Xiaomi’s Shares Are Even Better Value Than Their Smartphones

Xiaomi’s Shares Are Even Better Value Than Their Smartphones

25th August 2021 | 7 min read
  • By selling their smartphones at around 10% of the price of Apple’s iPhones, Xiaomi became the world’s #2 largest smartphone maker in 2Q2021. It is actually #1 in 12 countries that are not China.
  • Xiaomi smashed 1Q2021 earnings, with profit surging 163.8% YoY to RMB 6.1 billion (USD 945 million) and revenue tripling to RMB 76.9 billion, as it profited from main China rival Huawei’s troubles in the US. Analysts expect another stellar 2Q2021.
  • So far, Xiaomi has been relatively unscathed from Beijing’s crackdown on big tech companies though it was “forced” Xiaomi to disable its anti-theft feature on its new Mi Mix 4 smartphone due to security concerns.
  • Xiaomi’s founder Lei Jun is steering the company into EVs as the final act of his entrepreneurial journey.

In a market in which best-selling smartphones have crossed the USD 1000 mark, China’s Xiaomi is going against the tide and offering its phones at slightly over 10% of the price.

Global demand for its budget Redmi smartphones has propelled Xiaomi to become the #2 largest smartphone maker in the world in 2Q2021, knocking American titan Apple to #3.

But Xiaomi is far more than budget smartphones.

The MI in their logo stands for “Mobile Internet” (and actually “Mission Impossible” as well) and Xiaomi is building an AI and Internet of Things (AIoT) business to feature in your every life. This means that whilst Apple makes money by selling their smartphones, Xiaomi makes money through people using their smartphones.

From smart phones to lifestyle products such as entertainment systems including TVs, projectors and speakers, everyday home appliances including vacuum cleaners, air purifiers and security devices, daily wearables including watches and wireless earbuds, and even electric scooters, Xiaomi has it. 

And it has committed to never making more than a 5% net profit margin on its hardware.

Now, Xiaomi wants a piece of the electric vehicle (EV) pie.

In March 2021, the company announced it would invest USD 10 billion over the next 10 years into the sector.

“This will be the final major entrepreneurial project of my life,” Xiaomi founder and CEO Lei Jun said in a statement then. “I am willing to put all my personal reputation on the line and fight for the future of our smart EV!”

According to Meticulous Research, the EV market is expected to grow at a compound annual growth rate of 33.6% from 2020 to reach USD 2495.4 billion by 2027. A simple glance at Chinese EV giant NIO’s stock price performance over the past year (it’s gone up 594%) tells you all you need to know about the insane growth the EV market is experiencing.

However, an EV business does face high execution risks though. Just ask Jia Yueting, the former high-flying “China’s Netflix” entrepreneur who seemingly lost it all in his need for (EV) speed.

“The (EV) business requires substantial upfront R&D and capex, has a long product-design cycle and has to meet stringent safety standards, which may lead to substantial losses and hinder cash generation for a long period,” Fitch Ratings said in an April 2021 note.

And it could affect its “BBB” credit rating and “Stable” outlook for Xiaomi even as the business is expected to make further gains in its current business segments for the next few years.

Image credit: Bread News

Smashing Records

The COVID19 pandemic has made for an interesting 2020 and beyond for every company (and every person) on the planet and none more than Xiaomi, which has smashed records despite turbulent times. 

In 1Q2021, Xiaomi recorded its best quarter ever.

In that period, its net profit surged a whopping 163.8% YoY to RMB 6.1 billion (USD 945 million), with revenue increasing almost three-fold to RMB 76.9 billion, as it shipped a record 49.4 million smartphones globally. It only shipped 29.2 million units during the same period a year ago. 

And analysts expect another smashing 2Q2021.

In June 2021, Xiaomi actually managed to dethrone Samsung as the #1 smartphone maker, as the latter’s production was affected by Covid-19. Xiaomi’s market share rose to 17.1% from 11% a year ago, while Samsung’s market share dropped to 15.7%.

Interestingly, Xiaomi is the #1 smartphone maker in 12 countries that are not China.

Xiaomi’s #1 in India, Spain, Russia and the whole of Eastern Europe. It’s also #2 in Italy, #3 in Germany and France, for the very first time #5 in the UK.

This growth in the West is astounding, considering the pervasive anti-China rhetoric.

And it’s not just smartphones that people outside of China are buying.  

