Xiaomi: The goal is to open 20,000 Xiaomi Home stores by 2025 (24Q3 conference call)

Xiaomi Group (1810.HK) released its Q3 2024 financial report (ending September 2024) after the Hong Kong stock market closed on November 18, 2024, Beijing time. The key points are as follows:

Below is the summary of Xiaomi's Q3 2024 earnings conference call. For the financial report interpretation, please refer to "With Pride, 'Super Xiaomi' Arrives".**

1. $XIAOMI-W(01810.HK) Core Financial Report Information Review:

2. $Xiaomi Corporation(XIACY.US) Detailed Content of the Financial Report Conference Call

2.1. Key Information from Executives:

1）Business Progress

Mobile Business

High-end Strategy: Continued investment in technology, launched the Xiaomi 15 series, with prices increased from 4,000 RMB to 4,499 RMB, sales growth exceeded that of the Xiaomi 14.

Global Market Ranking: Ranked third in global shipments for 17 consecutive quarters, market share is 13.8%; market share in mainland China increased to 14.7%, ranking fourth.

High-end Market Share: Increased market share in the 3,000-6,000 RMB price range, leading the Chinese market in the 4,000-5,000 RMB range.

IoT and Home Appliance Business

Technology R&D: Enhanced independent R&D capabilities, launched differentiated products that cater to youth and intelligence (such as air conditioners, drying washing machines, etc.), with sales exceeding expectations.

Ecosystem Layout: Promoted a full-ecosystem connectivity strategy, integrating cars, mobile phones, and other smart devices.

Xiaomi Automobile

Delivery Progress: Cumulative delivery of the SU7 model reached 40,000 units, with monthly sales exceeding 20,000 units in October, aiming for 130,000 units for the entire year of 2024.

Global Layout: Expanded into overseas markets, leveraging IoT product advantages to demonstrate the synergy of the entire industry chain.

Safety Performance: The SU7 received a 3G+ level highest safety rating in safety tests, with pre-sale orders for the SU7 Ultra exceeding 114,000 units within 10 minutes Brand Development

Market Position: Ranked third globally in smartphone shipments, and among the top three in 52 countries.

User Scale: Global active users reached 686 million, with 168 million users in China.

Brand Influence: Selected as one of the world's best brands, becoming one of the only two Chinese brands on the list.

New Retail Model: Number of offline stores exceeded 13,000, with a year-end target of over 15,000 and a target of 20,000 by 2025.

Future Outlook

AI Technology Layout: Launched AIOS as the core soul of AI technology, focusing on perception, memory, reasoning, and execution capabilities to support users in completing trivial tasks in life; combining operating system AI, omnichannel retail, new technology capabilities, and high-end strategy to drive long-term growth.

Three Major Growth Curves:

- Mature Business: Smartphones, tablets, and wearable devices, with room for market growth;

- Innovative Business: Traditional home appliances such as air conditioners, refrigerators, and washing machines, with innovative potential;

- Strategic Focus: Smart electric vehicles, as an important growth engine for future development.

2）Financial Performance

Overall Performance

Total Revenue: Total revenue reached 92.5 billion RMB in the third quarter of 2023, a year-on-year increase of 30.5%, surpassing 90 billion for the first time.

Domestic and Overseas Revenue Proportion: Domestic revenue accounted for 56.6%, while overseas revenue accounted for 43.4%.

Comprehensive Gross Margin: Reached 20.4%, maintaining a healthy level.

Adjusted Net Profit: Reached 6.3 billion RMB, a year-on-year increase of 4.4%, with a cumulative net profit of 24.4 billion RMB in the first three quarters.

Cash Reserves: As of the end of September, cash reserves reached 151.6 billion RMB, a year-on-year increase of 18.7%, setting a new historical high.

Repurchase Plan: Has cumulatively repurchased over 3.71 billion HKD of stock.

Mobile Business

Revenue: Third-quarter revenue was 47.5 billion RMB, accounting for 51.3% of total revenue, a year-on-year increase of 13.9%.

Shipment Volume: Reached 43.1 million units, a year-on-year increase of 3.1%.

Gross Margin: Reached 11.7%, maintaining a healthy level.

