(28 Pages, 26 graphs and tables)

• Huami (HMI) is a Xiaomi ecosystem partner positioned for wide user base;
• As intelligent hardware evolves from smartphone to smartphone+, HMI was a main beneficiary of smartphone+watch. We expect HMI to further consolidation its market share in the watch category;
• We initiate the stock with a BUY and a TP of US$22

Huami’s user base is its foundation of cooperation with Xiaomi
We estimate Huami (HMI) contributed 45% of Xiaomi’s connected IOT device base of 140mn as of C4Q18. Even though HMI’s user activity level is low, few categories can contribute to user base as large as smartwatch, so HMI remains strategically important to Xiaomi, in our view.
 
HMI’s first mover advantage in smartphone+watch is still valid
Smartphone externalization and disintegration will be a trend in the next few years. HMI partnered with Xiaomi to be an early pioneer of smartphone-plus-watch. This trend still has room to grow. We expect HMI’s global smartwatch market share to grow from 4.4% in 2018 to 10% in 2023.
 
HMI should benefit from Apple’s product innovation
Smartwatch (iWatch) is today Apple’s No.1 user base contributor but is quickly being followed by smart earphone (AirPods). We expect Apple to leverage its iWatch and AirPods capabilities to create new usage scenarios and lead the Android camp. This will benefit HMI as a follower for the broader market.
 
Both active and passive smart wearable have room to grow
We believe smart wearable is on the verge of breakthrough on human-to-machine interaction and artificial intelligence (AI), thanks to 5G and cloud. Active wearables that enhance human senses will emerge in the next couple of years. But passive wearable also has room to grow, particularly in healthcare field.
 
Leveraging China’s engineer talent and Xiaomi infrastructure
Innovation in both active and passive wearables should benefit HMI if HMI leverages China’s engineer talent base to offer price-benefit competitive products. Xiaomi infrastructure is also a major plus. Trading at 2020 PE of 12, we expect HMI to grow non-GAAP operating profit at a 3Yr CAGR of 20%.

Click to download the full report