20180904-尚乘财富-小米集团-W-01810.HK-Innovation_and_unique_consumer_IoT_network_key_to_growth_31页_3mb

Xiaomi: Innovation and Growth in the Consumer IoT Network

Core Content

Xiaomi is positioned as a key player in the consumer IoT market, with a strong focus on innovation and an efficient OMNI-channel sales strategy. The company's growth is driven by its high-performance smartphones and smart hardware, which are sold at an "honest price" to attract a broad user base. Xiaomi's strategy includes a direct supply network of over 37,000 locations in China, which is crucial for its offline sales expansion. The company has maintained a strong presence in the Indian market, holding the No.1 position in 2Q18, and is rising in the Indonesian market to No.2.

Main Points

• Product Portfolio: Xiaomi offers a range of award-winning, high-performance smartphones, smart hardware, and lifestyle products with a competitive pricing strategy.
• Sales Strategy: The company uses an OMNI-channel approach that integrates direct online sales, self-operated Mi Home, and offline retail partners, enhancing sales efficiency.
• Growth Drivers:
  • Smartphones: Expected to grow at a CAGR of 30% in 2017-2020e, with increasing shipment and ASP (average selling price).
  • IoT Products: Projected to grow at a CAGR of 61%, contributing significantly to revenue.
  • Internet Services: Anticipated to increase its revenue contribution from 8.6% in 2017 to 10.7% in 2020e, with monetization potential through advertising and IVAS (Internet Value-added Services).
• Financial Performance:
  • Revenue is forecasted to grow from Rmb 114.6bn in 2017 to Rmb 352.9bn in 2020e, with a CAGR of 45%.
  • Non-IFRS net profit is expected to grow from Rmb 5.4bn in 2017 to Rmb 19.8bn in 2020e, at a CAGR of 54%.
  • Gross margin is projected to improve from 13.2% in 2017 to 14.4% in 2020e.
• Monetization Potential:
  • The company is moving towards the middle/high-end smartphone market, which is expected to enhance its monetization potential.
  • Xiaomi's IoT platform, with over 115 million connected devices, allows for data collection, which supports the development of consumer applications and services.
• FinTech Opportunities: Xiaomi has the potential to develop credit assessment and risk management models using its accumulated user data, offering innovative financial products.

Key Forecasts

Valuation

• Price Target: HK$22.0 per share (33% upside from the current price of HK$16.5).
• DCF Valuation: Based on a 13.4% cost of equity and 3% long-term growth rate, the price target is derived as HK$22.0.
• SOTP Valuation:
  • Hardware: Valuation based on 2019 P/E, ranging from 14x to 18x.
  • Internet Services: Valuation based on 2019 P/S, with a range of 7x to 11x.
• Valuation Range: HK$16.3 to HK$23.0 per share, based on SOTP analysis.

Risks and Opportunities

• Risks:
  • Continued competition in the smartphone and IoT markets.
  • The need for significant improvements in user engagement across apps, especially for middle/high-end users.
• Opportunities:
  • Expansion into overseas markets such as ASEAN and Europe through strategic partnerships.
  • Leveraging its large user base and IoT network for data-driven applications and FinTech innovations.

Conclusion

Xiaomi's growth is underpinned by its innovative product offerings, efficient sales strategy, and expanding IoT ecosystem. The company is expected to maintain strong revenue and profit growth, supported by its global expansion and increasing monetization from internet services. The stock is currently undervalued, with a potential 33% upside to the price target of HK$22.0. The company's ability to enhance user engagement and monetization will be critical to its long-term success.