9 July 2018 Hong Kong
EQUITIES Xiaomi Xiaomi net income* trend Welcome to Mi world
Rmb m 25,000 +40% Cagr in 2018-20E
20,000 Key points
15,000 We are bullish on Xiaomi’s competitive edge (fast-fashion) and business model (attractive pricing, user traffic, profits from device and advertising). 10,000 Xiaomi monetizes user traffic via internet services in contrast to its 5,000 smartphone peers, and similar to its internet / e-commerce peers.
- We initiate coverage of Xiaomi with an Outperform and TP of HK$30 (35x 2015 2016 2017 2018E 2019E 2020E 2019E PE; EPS CAGR 40%) and are positive on its supply chain (Fig 3). Xiaomi net income exclude preferred stock changes in fair value
*Exclude non-recurring financial liabilities caused by fair value changes of convertible redeemable preferred stock Internet services, monetizing user traffic Source: company data, Macquarie Research, July 2018 User traffic is the key asset Xiaomi monetises, rather than devices. This is the 1810 HK Outperform core differences between Xiaomi and its smartphone peers, in our view. Xiaomi *Price (at 03:44, 06 Jul 2018 GMT) HK$17.00 attracts user traffic through fast fashion devices, and monetizes the user traffic Valuation HK$ 30.00 via internet services, such as advertising, online gaming operation services, - PE APPs, IoT platform, etc. Internet services contributed 39% of Xiaomi’s GP, 12-month target HK$ 30.00 carrying 60% GM (vs. 13% blended GM), and we expect the GP contribution to Upside/Downside % +76.5 rise to 42% / 45% / 49% in 2018-20E, driven by growing internet services market, 12-month TSR % +76.5 MIUI MAUs (monthly active users), and ARPU (average revenues per user). GICS sector Technology Hardware & Equipment India; a strong smartphone market Market cap HK$m 380,392 We model Xiaomi’s smartphone shipments to grow at a 30% CAGR in 2018-20E Market cap US$m 48,467 to 221m units in 2020E (vs. 91m / 55m in 2017 / 16), or 14% global market share, Number shares on issue m 22,376 driven by India market growth and market share gains in Southeast Asia (SEA),
Investment fundamentals Europe, and China. We model the India market to grow at a 15% shipment CAGR
Year end 31 Dec 2017A 2018E 2019E 2020E in 2018-20E, driven by rising smartphone penetration rate, internet users, and 4G Revenue bn 114.6 163.2 222.9 294.4 network. Offline channel expansion, local production in Indonesia, fast fashion EBITDA bn -41.5 1.6 17.0 25.4 devices, and competitive prices are the keys to drive market share gain in SEA, EBITDA growth % nmf nmf 992.0 49.5 Europe, and China. Xiaomi penetrated operator channel (Three) in Europe via EBIT bn -41.9 1.2 16.5 24.7 EBIT growth % nmf nmf 1,255.2 50.2 partnership with CK Hutchison (1HK, Outperform, David Ng) in May 2018 (link). Reported profit bn -43.8 1.4 14.9 22.3 We also see Xiaomi’s capability in raising price (p.2). It raised high-end EPS rep Rmb -4.49 0.06 0.67 1.00 smartphone models price by 39% YoY in 2017 with units still up 6% YoY. EPS rep growth % nmf nmf 976.2 49.9 Total DPS Rmb 0.00 0.00 0.00 0.00 Fast fashion; competitive price strategy, growing user base ROA % -59.5 1.1 11.3 13.4 ROE % 39.8 -1.2 -15.5 -28.9 Fast fashion, competitive prices, and multiple devices is how Xiaomi wins over EV/EBITDA x -3.1 197.9 18.3 12.3 user traffic. Xiaomi’s smartphones are innovative and first to the market, such as
* IPO offer price AI, facial recognition, edge-to-edge screen, ceramic unibody, etc. Apart from Source: FactSet, Macquarie Research, July 2018 (all figures in Rmb unless noted, TP in HKD) smartphones, Xiaomi drives its product lines fast to capture every market need on ‘smart life’ to drive its user traffic, such as NBs, wearables, TVs, air purifiers, rice cookers, tooth brushes, etc. The Mi ecoystem is the unique strategy Xiaomi uses Analysts
