Consumer Electronics "Navigating the Pitfalls": XIAOMI-W Bounces Back, Apple Holds Firm

Entering the peak season for consumer electronics in the second half of the year, although Apple has released the new 15 series, its growth rate is still lower than that of Xiaomi.

Since October 2023, Xiaomi's growth rate has reached 20%. Meanwhile, driven by the strong performance of the NASDAQ during the same period, Apple's stock price has only increased by 12.5%.

After the release of the third-quarter reports, companies in the industry have shown both growth and decline. So, what is the current situation in the electronics industry? In this article, Dolphin Research mainly observes the performance of the three major products - "smartphones, PCs, and panels" - based on industry and specific core company data.

1. Industry data and selection of core companies:

a) In the smartphone sector, we have selected three listed smartphone brands: Apple, Xiaomi, and Transsion.

b) In the PC sector, we have selected three listed PC brands: Lenovo, Dell, and HP.

c) In the panel sector, we have selected two listed panel manufacturers: BOE and TCL.

2. Key observations: Revenue, profitability, inventory changes, industry trends, and market share changes.

3. Quantitative scoring: 2 points (indicating improvement), 1 point (indicating stability), 0 points (indicating decline).

Overall:

Smartphone sector: The industry trend is improving. Apple is relatively stable, while Xiaomi and Transsion are showing marginal improvement and have better business flexibility.

PC sector: The industry trend is improving. Lenovo is relatively stable, followed by Dell and HP, but they face market share pressure.

Panel sector: The industry trend is under pressure, and demand has not picked up. BOE and TCL's performance is still sluggish.

Combining industry data and the situation of each company, Dolphin Research believes that Xiaomi has performed relatively well in terms of business, while the panel industry will continue to be affected by weak demand and remain sluggish. As for Xiaomi, although there are expectations of a positive business outlook, it has already been reflected in the previous stock price increase. The current stock price corresponds to a PE ratio of nearly 20 times, which is not considered cheap. Although the business outlook is positive, the stock price will have more investment value after experiencing adjustments.

Below is Dolphin Research's specific analysis of the current situation in the electronics industry:

1. Smartphone Sector

With the release of multiple new smartphones in the second half of the year, the market is expecting the smartphone industry to emerge from the "sluggish period". From an industry perspective, there are indeed signs of recovery.

In the third quarter of 2023, global smartphone shipments reached 303 million units, a year-on-year increase of 0.3%, marking the first positive growth in nearly 9 quarters.

From the perspective of smartphone brands, Dolphin Research has selected Apple, Xiaomi, and Transsion. Looking at the specific performance of three listed companies (with mobile phones as their core business), namely $XIAOMI-W.HK and $TRANSSION.CN:

1.1 Revenue: The revenue growth rate of Apple, Xiaomi, and Transsion, the three mobile phone brands, is improving. Among them, Apple is the most stable, even during the industry downturn, the company did not experience a double-digit decline. In terms of revenue, both Xiaomi and Transsion have experienced a decline of more than 20%. However, their revenue growth rates have returned to positive in the third quarter.

The revenue performance of the three mobile phone brands also aligns with the trend of the recovery in the industry's shipment volume. Among them, the Android camp, which has experienced significant declines in the past, has better income elasticity than Apple during the recovery phase.

1.2 Profitability: The profitability of Apple, Xiaomi, and Transsion, the three mobile phone brands, is also improving. Apple's profit margin has always been outstanding among mobile phone manufacturers, with a net profit margin stable above 20%, which has also increased this quarter. Xiaomi and Transsion's net profit margins have also shown significant improvement compared to the previous period, with a higher increase than Apple.

1.3 Inventory: Inventory is an important indicator in the electronics industry. Dolphin Research observes the inventory situation from two aspects: "absolute value change" and "proportion to revenue".

1) Absolute value change: The absolute value of inventory for Apple and Xiaomi continued to decrease this quarter, while Transsion's inventory increased compared to the previous period;

2) Proportion to revenue: Apple's inventory proportion is within the normal range, while Xiaomi and Transsion's current inventory proportion is at a historically low level after inventory reduction.

