2019-05-22

(50 Pages, 51 graphs and tables)

  • We initiate Xiaomi with a HOLD rating and TP of HK$14.55 because we believe Xiaomi still need to hone its skills as either a technology champion like Huawei, or a platform+content powerhouse like Tencent, or both;
  • Xiaomi’s near-term challenge is to achieve greater profitability so that it can further build up Internet services and play in the technology top league ;
  • Global expansion and content are opportunities. Reasonable valuation is plus.
Becoming Huawei or Tencent will unleash Xiaomi’s value
Xiaomi is not only a technology company, it is also a brand, demographic, channel and investment company. Its product strategy as a cutting-edge partner of the smartphone’s Android-ARM ecosystem is solid and its company strategy of acquiring users first and monetizing them later is sound. However, these are not enough. Xiaomi needs to go further because it is competing globally.
 
Low ASP and margin hinder global competitiveness
The flip side of selling globally is also competing globally. Low average selling prices (ASP) and margin are results of Xiaomi’s product and company strategy and therefore not easily fixable, but have hindered Xiaomi’s competitiveness. Company is starting to address these issues but it will not be fixed overnight.
 
Leveraging capital markets to compete against Huawei
Access to public capital market is a key advantage of Xiaomi against Huawei and Oppo. Xiaomi should leverage transparency, acquisition currency and capital raising capabilities from its public market status.
 
2019 will be a transitional year for Xiaomi
For Xiaomi, 2019 is more likely a crossroad than a valuation floor. While Mi 9 showed strong execution, overstretching in supply chain, employee retention, product details and organization ability need to be addressed.
 
Mission possible, but still a work in progress
Xiaomi is now trading at 4% of Apple and 8% of Alibaba’s market caps, yet its free cash flow is only 1% of Apple, 5% of Alibaba and 6% of Huawei. We believe user loyalty and monetization certainty determine valuation multiples.  

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