Macquarie Capital Limited to drive its product portfolio. Competitive prices (usually 50% below peers, Fig 1)
Allen Chang +852 3922 1136 also accelerates Xiaomi’s user traffic expansion. [email protected] Initiate with Outperform rating TP of HK$30 (35x 2019E PE) Verena Jeng +852 3922 3766 [email protected] We believe a 35x PE multiple is justified by Xiaomi’s monetization through user traffic, similar to internet / e-commerce companies, and different from smartphone Chris Yu +86 21 2412 9024 [email protected] / devices brand makers. The 35x is attractive considering its strong EPS CAGR at +40% in 2018-20E with GM expansion, and compared to Amazon (e-commerce Jin Guo +86 21 2412 9054 [email protected] peer) at 67x 2019E PE, and BAT (internet peers) at 36x 2019E PE on average. The IPO attracted 7 cornerstone investors, including Qualcomm and China Wendy Huang, CFA +852 3922 3378 Mobile at US$100m each, or 2% of total funding each. Downside risks: slower- [email protected] than-expected smartphone market growth and internet services growth.
Please refer to page 29 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Macquarie Research Xiaomi
Welcome to Mi world Inside Initiate at Outperform 3 Investment thesis Internet services: monetize user traffic 6 Growth in user traffic to drive internet services: Xiaomi’s internet services Competitive edge 10 are mainly online advertising and online game operation services (sales of In-house mobile processor: Surge S 11 virtual currency), with upside in APPs, IoT platform, etc. Xiaomi owns Multiple devices beyond smartphones 12 comprehensive customers in both advertising and online game, and we expect Channels: extends to offline and O2O new retail 14 growth in user traffic to further drive internet services. Xiaomi’s MIUI MAUs Smartphone: Riding on India 16 grew 36m in Dec 2017 to 171m, compared to Dec 2016, and jumped to 190m India, riding on a growing smartphone market 18 in Mar 2018. We model 247m / 347m in Dec 2018 /19, driven by Xiaomi’s Xiaomi’s expansion in SEA 20 device expansion. We model online advertising / online game operation Xiaomi’s expansion in EMEA 22 services to grow at 60%/42% EPS CAGR in 2018-20E. China: Xiaomi to win back leadership by 2020E 24 Financial analysis 25 Devices drive user traffic: We model smartphones / IoT devices and Xiaomi revenues mix in 2017A Lifestyle products to grow at 40% / 35% EPS CAGR, driven by 1) market Other Gaming share gain in smartphones (SEA, Europe, China), TVs and wearables, hardwares services Others 2) rising market in smartphones in India and service robots / air purifier in Air purifier 5% 2% 3% Ads 2% China, 3) product lines expansion via the Mi ecological chain, 4) growing scale Service 5% robots TV to support GM, and 5) upside in raising price. It raised high-end smartphone 0.4% 11% model prices by 39% YoY in 2017 with units still up 6% YoY. Wearables Smartphones 2% 70% Market share gain key engines:
Source: Company data, Macquarie Research, July 2018 Fast fashion strategy: Innovative design and fast to the market, such as AI, Xiaomi’s gross profit mix in 2017A voice command, edge-to-edge screen, ceramic unibody, 3D sensing, etc. 30% Gaming Others of IPO funds (US$1.6bn) goes to AI, smart TV, mobile processor, OS, etc. services 3% 7% Rich product lines covers ‘smart life’: Products across smartphones, IoT devices, and life-style products. Fast SKU expansion via Mi ecological chain, a Smartphones partnership with startups. Invested in 210 companies by Mar 2018. 30% of IPO Ads 47% 30% funds goes to product line expansion and AI functions.