Considering both data, Apple's inventory remains relatively stable. Xiaomi and Transsion have relatively low inventory levels after the previous inventory reduction. The increase in Transsion's inventory in the third quarter is mainly due to the replenishment of stock. Dolphin Research believes that Android brands like Xiaomi and Transsion will continue to have a demand for inventory replenishment, while Apple's inventory situation has always been relatively stable.

1.4 Market Share: Apple's market share remains stable, with little impact from industry cycles. However, Xiaomi's market share has shown an upward trend recently, with a noticeable recovery since its low point, demonstrating relatively good resilience. Transsion has also entered the global top five, driven by emerging markets such as Africa and Southeast Asia.

Apple remains stable in the high-end market, while Xiaomi and Transsion have shown relatively alpha performance in competition.

Overall, the mobile phone industry has not only turned positive in terms of global shipments, but the revenue and profitability of major brands are also improving. In terms of performance, Apple is less affected by industry cycles and shows relatively stable performance. On the other hand, Android manufacturers like Xiaomi are more affected by cycles, but their recovery after a low period is more pronounced.

Dolphin Research believes that Apple maintains a steady operation, while the situation for Android manufacturers has significantly improved. This is mainly due to the previous destocking of inventory and the demand driven by new product releases. Currently, the inventory level of Android manufacturers is relatively low, indicating a need for further replenishment.

2. PC Sector

Previously, driven by the demand for home office and other needs, the PC industry experienced a highlight with quarterly shipments of over 90 million units. However, as demand cools down, the PC industry has entered a "winter period". In the past two quarters, the PC industry has shown signs of recovery.

Global PC shipments in Q3 2023 reached 68.2 million units, a YoY decline of 8.2%. Although shipments still declined compared to the previous year, the decline has significantly narrowed, and there have been two consecutive quarters of QoQ growth.

From the perspective of PC brands, Dolphin Research has selected Lenovo Group.HK, Dell Tech.US, and HP as examples. Looking at the performance of the three listed companies (with PC as their core business):

2.1 Revenue: Although the revenue of Lenovo, Dell, and HP, the three PC brands, is still declining compared to the same period last year, the decline has started to narrow. The revenue changes of the three brands are basically in line with the industry's shipment volume, and have started to rebound on a quarterly basis in the past two quarters.

2.2 Profitability: The profitability of Lenovo, Dell, and HP, the three PC brands, has improved. During the industry's downturn, the net profit margins of PC brands had declined to near breakeven, but now they have all shown varying degrees of improvement.

2.3 Inventory: Looking at "absolute value of inventory" and "proportion to revenue":

1) Absolute value change: In the third quarter, the inventory of HP and Dell continued to decline, while Lenovo's inventory increased after experiencing a significant decline in the previous period.

2) Proportion to revenue: In the third quarter, the inventory-to-revenue ratio of the three PC brands continued to decline, reaching a normal level, but not yet a relatively low level.

Regarding the PC market, Dolphin Research believes that the inventory situation in the industry is gradually improving, but it has not yet reached a relatively low level. This also indirectly indicates that the demand in the current PC market has not fully recovered. With the improvement of the inventory situation, brands will gradually replenish their inventory by pulling goods from the upstream suppliers.

2.4 Market Share: Lenovo's market share is steadily increasing, while Dell and HP's market share has declined. Compared to traditional PC manufacturers, Apple's Mac, with its self-developed chips, is showing an upward trend in the PC market.

**Overall, although the PC industry's shipment volume is still declining compared to the same period last year, the consecutive quarterly growth indicates that the PC market has passed its lowest point. Based on recent financial reports, all brands have shown improvement in revenue and profitability. The inventory levels in the PC industry have significantly decreased and are currently in a relatively normal range, but not yet at a low level. Apple computers, with the support of self-developed chips, are showing an upward trend in market share. Lenovo's share remains relatively stable, while Dell and HP's market share shows signs of erosion. Although there are signs of recovery in the overall PC industry, the recovery situation varies among different brands.