IoT and Home Appliance Business

Revenue: Third-quarter revenue was 26.1 billion RMB, a year-on-year increase of 26.3%.

Gross Margin: Reached 20.8%, setting a new historical high, a year-on-year increase of 2.9 percentage points.

Specific Performance:

- Air Conditioners: Shipment volume exceeded 1.7 million units, a year-on-year increase of 55%.

- Refrigerators: Year-on-year increase of 20%.

- Washing Machines: Year-on-year increase of over 50%.

- Tablet Devices: Shipment volume increased by 55%, ranked fifth globally.

- Wearable Devices: Performed well, with the launch of the new Xiaomi Watch S4 and Xiaomi Band 9 Pro in October.

Internet Services

Revenue: Third-quarter internet services revenue was 8.5 billion RMB, a year-on-year increase of 9.1%; among which overseas internet services revenue was 2.7 billion RMB, accounting for 32.5%, a year-on-year increase of 18.3%.

Smart Electric Vehicles and Innovative Business

Revenue: The total revenue from innovative business reached 9.7 billion RMB, with smart electric vehicle revenue at 9.5 billion RMB.

Gross Margin: The gross margin for smart electric vehicles reached 17.1%, an increase of 1.7 percentage points year-on-year.

Vehicle Deliveries: The SU7 series delivered 39,790 units, with an average selling price of 238,700 RMB.

Narrowing Business Losses: The adjusted loss for innovative business was 1.5 billion RMB, a year-on-year decrease of 16.6%.

Cost Control

Expense Spending: Total expenses for the third quarter were 13.7 billion RMB, of which core business expenses were 10.3 billion RMB, accounting for 12.4% of total revenue, a year-on-year decrease of 0.4 percentage points.

2.2 Q&A Analyst Q&A

Q: What is the future strategy for the home appliance business, including channel structure and future plans? Additionally, the gross margin for the IoT business exceeds 20%. What are the main driving factors behind this performance?

A: Regarding the home appliance business, this year's growth has been very strong, exceeding 50%, with a year-on-year growth of over 45% in September, showing significant acceleration. At the same time, the gross margin has also increased by several percentage points compared to last year. Compared to the IoT business, the home appliance business has performed better in terms of gross margin, thus contributing significantly to the overall gross margin. But this is just a starting point. In recent years, we have made efforts in multiple areas, such as developing the CODM model. Taking our new air conditioners and washer-dryer combos as examples, these products are highly innovative and perform excellently, showcasing our high-end manufacturing capabilities. Next, we will further strengthen our upstream capability building.

In terms of technology, we have advanced technologies accumulated from our mobile phone business; in terms of sales channels, we continue to deepen relationships with existing customers and expand them into the home appliance sector. This year, we have made new breakthroughs in this area and set clear goals. For example, in air conditioning, we have launched various energy-efficient and environmentally friendly models that align closely with Xiaomi's green image, allowing consumers to purchase a complete series of home appliance products at once.

Additionally, we have addressed installation challenges. For instance, traditional air conditioners can be cumbersome to disassemble and install, while we are the only brand that offers full-process services, which is one of the reasons for our strong market performance. Our washing machines are compactly designed, taking up less space, making them very suitable for limited living spaces in major cities like Beijing and Shanghai. At the same time, we have launched washer-dryer combos that save space and resources, making them very popular among consumers. The newly launched air conditioners feature a top air outlet design, tailored to family needs, further emphasizing energy efficiency and environmental protection.

In terms of product innovation, we adhere to transparent and unified standards, avoiding the practice of selling the same product under different names, which contrasts sharply with some poor practices in the industry. We believe there is significant room for optimization and reform in the home appliance industry. Currently, our home appliance business profit margin is slightly above 10%, and there is still considerable room for improvement in the future. We hold a critical view of unreasonable phenomena in the industry and believe that Xiaomi's experiential service model is still in its infancy, with growth rates expected to remain high through 2025

Q: What is the situation regarding the sales management expenses (SG&A) and R&D expenses of the automotive business, including expectations for 2025 and trends for next year?