Hardwares ex smartphones Competitive price: ASP mostly 50% lower than peers on similar performance. 13% Source: Company data, Macquarie Research, July 2018 Offline channel expansion: Penetrated operator channel in Europe in May Xiaomi’s revenue by region 2018; targets 2,000 stores by 2020E with 50% overseas; 30% of IPO funds Rmb m goes to global expansion (offline partners, local sales team, etc.). 140,000 120,000 100,000 28% In-house mobile processor (Surge S): A strength only four brands own 80,000 60,000 6% 13% globally, including Xiaomi. Surge S2 to arrive in 2H18 with better process. 40,000 72% 94% 87% 20,000 Company profile - 2015 2016 2017 Xiaomi monetizes user traffic captured by its smartphones, IoT devices, and China Overseas lifestyle products. The company’s internet services are online advertising, Source: Company data, Macquarie Research, July 2018 online game operating services, APPs, IoT platform, etc. Xiaomi’s Xiaomi’s ability to hike smartphone prices smartphones ranked global top four in 1Q18 by shipment, only after Apple, 120% 100% Samsung, and Huawei. Key competitors: Amazon, Google, Tencent, Alibaba, 100% 80% 61% Baidu, Roku, Irobot, Apple, etc. 60% 39% 40% 20% 6% 1% 0% -20% -2% High-end Mid-end Entry Fig 1 Xiaomi’s competitive prices to drive user traffic (Rmb2,000+) (Rmb800-1,999) (Rmb799 and below)
Shipment YoY in 2017 ASP YoY in 2017 US$ 1,400 Source: Company data, Macquarie Research, July 2018 1,200
Xiaomi smartphone shipments by region 1,000 m units Shipment Cagr at 30% in 2018-20E 800 250 221 600 200 179 400 150 132 29% 100 91 29% 200 67 55 33% 2% 28% - 50 13% 43% 44% 98% 75% 60% 48% Smartphones Wearables Air purifiers Robot vacuum Water purifier Suitcase Induction heating Folding electric - cleaner rice cookers bicycle 2015 2016 2017 2018E 2019E 2020E Xiaomi's selling price Peers' selling price China India SEA EMEA ROW Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
9 July 2018 2
Macquarie Research Xiaomi
Initiate at Outperform
TP price at HK$30/sh 35x target PE multiple We initiate coverage of Xiaomi with an Outperform rating and set our target price at HK$30.0. Our vs. Amazon at 67x, BAT TP is based on a 35x target PE multiple, which is the trading average of Xiaomi’s peers. We at 36x on average believe Xiaomi deserves a premium valuation compared to its smartphone peers given Xiaomi monetizes from user traffic rather than smartphones, which is the core differences with its smartphone peers and similarity to its internet / e-commerce peers. We believe the 35x target PE multiple is justified by Xiaomi’s business nature of monetizing from user traffic, strong EPS CAGR (+40% in 2018-20E), its unique stance across internet services, IoT, and smartphones, and market share gains. The company also enjoys exposure to both hardware and software (IoT platform, APP) devices and internet services, and e-commerce and offline channels, suggesting it’s more than a pure smartphone play. Xiaomi’s internet services contributed 39% of total gross profit in 2017 (vs. smartphones at 47%). Among Xiaomi’s peers, Amazon trades at 67x 2019E PE while China internet giant BAT trades at 36x 2019E PE on average.