3. Panel Sector

After more than 2 years of decline, panel prices in the industry began to rebound at the beginning of the year. However, six months later, the price increase came to a halt. The inability of panel prices to continue rising reflects the lack of strong demand support downstream.

Taking the 65-inch panel as an example, it rose from a low point of $107 to $169, an increase of 58%. However, recent product quotations have once again declined.

From the perspective of panel manufacturers, Dolphin Research has selected two listed companies (with panel as their core business), BOE.CN and TCL TECH..CN, to examine their specific performance:

3.1 Revenue: Both BOE and TCL have seen positive revenue growth in the past two quarters, mainly driven by the increase in panel prices. Looking at the quotations of large panels, industry prices in the third quarter have generally increased by more than 20% YoY, which is the main driving force behind the revenue growth of these companies.

3.2 Profitability: Both BOE and TCL have seen improved profitability, as they have transitioned from losses to profits, mainly driven by the increase in prices. Previously, as the industry declined, the decline in panel prices directly led to losses for both companies. With the increase in product prices, they have once again achieved profitability.

3.3 Inventory Situation: Still looking at "absolute value of inventory" and "proportion to revenue"

1) Absolute value change: In the third quarter, both BOE and TCL saw an increase in the absolute value of inventory MoM. Compared to the end of last year, the inventory of both companies has increased by more than 10%.

2) Proportion to Revenue: The inventory levels of BOE and TCL have decreased overall, but they have not yet reached a relatively low position.

In terms of the panel market, the inventory situation in the industry has improved compared to the peak, but it is still not at a critically low level. Dolphin Research believes that in the early stages of the cycle, companies in the industry actively reduced their inventory levels and cleared out a large amount of inventory. However, due to the lack of significant improvement in downstream demand, inventory levels have not further decreased.

Overall, the price recovery in the panel industry has directly contributed to the positive improvement in revenue and profitability for panel manufacturers.

However, considering the inventory situation, Dolphin Research believes that the price increase in the panel industry this time is mainly driven by the proactive contraction of supply (manufacturers). They have reduced capacity utilization and prioritized the clearance of high inventory levels.

The recent decline in panel prices indicates that the sustainability of this price increase is insufficient, mainly due to the lack of significant improvement in downstream demand.

At the current price and inventory levels, panel manufacturers will not incur losses like they did during the low point. However, for a true recovery in the cycle, it still requires stimulation from the demand side.

Dolphin Research's recent articles related to the industry:

November 20, 2023: Xiaomi Earnings Report Review - "Xiaomi Strikes Back" (link: Xiaomi "Strikes Back")

November 20, 2023: Xiaomi Conference Call - "Sources of Gross Margin Improvement" (link: Xiaomi Management Talks: Sources of Gross Margin Improvement (3Q23 Conference Call Summary))

November 3, 2023: Apple Conference Call - "Apple: Lackluster Next Quarter" (link: Apple: Lackluster "Cash Cow," Worth 30x PE? (FY23Q4 Conference Call))

November 3, 2023: Apple Earnings Report Review - "Apple: Zero Growth 'Money Tree,' Worth 30x PE?" (link: Apple: Zero Growth "Money Tree," Worth 30x PE?)

October 31, 2023: BOE Earnings Report Review - "BOE: Price Increase is Not a True Recovery, Demand is the Key" (link: BOE: Price Increase is Not a True Recovery, Demand is the Key) Industry Chain Companies

November 2, 2023, Conference Call: "Mobile Revenue to Experience Double-Digit Recovery (Qualcomm FY23Q4 Conference Call)"

November 2, 2023, Earnings Report Review: "Qualcomm: Is the Winter Sleep of the Android Leader Finally Coming to an End?"

October 27, 2023, Earnings Report Review: "GoerTek: When Will Profits Recover?"

October 20, 2023, Conference Call: "Scaling Up to 3nm, Planning to Enter the 2nm Market (TSMC 23Q3 Conference Call)"

October 20, 2023, Earnings Report Review: "TSMC: Overcoming the Performance Bottom, the Battle Cry for 3nm"

Risk Disclosure and Statement: Dolphin Research Disclaimer and General Disclosure