A: Regarding the automotive business, it is currently experiencing rapid growth, and we expect the performance in the fourth quarter to surpass that of the third quarter. The main reason is the improvement in economies of scale and operational efficiency. Simply expanding scale does not equate to achieving economies of scale; it requires extremely high efficiency to support it. If our sedan models can achieve sales of 20,000 units, we can rank first in the market. When the factory operates at full capacity, our efficiency reaches its highest level, further enhancing the gross margin. Additionally, we are establishing a series of advanced technological capabilities, such as intelligent chassis technology.

In the first three quarters of this year, we invested 8.8 billion yuan in new businesses, most of which was used for R&D expenditures. The investment in new businesses remains substantial this year, and as the gross margin exceeds expectations, we plan to allocate more resources to future R&D projects. It is expected that related expenses will further increase next year, and we are also looking forward to better business performance. The improvement in gross margin provides us with more room for R&D investment, which will lay a more solid foundation for future development.

Q: The market competition for small-screen products has intensified; however, the Xiaomi 15 series has maintained outstanding sales performance. How is Xiaomi positioning itself to respond to this competition?

A: Some competitors hastily launched small-screen devices, but in reality, the process of miniaturization poses more technical challenges than enlarging components. We are well aware of the technical issues that need to be addressed in the development of small-screen products. For example, in product design, our screen edge craftsmanship is excellent, and the battery life performs exceptionally well. Additionally, our products integrate IPT technology, with no shortcomings in any aspect.

Compared to other products, such as the iPhone, we pay more attention to the details of user touch. Many users have reported that the edges of some phones may scratch the skin, while using a Xiaomi phone does not cause this at all, providing a particularly comfortable feel. These details reflect our emphasis on user experience.

The success of the Xiaomi Pro model lies in its large-screen design, but it is not just a simple increase in screen size. We have also optimized key functions such as battery life based on the large screen, making the Pro model very popular.

From a market strategy perspective, we attract entry-level users with products priced between 3,000 yuan and 4,000 yuan, and retain them with product performance, ultimately driving users to upgrade to high-end models priced above 5,000 yuan. We attract and cultivate different customer groups through excellent product performance and user experience, gradually achieving consumption upgrades.

Q: In recent years, Xiaomi has achieved significant success in IoT and offline retail for mobile phones. Can you share Xiaomi's plans for the automotive sales network and offline business expansion, and whether these businesses can achieve synergy?

A: Regarding synergy, although Xiaomi's automotive business is developing at a slightly slower pace than home appliances, the efficiency is very high. We currently have 130 stores, with an average of about 150 cars sold per store, which is far higher than some brands that sell only 30 cars per store. Our synergy is outstanding, consumers can purchase our products through 4S vehicle cities, while delivery capabilities remain stable. In addition, we have opened physical stores, initially with a store area of only 50 square meters, displaying four vehicles, and now the scale has rapidly expanded. Compared to the trend of traditional automotive brands withdrawing from shopping malls, our store locations are very advantageous, and the number of large stores entering is continuously increasing.

In shopping malls, Xiaomi has demonstrated strong appeal, with store areas of at least 50 square meters, which can bring significant foot traffic to the mall, allowing us to enjoy very favorable rental conditions. Our operating costs are far lower than those of traditional automotive brands, and this model is difficult to imitate because we achieve multi-channel sales through a variety of products, forming a unique competitive advantage.

In the future, we will open more stores and continuously optimize site selection. Our shopping mall layout is gradually expanding, and when we enter malls next year, consumers will see a more refreshing experience.

Q: Regarding the automotive business, is the year-on-year increase in average selling price in Q3 due to changes in product structure or other reasons? Looking ahead, where does the improvement in average selling price for the automotive business come from? With the continuous upgrading of configurations such as refrigerators and seats, will the product structure continue to optimize? Additionally, regarding the progress of the automotive production line construction, when can it contribute to the company? Is there a possibility of early production?

A: Regarding the average selling price, it mainly depends on the optimization of the product mix. From the current delivery situation, the growth in ASP mainly comes from changes in the sales proportion of different product versions. With the continuous launch of new products, we expect ASP to further increase. At the same time, we will continue to release factory capacity to shorten customer delivery cycles, thereby better meeting market demand.

