles overseas may be challenging (in emerging Asian countries (insufficient charging stations), especially Tesla (TSLA) dominates the smart electric vehicle segment in the United States. This could hinder or at least slow down the expansion of these markets.
Can they sustain these investments and equipment costs and maintenance? I think they have enough cash to pay for it. Sales this quarter were 3.8 billion yen, a year-on-year increase of 23%, and management stated that 100 billion yen will be invested in the next five years. Let's think about it this way and believe that their premiumization strategy will take effect in 2023. If not, perhaps starting in 2024, the company will have enough cash to support its R&D investments as its IoT services proliferate. A better global economy will also increase its cash, as it will spend less on logistics and return cash to investments.
Xiaomi invests in humanoid robot
Xiaomi also released CyberOne, their humanoid robot capable of bipedal movement and balance through mechanical joint motors and full-body algorithms. It can detect human emotions and reconstruct real-world 3D virtual environments using the company's self-developed audio and visual algorithms. This may sound great, but management also mentioned that the cost is too high for these humanoid robots, and it's still very early days.
I believe the cost of this humanoid robot will remain high until they do enough research on how to reduce the cost. According to MarketsAndMarkets, the humanoid robot market will be worth $1.5 billion by 2022, which represents an excellent opportunity for the healthcare industry, especially in hospitals where they can help supply food and medicine. Overall, I think the cost of the CyberOne is high, considering Xiaomi is making a product with in-house developed features. Investors should consider this, if Xiaomi succeeds in the humanoid robot market (a human-scale IF), it could add more to Xiaomi's revenue mix, which means more cash, more money to reinvest in the company , as well as its premiumization in smartphones and investment efforts in smart electric vehicles.
Xiaomi’s Notable Achievements
Xiaomi has achieved many achievements in the second quarter of 2022. In August 2022, the company entered the Fortune 500 for the fourth consecutive year, ranking 266th, up 72 spots from previous years. This is a remarkable achievement as Xiaomi has gained more recognition around the world. In July 2022, the company was selected as Forbes China's 2022 Best Employers.
At the same time, they also established the Xiaomi Joint Innovation Fund - Beijing Natural Science Foundation to support basic research on artificial intelligence , digital information and intelligent manufacturing. Here are other Xiaomi achievements investors should know about:
Growing number of monthly active users in connected devices
Xiaomi’s global MIUI (Xiaomi Mobile Operating System) MAU (monthly active users) reached 547 million in June 2022, with mainland China annual The company's MIUI MAU has grown for seven consecutive quarters, reaching 140 million.
Global smartphone industry shipments remain undisturbed
In Xiaomi’s Q2 results of 222, the company still achieved quarter-on-quarter growth and increased its global market share for two consecutive quarters from 12.5 in Q4’21 % increased to 13.8% in the second quarter of 2022, while global smartphone industry shipments fell by 9% quarter-on-quarter. Still, higher shipments don't necessarily mean more revenue, as revenue in the smartphone segment was still down 40%.
My Valuation – Why Investors Should Care About Xiaomi
Global Smartphone Market Share – Counterpoint
Starting with the valuation side, Xiaomi still maintains its position in the global smartphone market share, accounting for about 13% of the smartphone market share. %, while its year-on-year market share was 16%.That's a 19% market share decline, but it's still hovering around low double-digit numbers, which is the average market share the company has achieved over the past seven quarters.
Xiaomi's revenue fell 20% year-on-year and 4.34% quarterly, due to a 28.5% decline in smartphone revenue, a 4.5% decline in IoT and lifestyle product revenue, and a decline in Internet services revenue. was down 1%, resulting in an overall year-over-year decline of 20% (although I did mention the company's quarter-over-quarter decline, I don't think it makes sense to compare segment revenue since the first quarter of this year does not include the 618. Holidays, in plays a sizable role in Xiaomi's revenue mix).
Xiaomi's year-over-year gross profit also declined 22% as the company worked to clear inventory impairments (we talked about it before, there is still a lot of inventory to clear) as the company Intensified promotional efforts for the 618 Shopping Festival in mainland China led to an 8.7% year-on-year decrease in gross profit margin of the smartphone business and due to the appreciation of the US dollar. This is something investors need to keep an eye on, as holiday sales in the second half of 2022 could further impact its gross profit growth as products are heavily discounted.
