Company Description
Xiaomi is one of the world’s fastest growing internet companies with a strong focus on producing innovative and affordable products and services. Xiaomi generates over 80% of its revenue via hardware sales (smartphones and Internet of Things – IoT devices) but is increasingly generating more revenue via higher margin internet services (advertising and other value-added services). Xiaomi has a strong direct sales channel that enables it to keep prices of its products low and is a key competitive advantage of the company.

Overall, we are positive on the outlook for Xiaomi and anticipate continued strength in smartphone sales driven by its strong position in India and other emerging markets as well as potential market share gains in China with the launch of premium models. We expect this and the increased sales of IoT and lifestyle products to translate into a larger user base, increasing the monetization potential for high margin internet services. We expect cost to remain fairly stable and as a result, earnings should increase with continued operating leverage.

 

 

 

Investment Thesis
Xiaomi is the 4th largest smartphone provider globally and a fast growing internet company. With its strong position in key emerging markets, we are positive on the company’s outlook and expect strong hardware sales to grow its user base, driving high margin internet service revenues going forward.

  • Positive sentiment – We remain positive on the outlook for Xiaomi driven by its strong position in India and other emerging markets as well as potential market share gains in China with the launch of premium models. We expect this and the increased sales of IoT and lifestyle products to translate into a larger user base, increasing the monetization potential for high margin internet services. We expect cost to remain fairly stable and earnings should increase with continued operating leverage. Some key risks to operations and earnings include its ability to grow and maintain active users of its MIUI platform and reliance on US suppliers for key components in its smart devices and a potential trade war or supply chain disruption could severely hamper operations.
  • Xiaomi is more than hardware – We see over 70% of the company’s value in the fast-growing high margin internet services space as we expect Xiaomi’s user base to grow from to 306mn users by 2019 (171mn in 2017). We see significant monetization opportunities from the enlarged user base and the potential for monetization outside of China (currently not monetized).
  • Shipments of smartphones and IoT devices could be better than expected, increasing the overall number of devices within the ecosystem.
  • Active user numbers could grow faster than expected
  • Monetizing of users outside of China could see a spike in top line growth

 

A leading smart device and IoT provider in China
Xiaomi is one of the world’s fastest growing internet companies with its strong focus on producing innovative and affordable products and services. Xiaomi is popular for its attractively-priced smartphones and smart hardware that is interconnected through its large Internet of Things (IoT) ecosystem. Xiaomi has grown to become the 4th largest smartphone vendor globally and in mainland China and has become the largest smartphone company in India. In 2017, Xiaomi’s global smartphone shipments topped 91.4mn and the company grew its active users of its MIUI platform to 170.8mn. Xiaomi has a strong direct sales channel that enables it to keep prices of its products low and is a key competitive advantage of the company. Xiaomi’s growth is driven through its Triathlon business model based on 3 different aspects:

  1. Hardware – Xiaomi’s commitment to its mission to ‘build amazing products with honest prices’ has allowed it to see strong user growth with revenue from its Smartphones and Lifestyle products providing for a lion’s share of their revenue.
  2. New Retail – the company operates an omni-channel new retail distribution platform designed to allow easier sales of products along with building a digital relationship with its users.
  3. Internet Services – Xiaomi provides internet services to its users through its MIUI platform, a mobile operating system built upon the Android kernel. The company’s three pillar business model is designed to form a synergistic relationship, with world-class products driving traffic towards its new retail platform and using their internet services, provide a platform for user interaction, engaging users to increase user retention along with allowing for increased monetization opportunities.

Looking ahead, smartphone growth is expected to rise globally driven by increased adoption in developing countries (from a CAGR of 3.8% in 2015-2017 to a CAGR of 4.6% in 2017-2022 according to IDC). We anticipate that Xiaomi with its affordably priced smart devices, in key fast growing markets, can sustain an above-industry growth rate over the medium term. In Q4 2017, while major global smartphone companies saw a decreasing year on year growth of shipments, Xiaomi continued to see a strong increase in unit shipments compared with its competitors. Additionally, with the launch of new premium models in 2018, we expect further market share gains in key markets like China. As one of the largest global IoT device vendors, we expect Xiaomi to further benefit from the fast growth in the Global IoT space as well.