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Elevator Pitch
I retain my Hold rating for Xiaomi Corporation’s (OTCPK:XIACF) (OTCPK:XIACY) [1810:HK] shares.
My previous article published on October 25, 2021 detailed key takeaways from Xiaomi Corporation’s 2021 Investor Day held on October 19, 2021. In the current article, I focus my attention on the company’s recent developments following my prior update and provide my updated views regarding Xiaomi Corporation.
I continue to view Xiaomi Corporation as a Hold, based on my mixed view of the company’s future growth prospects. I am positive on the introduction of the new Xiaomi 12 Series flagship smartphones, but I am negative on the risk relating to stiffer-than-expected competition from rivals like Honor.
New Flagship Smartphones Introduced In China Last Month
On December 28, 2021, Xiaomi Corporation revealed in a media release that it “launched its latest flagships, Xiaomi 12 Series (Xiaomi 12, Xiaomi 12 Pro and Xiaomi 12X), in Mainland China.”
The new Xiaomi 12 Series flagship smartphones are attractively priced in the RMB3,199-RMB5,399 ($502-$847) range. Notably, the previous Xiaomi 11 Series of flagship smartphones which was launched in January 2021 was priced at a much higher RMB3,999 for the cheapest variant. Notwithstanding the attractive pricing, the three new smartphones offer premium features such as a triple camera, a 120Hz display refresh rate, fingerprint unlock and fast charging among others. Specifically, Xiaomi Corporation mentioned in the media release that “Xiaomi 12 and Xiaomi 12 Pro both feature Qualcomm’s most advanced chipset to date, Snapdragon 8 Gen 1 mobile platform”; Xiaomi 8X, the cheapest of the three, uses a Snapdragon 870 instead.
Pricing For The New Xiaomi 12 Series Flagship Smartphones
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Source: Xiaomi Corporation’s December 28, 2021 Media Release
In my October 25, 2021 article for Xiaomi Corporation, I noted that “it has set a goal of becoming the global leader in the smartphone market in three years’ time or by 2024.” Xiaomi Corporation’s “same-for-less” positioning (similar features as other premium smartphones but priced lower) in the global smartphone market as evidenced by the new Xiaomi 12 Series launch is a positive factor supporting its long-term market share target.
More importantly, Xiaomi Corporation is able to adopt a volume-driven strategy that emphasizes less on profitability for its smartphone business, because of cross-selling synergies between its various businesses. As an illustration, the gross profit margins for Xiaomi Corporation’s smartphone and internet services business segments were 12.8% and 73.6%, respectively, in the most recent third quarter of fiscal 2021. Xiaomi Corporation “sacrifices” its gross profitability for its smartphone business by selling its phones at attractive prices implying lower margins. But Xiaomi Corporation is more than compensated with an increase in high-margin revenue associated with the internet services segment, as it grows its smartphone user base and cross-sells more internet services to these users.
Market consensus expects Xiaomi Corporation’s overall gross margin to expand by +310 basis points in the intermediate term from 14.9% in fiscal 2020 to 18.0% by FY 2025, as per S&P Capital IQ data. This expected improvement in gross profitability for Xiaomi Corporation will be dependent on the company’s ability to grow its market share in smartphones and cross-sell more high-margin internet services to its users or customers.
In the subsequent section of this article, I touch on Xiaomi Corporation’s market share loss in the Chinese smartphone market.
Market Share Loss In Home Market
In my prior October 25, 2021 article, I noted that the greatest competitive threat in the smartphone market for Xiaomi Corporation comes “from Honor, a former sub-brand of rival Huawei which 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 August 2021 sales.”
The latest comments from Xiaomi Corporation’s management and industry market data indicate that Honor continues to gain traction in China’s smartphone market.
At its Q3 2021 earnings call on November 23, 2021, Xiaomi Corporation revealed that the company’s share of the smartphone market in China had declined from 16.8% in the second quarter of 2021 to 13.8% in Q3 2021.
Data from both Counterpoint Research and Canalys suggest that Honor has moved ahead of Xiaomi Corporation to be the player with the third-highest market share in the Chinese smartphone market in Q3 2021, and Honor’s market share is estimated to have roughly doubled QoQ in that quarter.
A sell-side analyst from JPMorgan (JPM) noted at Xiaomi Corporation’s third-quarter investor briefing that “it seems like Honor has come in and taken a fair bit of market share in a short period of time.” In response, Xiaomi Corporation did acknowledge that “we have a lot of competition” and mentioned that “China is the most competitive market.” Specifically, Xiaomi Corporation also emphasized at the most recent earnings call that strong sales from competition from the iPhone 13 and efforts to optimize production and distribution in the face of chip shortages also hurt its smartphone sales and market share in China.
Referring to Canalys’ research that was cited above, the research firm emphasized in its Q3 2021 China smartphone market report that Honor “is successfully upgrading Huawei users, supported by its breadth of channel partnerships.” More significantly, Canalys stressed that Honor “is now sending clear signals that the brand has returned after its split from Huawei, and these signals will go beyond China.”
I agree with Canalys’ views that Honor might continue to gain market share at the expense of its rivals in both China and international markets going forward, and this is negative for Xiaomi Corporation’s future smartphone business growth outlook.
Concluding Thoughts
I like the fact that Xiaomi Corporation is still executing well on its strategy of introducing premium smartphones that are attractively priced as seen with the new Xiaomi 12 Series flagship smartphones. If Xiaomi Corporation can continue to expand its number of smartphone users, it is in a good position to improve its profitability by generating higher revenue from its internet services segment via cross-selling.
However, Xiaomi Corporation’s market share loss in the Chinese smartphone segment in the third quarter of last year suggests that competitors are giving the company a good run for its money, and one formidable rival is Honor, which was formerly Huawei’s sub-brand. The key risk going forward is that Xiaomi Corporation also cedes market share to its rival in international markets as well.
Xiaomi Corporation is deemed as a Hold based on my analysis.
Source: https://seekingalpha.com/article/4478971-xiaomi-new-flagship-smartphones-china-market-share-loss