HSBC is bullish on Xiaomi-W: High-end models boost profit margins, target price raised by 33%.

With the "big sale" of Xiaomi 14, investment institutions have also become optimistic about the growth of Xiaomi's smartphone business and have subsequently raised their rating on Xiaomi.

On November 6th, HSBC stated in a report that the unexpectedly strong sales of the Xiaomi 14 series will drive the strong development momentum of Xiaomi's smartphone business. Therefore, the target price of Xiaomi has been raised from HKD 15.60 to HKD 20, an increase of 32.6% compared to the closing price of HKD 15.08 on the same day. The "buy" rating remains unchanged.

HSBC stated that the sales volume of the Xiaomi 14 series in recent months has increased sixfold compared to the previous generation. The upcoming Redmi K70 will also become a new catalyst, bringing more upward potential to Xiaomi's total smartphone shipments in the fourth quarter of this year. HSBC has raised Xiaomi's smartphone shipments for 2023 by 7% to 150 million units and for 2024 by 6% to 160 million units.

Affected by the growth in sales in emerging markets, HSBC believes that the average selling price of Xiaomi phones may slightly decrease, but the lower component prices will increase the profit margin of the smartphone division:

According to IDC data, Xiaomi's smartphone shipments in the third quarter were 41.5 million units, a year-on-year increase of about 2%, which exceeded our expectations. With the strong growth in emerging markets, the average selling price may slightly decrease.

We predict that Xiaomi's smartphone revenue will reach RMB 40.8 billion, a year-on-year decrease of 4%, which is a significant improvement compared to a year-on-year decrease of 13% in the second quarter of this year.

In particular, we believe that the overall profit margin of this division will increase to 15% in the third quarter, a year-on-year increase of about 6 percentage points. With the lower component prices, we expect the gross profit margin of this division to increase to 15% in the third quarter, a year-on-year increase of about 6 percentage points.

Due to better-than-expected smartphone shipments and steady expansion of the profit margin of phones and IoT, HSBC has raised its forecast for Xiaomi's recurring net profit for 2023-2025 by 11-27%, which is 17-18% higher than the consensus. It is expected that Xiaomi's recurring profit in the third quarter will reach RMB 5.2 billion, a year-on-year increase of 144%.

Although the strong performance in emerging markets may lower the average selling price, HSBC believes that Xiaomi's high-end strategy is also yielding results. More high-end models mean higher ARPU (average revenue per user), which will lead to an increase in the average selling price and profit margin of its smartphone business. At the same time, with the increase in gaming and pre-installed app revenue, Xiaomi's ARPU for internet services will also rise:

According to our scenario analysis, if ARPU increases by 10%, Xiaomi's recurring net profit for 2023 will have a high single-digit growth. If we exclude the loss from the automotive business, Xiaomi's current stock price is only 14 times the forward 12-month EPS, which is more than 1 standard deviation below the average level. In addition, HSBC also predicts that Xiaomi's 5G penetration rate will reach 40% by the end of 2023 and 42% by 2024, with a slight increase in overseas 5G shipments. This growth is mainly driven by strong growth in Latin America.