Fig 2 Peer valuation 3M Stock Mkt cap ADTO Price perfor - TP Up - EPS Div Company Ticker (US$m) (US$m) (lcy) mance (lcy) side R PE PB ROE CAGR PEG yield Analyst 1Y 18E 19E 19E 19E 18-20E 19E 19E
Xiaomi 1810 HK 48,768 na *17.00 na 30.00 76% O 27.4 20.0 na -16% 40%* 1.2 0% Allen Chang Leading Tech solution providers (smartphone, PC, TV, wearable, VR, game console, etc.) Samsung 005930 KS 269,778 726 46,800.00 -2% 72,000.0 54% O 6.5 5.8 1.2 22% 15% 0.5 0% Daniel Kim Sony 6758 JP 64,946 304 5,667.00 30% 7,150.00 26% O 14.8 14.2 2.1 16% 6% 3.6 0% Damian Thong Philips PHIA NA 39,514 122 35.72 14% 25.4 20.7 2.5 13% 20% 0.9 2% Sharp 6753 JP 12,152 42 2,699.00 -35% 20.8 22.1 3.2 16% 4% -3.5 0% Garmin GRMN US 11,492 50 60.96 20% 19.7 18.9 2.6 15% 4% 4.4 3% HP HP US 7,083 91 65.05 20% 38.00 -42% U 14.3 na 1.8 -1% -96% na 4% Walt Chancellor Lenovo 992 HK 6,445 27 4.21 -15% 5.10 21% O na 18.9 1.4 18% na na 6% Verena Jeng Razer 1337 HK 2,173 3 1.89 na na 2.3 na na na na na Hisense 000921 CH 1,875 16 10.31 -40% 9.9 8.5 1.6 20% 17% 0.5 4% Fitbit FIT US 1,597 41 6.62 23% na na 2.5 -26% na na 0% HTC 2498 TT 1,533 13 56.90 -22% 2.3 na 1.0 -16% na na 0% Skyworth 751 HK 1,357 7 3.48 -29% 4.90 41% O 19.5 6.7 0.5 8% 91% 0.0 8% Verena Jeng TCL M 1070 HK 1,097 2 3.69 4% 10.1 8.9 0.9 10% 19% 0.6 2% Huami HMI US 546 3 9.08 na 12.7 7.6 2.2 na 44% 0.1 0% Average -3% 14.2 12.2 1.8 8% 13% 0.8 2% Xiaomi’s target peers Apple AAPL US 911,758 5,096 185.50 29% 197.00 6% O 16.1 13.6 5.2 44% 15% 0.7 1% Benjamin Schachter Amazon AMZN US 825,589 7,335 1,701.45 74% 2,100.00 23% O 126.3 66.3 16.9 30% 79% 0.7 0% Benjamin Schachter Google GOOGL US 777,926 2,172 1,126.78 20% 1,150.00 2% O 27.8 25.1 3.5 15% 11% 2.3 0% Benjamin Schachter Alibaba BABA US 482,470 3,396 188.38 34% 249.00 32% O 50.8 46.4 7.2 26% 25% 4.9 0% Wendy Huang Tencent 700 HK 473,037 1,297 390.60 38% 560.00 43% O 38.5 33.4 7.2 26% 16% 2.2 0% Wendy Huang Roku ROKU US 4,228 271 41.62 na 49.00 18% O na na 27.4 -9% na na 0% Paul Golding Irobot IRBT US 2,122 54 76.30 -12% 32.1 25.5 3.6 9% na 1.0 0% Average 30% 48.6 35.1 7.3 25% 29% 2.0 0% Note: Xiaomi’s net income numbers exclude non-recurring financial liabilities. * IPO price Source: Bloomberg, Macquarie Research, July 2018. Price on June 29, 2018.
