Xiaomi review: how the company's business works and why it is worth investing in it

Обзор Xiaomi: как устроен бизнес компании и почему в нее стоит инвестировать

Xiaomi review: how the company's business works and why it is worth investing in it

Xiaomi review: how the company's business works and why it is worth investing in it

Xiaomi181012.88 HKDBuyService in partnership with Tinkoff Investments. Quotes are updated every 15 minutes

history of the company

Xiaomi Corporation was founded in April 2010 by Lei Jun and his partners, and 9 July 2018 became public, by listing its shares on the Hong Kong Stock Exchange under the ticker 1810.

At first, the company was engaged in the development of an operating system based on Android - MIUI. The production of the first smartphone of the company was announced a year and a half after its foundation - in August 2011. It was Xiaomi Phone Mi-One, sales launch of which was successful: for the first day of sales, the company collected 300 thousand pre-orders.

In 2013, Smart-TV appeared in the product line. In 2014, humidifiers appeared, tablets, routers, Xiaomi set-top boxes and the legendary Mi Band fitness bracelets. To count products across the device and accessory lineup, you and your pet will not have enough fingers, but the main market for the company is still the smartphone market.

According to the results of the first quarter of 2022, Xiaomi remains in the top three in the global smartphone market with a share 12,6%. In China, Xiaomi ranks fifth in the market with a share 13,9%.

Xiaomi review: how the company's business works and why it is worth investing in it

The company has also created the world's leading consumer AIoT platform – artificial intelligence plus the Internet of Things., — to which according to the results 1 in the quarter of 2022, 478 million smart devices were connected, except smartphones, tablets and laptops. Xiaomi products are presented in more than 100 countries.

In August 2021, the company was included in the Fortune Global list for the third time. 500, taking 338th place and rising to 84 places compared to 2020.

What do they earn

According to the company's annual report, the business consists of four main divisions:

  1. Smartphones — 63,6% proceeds. In this segment, the company produces and sells smartphones under the brands Xiaomi and Redmi. Segment margin — 9,9%.
  2. Internet of Things and Products for Life — 25,9% proceeds. In this segment, the company produces and sells TVs, air conditioners, washing machines, humidifiers, vacuum cleaners and other household appliances, as well as tablets, laptops and wearables: headphones and fitness bracelets. Segment margin — 15,6%.
  3. Internet services — 8,6% proceeds. In this segment, the company earns on advertising, sale of shell for SmartTV, games and content creation with partners in streaming. Segment margin — 70,8%.
  4. Other - 1,9% proceeds. What exactly falls on this segment, the company does not disclose. Segment margin — 22%.
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Revenue by region:

  1. China - 50,2%.
  2. The rest of the world - 49,8%. As the company says, the main share in this part falls on India and Europe, but it does not give a more detailed distribution..

Xiaomi review: how the company's business works and why it is worth investing in it

Arguments in favor of companies

Ecosystem and 5G. Smartphones account for 63,6% company revenue. The share of 5G devices among new smartphones sold will grow from the current one 53 to 78% by 2026 and will exceed a billion devices per year. This will help maintain high sales growth rates..

Xiaomi review: how the company's business works and why it is worth investing in it

Xiaomi implements smartphone × AIoT strategy, which is built on the basis of the ecosystem of a smart home and interconnected devices. The launch of 5G networks will improve the quality and speed of interaction between devices, what should spur sales.

The number of Internet-connected devices will double by 2025 from the current 12.3 to 27 billion devices. The number of devices in the Xiaomi ecosystem for 2021 increased by 36,2% — up to 478 million.

Xiaomi review: how the company's business works and why it is worth investing in it

There is room for growth. The level of penetration of smartphones in developed countries exceeds 75%, but Xiaomi's main markets are China and India, where smartphones are used 63 And 32% population respectively. Sales growth in these regions will outpace global growth.

In 2021, Xiaomi sold 190 million smartphones, and it's on 30% more, than a year earlier. At the same time, the global smartphone market is growing at a pace 6% in year, and in India, faster — 10,5% in year.