Q: Regarding the smartphone business, market share continues to increase, but there is still a gap with the leaders globally. In the future, if we want to further improve production efficiency and competitiveness, which areas will management focus on?

A: This year, our smartphone shipments increased from 146 million units last year to about 170 million units, with growth achieved in all regional markets. Although the competition in the Chinese market is fierce, we still hope to achieve a 1 percentage point increase in market share each year, and there is still significant room for improvement in this goal.

For example, the market share in Africa is 11%, and in Latin America, it is 16%-17%. With the enhancement of brand influence, we expect the growth rate in these markets to reach 20%. In addition, we are also focusing on the sales growth of high-end products and the optimization of product structure. We believe that the growth potential in the future remains considerable.

Q: Do you think that our automotive business will bring more advantages to the smartphone business through synergies in the operation of the entire business chain in the future?

A: This year, our smartphone business in the Chinese market has achieved good growth, mainly due to enhanced competitiveness, brand influence, and Xiaomi's organic growth. At the same time, Xiaomi's automotive business has positively impacted our performance and development by enhancing the brand and promoting the new retail trend Our customer base also benefits from this. We are able to attract users from the foundational level and gradually establish connections with them, effectively bringing traffic to the business. In contrast, smartphone users may gradually be converted into purchasers of other Xiaomi products, such as extending from buying Xiaomi smartphones to buying Xiaomi cars. This kind of cross-influence is gradually becoming apparent, and this synergy is becoming stronger.

Q: Regarding high-end positioning. Do you think the market can still support a higher average selling price? Additionally, how will you achieve your goals for the high-end strategy in overseas markets? Are you planning to launch high-end products globally, or will you take a more selective approach in specific markets?

A: The extent of price adjustments and their impact on sales varies among different brands. Some brands have not raised prices, while others have increased prices by 100 yuan or more, which directly affects their sales expectations. For the Xiaomi 15 series, even after the price increase, it remains popular, and sales are even faster, indicating its high popularity. The reasons behind the price increase include product competitiveness and rising chip prices, which also impact overall pricing.

In terms of high-end positioning overseas, we release relevant news at MWC (Mobile World Congress) every year and gradually promote in overseas markets. Although the launch time overseas is slightly lagging compared to the domestic market, Xiaomi's brand influence globally continues to strengthen. Especially, the latest series of products perform exceptionally well. Our current key markets include Europe, Southeast Asia, the Middle East, Latin America, and Africa. Although high-end models face certain pressures in overseas markets, we are confident in our high-end strategy in these regions.

Q: Regarding Xiaomi Home, the company has raised its target to 15,000 stores and plans to open 500 super-large stores. Are there any strategic adjustments and future goals? Additionally, are there new targets for enhancing upstream capabilities?

A: At the beginning of the year, we set a goal to add 3,000 stores and accelerated the pace. We found that the market can accommodate more stores, so we will reach 15,000 by the end of the year. By 2025 and 2026, we plan to expand to 20,000 stores. Meanwhile, the profitability of stores in lower-tier markets is performing very strongly.

Xiaomi focuses on the long-term sales of products rather than short-term explosive growth. Many of our products can maintain strong sales throughout the year, with 40% of sales coming from the home appliance business. Unlike some brands that experience rapid fluctuations after launching new products, Xiaomi's product sales are relatively stable, which has long supported our gross margin.

We also plan to open more super-large stores, with an area of over 50,000 square meters, selling a variety of products including cars. By the end of this year, we will open 120 super-large stores in prime locations of shopping malls and secure favorable rental conditions. Shopping malls welcome our presence because we can bring a large flow of customers. A Xiaomi Home can attract 5,000 visitors daily, a figure that is difficult to achieve in some larger shopping malls Next, we will continue to expand in large cities while going deep into rural markets. The market share in Beijing and Shanghai is already high, with Xiaomi, Apple, and Huawei being the main competing brands. In the future, we will continue to layout in county-level markets and high-quality shopping centers, planning to further expand the network by 2025 and cover more high-quality malls and super large stores by 2026 and 2027. Xiaomi's growth potential is limitless.

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