Entering the balance sheet, Xiaomi has 28.2 billion yen in cash and cash equivalents (down 12% from last year's 32 billion yen in cash and cash equivalents), current assets of 180 billion yen, and current liabilities of 180 billion yen. 107 billion yen, which gives us a current ratio of 1.70, which is still healthy. However, if Xiaomi wants to clear its inventory, it will spend a lot of cash on marketing and allocate more of its advertising budget. The company has maintained its gross margins, which averaged 17% over the past eight quarters, meaning it has maintained its profitability despite macro factors, a stronger dollar, and the challenges I mentioned above.
Data from Xiaomi’s historical financial statements
I made a 5Y DCF model for valuation through the Gordon Growth Exit method. Therefore, my assumptions can be found below, assuming the economy will stabilize in 2 years with a CAGR of 9%. I also think the company will have better EBITDA margins with with . To do this, I used the last five years' EBITDA margin. My base case estimate on the image shown is where I expect the stock price should be in five years, and although I include both bear and bull case scenarios (and their associated share prices and percentage upside), the only difference is that I use Bear and bull markets have permanent growth rates and discount rates that are 0.5% lower/higher than the base case. However, here are alternatives to bear and bull cases:
Alternative Bear Case: For my revenue forecast, I expect revenue to grow 15% in 2022, 10% in 2023, and 7.5% in subsequent years. Once it reaches 450 billion yen or $66 billion, it becomes more difficult for the company to grow. If we forecast that the company still accounts for 13-16% of the global smartphone market, revenue growth will slow down.
I also believe that revenue will not be driven by volume but by price. Xiaomi is pushing for premiumization, and prices will naturally go higher. If the company still allocates money on R&D to make the cost cheaper, COGS expenditures will decrease. I also think that IoT lifestyle products will be more common by this time as Xiaomi releases a lot of IoT products.
For the bear case scenario, I also assume the company will maintain at least 5% before increasing to 6% by 2024, capex at least constant 2%, 1% constant D&A, and a 5Y estimated NWC of -0.2%. So, with all assumptions, our 5-year average FCF is 9% and FCF CAGR is 3% (cash will be lower in 2022, expected to be negative -22% because of how much money the company has invested, to inventory clearances, the appreciation of the U.S. dollar and the associated geopolitical risks that come with it).
To obtain the P.V. of the discrete cash flow , we discount the FCF.After running the numbers, we get a P.V. of discrete cash flow of ¥54 billion and a terminal value of ¥118 billion. Our EV is ¥172 billion (perpetual growth rate of 0.5%). After that, we add cash, investments, less debt and liabilities, plus 5.1 million shares outstanding, our implied share price is 58.4 yen or $8.51, which still has room for 20% upside.
Alternative Bull Case: For the bull case, I will use similar assumptions except that revenue will grow 15% in 2022 and 2023 and become a constant 10% in the next few years (I think it will be difficult to maintain this revenue growth, but let us assume Xiaomi becomes one of the industry leaders in smart electric cars, especially if they target the middle class, Have enough EV chargers by 2024, then this could be a possibility). This 10% portion also comes from growth in IoT services and lifestyle products. If these products sell like crazy in overseas markets, then 10% revenue growth can be achieved within 5 years, assuming market conditions have stabilized by then.
In Bull's case, I also assume the company will maintain EBITDA margins of 6% to 7% starting in 2024. The discount rate is 9.5% (assuming the global economy stabilizes, demand increases, and logistics costs return to pre-pandemic average levels of $1,750-2,000 per 40 feet). We then see a discrete cash flow P.V. of 76 billion yen, a terminal value of 217 billion yen, and an E.V. of 293 billion yen (perpetual growth rate of 1.5%). After that, we add cash, investments, less debt and liabilities, and add 5.1 million shares outstanding, we get an implied share price of 82 yen or $12, which isn't too far off from the chart above.
plus my full analysis of the company and its strengths. I would like to base my valuation on the base case and rate the stock a buy as it is currently trading below its $11 fair value for . With a 50% margin of safety, we price the ideal price at $5.51 if you want to minimize investment risk. Regardless, even with a 30% margin of safety, the stock trades at $7.72, which is cheaper than its current price. The alternative assumptions I make for the bear and bull cases are risky, so trade at your own risk.
Advice for investors
I think Xiaomi is taking steps to become an industry leader in certain markets while trying to improve its brand image through premiumization. They are driving significant IoT services and overseas growth, which can add more to the company's geographic revenue mix. They are also taking a step forward in the self-developed technology, smart electric vehicle market and humanoid robot market. I believe stocks are profitable and the headwinds are temporary. My valuation shows the stock is a Buy with decent upside. Overall, I rate the stock a Buy based on my fundamental analysis of the company.
Thank you for taking the time to read this and have a nice day!
