$XIAOMI-W (01810.HK)$ Target raises 32% to HK$27 and retains...

Target raises 32% to HK$27 and retains buy

It raised Xiaomi's target price by 32% from HK$20.5 to HK$27 and maintained its buying opinion. It was derived by applying a 25-year target of 21-fold PER as a result of raising its earnings estimate for 24-25 years, reflecting continuous growth in the smartphone market, growth of IoT products based on cost-effectiveness and marketability, and faster-than-expected profitability improvement in the electric vehicle sector.

Xiaomi's stock price has risen to the high point level for the first time in three years on the background of rapid performance improvement. However, the background of Xiaomi's improved performance is structurally judged. This is because the cost-effectiveness and product competitiveness of companies such as Xiaomi are becoming more important than the technology of advanced countries as technological barriers to entry in the main smartphone and electric vehicle industries are lowering.

Xiaomi overtook Apple for the first time in August 24 to rank second in global smartphone sales, and new electric vehicles are also receiving good responses, and mass production and profitability improvement are fast. In the past, it was difficult for latecomers to have competitive edge in mass production of smartphone software or electric vehicles, but now, as smartphone technology has already been leveled up to a large extent and electric vehicles have a good supply chain, it is believed that companies with competitive cost-effectiveness such as Xiaomi are expanding their market dominance.

Q3 Preview: Expected Consensus Good Earnings

Xiaomi's sales in the third quarter are expected to grow 29% year-on-year to 91.4 billion yuan and operating profit to 5.3 billion yuan, which is expected to meet the consensus. Smartphone share continues to rise mainly in emerging markets such as India, and the growth of the IoT sector, which grew faster than expected in the second quarter, is expected to continue.

The electric vehicle sector is also expected to further improve its profitability as sales rose to 40,000 units in the third quarter after 270,000 units in the second quarter. Despite the fact that it is still in the early stages of the business, Xiaomi said that its gross profit margin in the electric vehicle sector improved rapidly to 15% due to its friendly supply chain and single model strategy, which is expected to improve further profitability in the third quarter as the economic effect of scale is greater and mass production facilities are stabilized.