Summary in seconds
I keep my Hold note for Xiaomi Corporation (OTCPK: XIACF) (OTCPK: XIACY) [1810:HK] actions.
My previous article published on October 25, 2021 detailed the main takeaways from Xiaomi Corporation’s 2021 Investor Day held on October 19, 2021. In this article, I focus my attention on recent developments in the industry. company following my previous update and I give my updated take on Xiaomi. Society.
I continue to view Xiaomi Corporation as a holdover, based on my mixed view of the prospects for the company’s future growth. I am positive about the introduction of the new flagship smartphones of the Xiaomi 12 series, but I am negative about the risk of tougher than expected competition from competitors like Honor.
New flagship smartphones were introduced in China last month
On December 28, 2021, Xiaomi Corporation revealed in a press release that it “has launched its latest flagships, the Xiaomi 12 series (Xiaomi 12, Xiaomi 12 Pro and Xiaomi 12X), in mainland China”.
The new flagship smartphones of the Xiaomi 12 series are attractively priced in the range of 3,199 RMB to 5,399 RMB ($ 502 to $ 847). Notably, the previous series of Xiaomi 11 flagship smartphones launched in January 2021 were offered at a much higher price of 3,999 RMB for the cheaper variant. Despite the attractive price tag, all three new smartphones offer premium features like a triple camera, 120Hz screen refresh rate, fingerprint unlock, and fast charging, among others. Specifically, Xiaomi Corporation mentioned in the press release that “Xiaomi 12 and Xiaomi 12 Pro both feature Qualcomm’s most advanced chipset to date, the Snapdragon 8 Gen 1 mobile platform”; Xiaomi 8X, the cheapest of the three, uses a Snapdragon 870 instead.
Prices of the new flagship smartphones of the Xiaomi 12 series
Source: Xiaomi Corporation press release of December 28, 2021
In my October 25, 2021 article for Xiaomi Corporation, I noted that “it has set itself the goal of becoming the global leader in the smartphone market in three years or by 2024”. Xiaomi Corporation’s ‘even for less’ positioning (similar functionality to other high-end smartphones but at a lower price) in the global smartphone market, as evidenced by the launch of the new Xiaomi 12 series, is a factor. positive that supports its long-term market share target.
More importantly, Xiaomi Corporation is able to adopt a volume-driven strategy that places less emphasis on the profitability of its smartphone business, due to the cross-selling synergies between its different businesses. As an illustration, the gross profit margins of Xiaomi Corporation’s smartphone and internet services business segments were 12.8% and 73.6%, respectively, in the last third quarter of fiscal 2021. Xiaomi Corporation “sacrifices” its gross profitability for its smartphone business by selling its phones at attractive prices involving lower margins. But Xiaomi Corporation is more than offset by an increase in high margin revenue associated with the internet service segment as it increases its smartphone user base and sells more internet services to such users.
Market consensus expects Xiaomi Corporation’s overall gross margin to increase +310 basis points over the medium term, from 14.9% in fiscal 2020 to 18.0% by 2025 , according to data from S&P Capital IQ. This expected improvement in Xiaomi Corporation’s gross profitability will depend on the company’s ability to increase its market share in smartphones and sell more high-margin internet services to its users or customers.
In the next section of this article, I discuss Xiaomi Corporation’s loss of market share in the Chinese smartphone market.
Loss of market share in the domestic market
In my previous article from October 25, 2021, I noted that the biggest competitive threat in the smartphone market for Xiaomi Corporation comes from “Honor, a former sub-brand of rival Huawei that was sold to third parties in November 2020. “. I also noted then that “Honor has already overtaken Xiaomi to become the third largest smartphone player in China in terms of sales as of August 2021”.
The latest comments from management and industry market data from Xiaomi Corporation indicate that Honor continues to gain traction in the Chinese smartphone market.
During its Q3 2021 earnings call on November 23, 2021, Xiaomi Corporation revealed that the company’s share of the smartphone market in China had increased from 16.8% in Q2 2021 to 13.8% in third quarter 2021.
Data from both Counterpoint search and Canalys suggest that Honor edged Xiaomi Corporation to become the third largest player in the Chinese smartphone market in the third quarter of 2021, and that Honor’s market share would have roughly doubled in QoQ during this quarter.
A JPMorgan (JPM) seller-side analyst noted during Xiaomi Corporation’s third quarter investor briefing that “it looks like Honor has entered and has taken a good market share in a short period of time.” In response, Xiaomi Corporation acknowledged that “we have a lot of competition” and mentioned that “China is the most competitive market”. Specifically, Xiaomi Corporation also pointed out in the latest earnings conference call that strong sales from competing iPhone 13s and efforts to optimize production and distribution in the face of chip shortages are also hurting its sales. of smartphones and its market share in China.
In reference to Canalys Research cited above, the research firm noted in its Q3 2021 China Smartphone Market Report that Honor “is successfully improving Huawei users, supported by the breadth of its distribution partnerships.” . More significantly, Canalys pointed out that Honor “is now sending clear signals that the brand has come back after its separation from Huawei, and those signals will go beyond China.”
I agree with Canalys believes that Honor may continue to gain market share at the expense of rivals in Chinese and international markets in the future, which is negative for the future growth prospects of Xiaomi Corporation’s smartphones.
I like the fact that Xiaomi Corporation always executes well its strategy of introducing high-end smartphones at an attractive price, as seen with the new flagship smartphones of the Xiaomi 12 series. If Xiaomi Corporation can continue to increase its number smartphone users, it is in a good position to improve profitability by generating higher revenues from its Internet service segment through cross-selling.
However, Xiaomi Corporation’s loss of market share in the Chinese smartphone segment in the third quarter of last year suggests that competitors are getting their money’s worth, and a formidable rival is Honor, which was previously the sub-brand of Huawei. The main risk in the future is that Xiaomi Corporation will also cede market share to its rival in international markets.
Xiaomi Corporation is considered an expectation based on my analysis.