Xiaomi remains the #5 smart TV maker worldwide and shipped 2.6 million units globally in 1Q2021, according to All View Cloud research.

Meanwhile, more are using MIUI (Xiaomi’s OS) with monthly active users (MAU) reaching 425.3 million – an increase of 28.6% YoY aided by Western Europe jumping on the Xiaomi bandwagon.

Xiaomi also remains confident that there is even more room to grow overseas, despite already ranking #2 in Europe. In particular, the company cited its carrier business in their Q1 2021 conference call. “Our market share in carrier channel’s still very low, but our growth is over 100%, maybe 300% in Q1. It’s a very strong growth. You see the trend that we’re going to grow our smartphone shipment in the carrier channels. That’s another potential.”

Over in India, Xiaomi recently announced it is doubling its finance service sector after experiencing 95% growth in the sector from the October-December 2020 quarter to January-March 2021. Offering lending, Xiaomi will introduce business and a credit line card.

Image credit: Bread News

Stock Price Like Its Products

Xiaomi’s recent impressive performance has been a result of an amalgamation of progressive steps made by the company in expanding their product lines, as well as their global footprint, which it will continue to do. 

It has also shown that it’s market share gain, off the back of troubles faced by rival and former number #1 Chinese smartphone market Huawei, isn’t a one-off.

During his time in office, US President Donald Trump went out of his way to make an example of Huawei amid heightened US-China tensions. Meng Wanzhou, Huawei’s CFO and daughter of the company’s founder, is still facing alleged bank fraud charges in the US. And Huawei has since sold-off its budget smartphone brand Honor.

Furthermore, the US has also removed Xiaomi from its list of banned Chinese companies. Under the ban, Americans were prohibited from trading such banned companies. With the ban lifted, not only will American dollars be able to flow Xiaomi’s way, but sentiment towards Chinese companies is also warming.

Consequently, Xiaomi was added to the FTSE Russell as part of the FTSE China 50 index. The re-inclusion restores positive sentiment towards the company from an investor’s perspective.

Over the past few months, industries across China have been at the mercy of CCP regulators. Education sectors and even insurance has faced scrutiny from Beijing, but none more so than the tech sector. Internet giants such as Tencent saw their stock prices plummet. Tencent alone has lost over USD 170 billion.

Xiaomi, although affected by the China’s regulation crackdown, walked away relatively unscathed.

Earlier this month, Xiaomi announced the newest addition to its smartphone line-up: the Mi Mix 4. Upon making the announcement, the company showcased an impressive new feature that allowed users to recover their lost or stolen phone even if the physical SIM card is removed.

Image credit: Bread News

However, Chinese regulators weren’t too keen about the unregulated feature and Xiaomi was ultimately forced to remove it. The company apologised both to regulators and to its customers for removing it.

Nonetheless, by looking at Xiaomi’s stock price, you certainly couldn’t tell that regulators had tightened their grip on the tech sector, let alone Xiaomi itself.

Although Xiaomi’s stock price has increased more than 32.05% over the past year, its current valuation is not too scary. Yes, its PE ratio of 19.68 is higher than the Hong Kong tech industry average of 12.1, but it’s still lower than Apple’s at 29.02 and Tesla’s 355.71.

Especially taking into consideration Xiaomi’s growth potential as it embarks on its EV journey, a PE ratio of 19.68 for a growth company is certainly reasonable.

“We see Xiaomi entering FY21 on multiple growth drivers: 1) strong momentum in smartphone and continuously gaining market share in the high-end segment; 2) new acquisition and new product launches in IoT markets; 3) MIUI MAU growth accelerating with an upside in ARPU, boosted by growing high-end installed base,” according to a March 2021 AMTD Equity Research report. It has a “buy” rating for Xiaomi with a target price of HKD 35 per share. 

Currently, Xiaomi has everything going for it – its financial performance is solid, its stock listing is US-approved, it’s gaining market share in Europe, it’s still reasonably valued and its EV future has potential.

Perhaps now’s a good time to be part of Xiaomi’s history.

Written by Cohan Chew

Having co-founded Europe’s biggest East Asian culture website (WeAreResonate.com), Cohan has since ventured into East/West equities. His writing background includes Seeking Alpha, The Motley Fool, Capital A, Time Out Singapore, The Huffington Post, Gigwise and Redstar Qingdao.

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