Xiaomi SU7 listed, Goldman Sachs and Morgan Stanley are optimistic, capacity expansion becomes the focus

Xiaomi's SU7 continues to be hot after its release, with a total of 88,898 units sold in the first 24 hours. As of the afternoon of March 31st, the locked-in orders (non-refundable quantity) reached 20,000 units.

Due to the aggressive pricing of SU7, major car companies have clearly felt the pressure and each has come up with countermeasures. Aito's new M7 entry-level model, M7 Plus, a five-seat rear-wheel drive version co-developed with Huawei and Zeekr, has reduced its price by 20,000 to 229,800 yuan, making it closer to the standard version of Xiaomi SU7. Nio has announced a subsidy of up to 1 billion yuan for oil car replacements. However, Tesla, which Xiaomi frequently benchmarks against, has raised the prices of all models of its Model Y by 5,000 yuan.

In response to the impact of Xiaomi SU7 on the electric vehicle market, Goldman Sachs and JP Morgan recently released research reports, both expressing optimism about Xiaomi's electric vehicle strategy. Goldman Sachs raised Xiaomi's target price to 20 Hong Kong dollars, while JP Morgan reiterated its "overweight" rating on Xiaomi.

Goldman Sachs: Capacity Expansion Becomes the Focus, "Full Ecosystem" Strategy Will Accelerate Development

Goldman Sachs released a research report on Monday stating that Xiaomi SU7 was a pleasant surprise. Although the price range of 215,900 to 299,900 yuan basically met the bank's previous average price expectations, the number of units sold far exceeded expectations, showing Xiaomi's ability to potentially lead the market in pricing rather than following prices. According to the report, Goldman Sachs believes that the order mix between the three models of SU7 is more balanced, with SU7/Pro/Max expected to contribute approximately 30%/40%/30% of the order volume, respectively.

Goldman Sachs stated that Xiaomi SU7, with its core advantages of industry-leading specifications and intelligent/ecosystem, has shown the potential to become one of China's best-selling high-end electric sedans, a market that currently includes Tesla Model 3.

On the other hand, Goldman Sachs pointed out that in the coming months, the increase in Xiaomi's automotive production capacity may become the most focused issue. According to Goldman Sachs' survey, the average delivery waiting time for SU7 has extended to 18-21 weeks, compared to 5-8 weeks previously. Before the initial launch, Xiaomi's electric car factory's first-phase capacity is over 300 units per day or 40 units per hour, running a shift of 900 workers. However, if the factory can achieve two shifts, there is a 100% capacity increase potential.

Goldman Sachs believes that in the long run, SU7 holds more strategic significance for Xiaomi:

Firstly, for Xiaomi's electric vehicles, Xiaomi's Moderna manufacturing platform may have stronger economies of scale, with Goldman Sachs expecting SU7 to become one of the top three best-selling high-end sedan models in China, with average monthly sales exceeding 10,000 units and an average retail price of 250,000 yuan Goldman Sachs stated that the Moderna platform is not only suitable for the SU7, but may also be suitable for a mid-size SUV next year. Although Goldman Sachs predicts that Xiaomi's electric vehicles will generate approximately RMB 12 billion in operating losses in 2024, the Moderna platform shared by the SU7 and the potential mid-size SUV should provide more favorable economic benefits, significantly reducing operating losses in the coming years and achieving profitability in 2028.

Furthermore, in terms of Xiaomi's "Smartphone + IoT + Internet Ecosystem" strategy, the success of the SU7 has expanded Xiaomi's brand audience, attracting more high-end/female users. With Xiaomi's smartphone + IoT + internet ecosystem steadily growing in China and globally, it may promote a flywheel effect, accelerating future development.

Therefore, Goldman Sachs has raised Xiaomi's revenue expectations for 2024-26 by 2-6%, mainly due to higher revenue forecasts for smart electric vehicles. It is now expected that Xiaomi's electric vehicle sales will reach 100,000, 170,000, and 326,000 units in 2024-26, accounting for 1.0%, 1.5%, and 2.5% of China's new energy vehicle retail sales, respectively. By 2030, electric vehicle revenue is expected to account for 30% of Xiaomi's total revenue.

Taking into account the slightly increased loss assumption in 2024 and the long-term more favorable profit potential in the electric vehicle sector, Goldman Sachs has revised Xiaomi's adjusted earnings per share forecast to decrease by 7%, remain flat, and increase by 2% in 2024-26.

In terms of valuation, Goldman Sachs has raised Xiaomi's target price from HKD 18.9 to HKD 20.0, mainly based on a higher DCF (discounted cash flow) valuation for the electric vehicle segment, estimated at USD 6.1 billion or HKD 1.9 per share (previously USD 2.7 billion), driven by higher sales (approximately 50% higher than previous forecasts on average for 2024-26) and improved profit prospects from economies of scale.

Goldman Sachs stated that this means Xiaomi's EV/revenue ratio for 2024 and 2025 is 2.0 times and 1.1 times, respectively, which is basically in line with the high end of the EV/sales ratio for Li Auto, Nio, and XPeng in 2024, considering Xiaomi's rapid sales growth and strong balance sheet. Goldman Sachs maintains a buy rating on Xiaomi, expecting a 34% upside potential.

J.P. Morgan: Shipments in the first 12 months may exceed expectations Morgan Stanley said in a research report released last week that the pricing of Xiaomi's SU7 is very attractive and has strong competitive specifications. Given the strong pre-order numbers, Morgan Stanley believes that Xiaomi's electric vehicle business has had a strong start and may exceed the market's expectation of shipping about 50,000 units in the next 12 months, triggering a strong positive response in the short to medium term stock price, and continues to maintain an "overweight" rating on Xiaomi.

The report stated that the pricing of Xiaomi SU7 is quite aggressive and attractive, with specifications such as range, SiC voltage, 0-100 km/h acceleration, top speed, etc., surpassing its competitors in the same segment market, such as Zeekr 007, Tesla Model 3. Morgan Stanley believes that this is consistent with Xiaomi's strategy in other hardware products (smartphones, AIoT), aiming to maintain lower profit margins on hardware sales and target profitability in service revenue.

Morgan Stanley believes that Xiaomi's electric vehicle factory has highly automated production lines in key processes such as painting, stamping, die-casting, and body assembly, supported by its expertise in intelligent manufacturing. The report stated that high automation should help accelerate the profitability of its electric vehicles in the medium to long term.

Like Goldman Sachs, Morgan Stanley stated that although Xiaomi's electric vehicle business will incur losses in the initial few years, mainly due to its small operating scale, continuous R&D investment for new product development, and sales/marketing expenses for sales channel expansion.

However, Morgan Stanley believes that Xiaomi has enough cash on hand (approximately RMB 110 billion by the fourth quarter of 2023) and strong EBITDA inflows from its core business (RMB 20/18 billion in fiscal year 2024/25) to support its continued expansion into electric vehicles (operating expenses of RMB 7.5 billion in fiscal year 2024, which may expand in the future). In the short term, Morgan Stanley expects the market to continue to focus on Xiaomi's strong unit sales in 2024 for electric vehicles.

At the same time, Morgan Stanley maintains a positive view on Xiaomi's strong core business and the better-than-expected initial momentum of its electric vehicles. The report stated that given Xiaomi's strong growth/stable gross profit margin in its core business (smartphones, AIoT, internet services) in 2024, the bank remains optimistic about Xiaomi. Xiaomi's stock has performed well in the past month (up 12% relative to the Hang Seng Index), and it is expected to continue to perform well due to the better-than-expected sales momentum of its electric vehicle products