Smartphone penetration rate, million people

Smartphone usersPercentage of population
China91263%
India43932%
USA27082%
Indonesia16059%
Brazil10951%
Russia10069%
Japan7660%
Mexico7054%
Germany6578%
Vietnam6163%
United Kingdom5479%
Bangladesh5332%
Iran5363%
Turkey5262%
France5178%
Italy4676%
Philippines4138%
Pakistan4118%
South Korea3977%
Thailand3854%

Electric cars. In March 2021, Xiaomi announced the launch of a division for the production of electric vehicles and plans to spend $ 10 billion on its development in the following 10 years. In November, the company went further and announced the construction of a plant in Beijing.. The plant is due to open in 2024 and will produce 300,000 cars a year..

The electric car market is huge, and it will grow into 10 over again 15 years, and China will lead in this growth.. According to Bloomberg Electric Vehicles Outlook, in China, electric vehicles will account for 19% all sales of passenger cars - against 14% in Europe and 11% in USA.

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If Xiaomi will be able to gain a foothold in this market, this will have a positive impact on financial results.

Xiaomi review: how the company's business works and why it is worth investing in it

What can get in the way

Slowing growth in the smartphone market. 63,6% the company's revenue falls on the smartphone market. Xiaomi is moving towards business diversification. From 2019 to 2021, the share of revenue in the smartphone market fell from 86 to 78,9%, but it's still very much, and problems in the sector will affect the company's business.

According to the Worldwide Quarterly Mobile Phone Tracker forecast, smartphone shipments will be reduced by 3,5% — to 1.31 billion units — in 2022. But in 2023, the market will return to growth and will grow by 1,9% annual until 2026. The driver of growth in this case will be smartphones with support for 5G technologies, and if the company manages to maintain market share and adapt to this transition, then the change of technologies will be painless for the business.

R&D & Marketing. Xiaomi spends a lot on research and development. In 2021, the R&D budget grew by 42,3% — up to 13.2 billion yuan — 4% annual revenue. In the following 5 the company plans to spend 100 billion on research and development.

Marketing spending for 2021 increased by 44% — up to 20.9 billion yuan, or 6,3% annual revenue.

The problem with such expenses is, that their effectiveness is not immediately apparent, and the bottom line results can disappoint shareholders. But hope is inspired by the fact that, how quickly Xiaomi has grown from the creator of the operating system into one of the largest manufacturers of smartphones and consumer electronics in the world.

Problems in India. In April 2022, India confiscated the assets of the Xiaomi division for $ 725 million for violating the country's currency legislation. Xiaomi representatives deny the allegations, because the confiscated payment was intended for the parent company Xiaomi in China and did not violate any prohibitions.

Previously, India banned the use of applications of Chinese companies due to concerns, that they threaten the national security and defense of the country. Among the banned applications were Xiaomi applications. Xiaomi's share in the Indian smartphone market — 23%.

If India continues to nightmare Chinese business, this will have a bad effect on Xiaomi's business in this country, and India is one of Xiaomi's main markets with the highest growth potential.

Resume

In comparison with the main competitors in the smartphone market, Xiaomi has no advantageous differences. Assessment of the future P / E slightly lower compared to Apple, revenue growth rates for 2021 are the same, but the margins of the business are noticeably lagging behind.

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Comparison with competitors

AppleSamsungXiaomi
Capitalization, billion dollars301,142313,1941,72
Market share24%18,2%12,6%
Forecast P / E823,318,1
Total margin14%25,7%3,37%
Debt / EBITDA0,20,81,5
Revenue growth for 2021 year18%33%33%

Overall, I like Xiaomi's business and its development strategy., so I would buy shares in a portfolio. The company focuses on promising sectors, and if it can implement a strategy to reduce the share of smartphones in the business structure, then it will make it more stable and efficient.

The immediate target in Xiaomi shares is the level of 17.5 HKD, which corresponds to the growth on 30% from current levels. Long-term goal – level 30 HKD, or growth potential on 120% from the current price of 13.4 HKD.

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