China Mobile and Xiaomi’s IPO offer price was set at HK$17 per offer share for a total of 2,180m shares. Based on Qualcomm as the offer price, the net proceeds from the Global Offering should be HK$24bn (US$3bn). Xiaomi cornerstone investors will use the net proceeds as follows 1) 30%, or HK$7.2bn, to develop core products, including smartphones, smart TVs, AI speakers, smart routers, and notebooks, 2) 30%, or HK$7.2bn, to expand and strengthen its ecosystem, including internet services, AI, IoT and lifestyle products, 3) 30% of net proceeds, or HK$7.2bn, for global expansion, including investing in retail partners and expanding local teams, and 4) 10% of the net proceeds, or HK$2.4bn, for working capital. The IPO attracted 7 cornerstone investors: CICFH at 88m shares (0.39% holdings post IPO), followed by China Mobile at 46m (0.21%), Qualcomm at 46m (0.21%), CDB at 30m (0.14%), Grantwell at 15m (0.06%), Celestial Ocean at 14m (0.06%), and CMC Concord at 13m (0.06%). The IPO offer price implies 27.7x / 20.2x our 2018/19E PE, which is attractive considering our projected 40% EPS CAGR in 2018-20E, excluding non-recurring financial liabilities caused by fair value changes in convertible redeemable preferred stock, given Xiaomi’s rising market value. The valuation is also attractive compared to Xiaomi’s peers: Amazon trades at 67x 2019E PE; China internet giant BAT trades at 36x 2019E PE on average. 9 July 2018 3 Macquarie Research Xiaomi
Fig 3 Xiaomi’s supply chain Name Ticker Rev exposure in 2018E Components Analyst
Tongda 698 HK 30% Metal casing / metal middle frame Verena Jeng FIH 2038 HK 25% Metal casing / middle frame & assembly Verena Jeng O-Film 002456CH 20% Camera module, fingerprint module, touch Verena Jeng CCTC 300408CH 18% Ceramic casing Verena Jeng Largan 3008 TT 10~15% Handset lens Allen Chang Sunwoda 300207CH 10~15% Battery for smartphone, NB, service robot (sole), self-balancing scooter, etc. Chris Yu Lens Tech 300433CH 10% 3D glass casing Verena Jeng AAC 2018 HK 5~10% Acoustics, RF mechanical, Handset lens Allen Chang BOE 000725CH 5~10% Panel Allen Chang BYDE 285 HK 5~10% Metal casing / metal middle frame Allen Chang Goodix 603160 CH 5~10% Fingerprint IC Lynn Luo Sunny Optical 2382 HK 5~10% Handset lens, Camera module Allen Chang Tianma 000050CH 5~10% Panel Verena Jeng Inventec 2356 TT 5% Handset assembly Jeff Ohlweiler CHPT 6510 TT 3~5% Wafer/IC testing board for smartphone SoC Lynn Luo MediaTek 2454 TT 3~5% Smartphone SoC Patrick Liao Win Semi 3105 TT 3~5% Foundry for smartphone PA Lynn Luo TSMC 2330 TT ~1% Foundry for smartphone SoC Patrick Liao Elite Material 2383 TT <5% CCL Kaylin Tsai Everwin 300115CH <5% Metal casing / metal middle frame Verena Jeng Goertek 002241CH <5% Acoustics Verena Jeng Kinsus 3189 TT <5% Substrates Kaylin Tsai Luxshare 002475CH <5% Type C, wireless charging, antenna, haptics Verena Jeng Sunlord 002138CH <5% Inductor Verena Jeng Sunway 300136CH <5% Antenna Verena Jeng Zhen Ding 4958 TT <5% FPCB Kaylin Tsai Source: Company data, Macquarie Research, July 2018
Fig 4 Xiaomi supply chain valuation comparison 3M Stock Mkt cap ADTO Price perfor - TP Up - EPS Div Company Ticker (US$m) (US$m) (lcy) mance (lcy) side R PE PB ROE CAGR yield Analyst 1M 1Y 18E 19E 19E 19E 18-20E 19E
TSMC 2330 TT 179,795 272 212.00 -7% 2% 280.00 32% O 14.6 12.8 3.0 25% 14% 5% Patrick Liao Sunny Optical 2382 HK 19,444 139 139.10 -13% 101% 220.00 58% O 28.2 20.0 8.1 48% 41% 1% Allen Chang Largan 3008 TT 19,128 112 4,360.00 7% -10% 2,200.00 -50% U 22.6 23.0 4.7 22% -3% 2% Allen Chang BOE 000725 CH 17,771 364 3.41 -16% -18% 8.50 149% O 10.1 7.7 1.1 15% 30% 0% Allen Chang AAC 2018 HK 16,163 118 103.80 -11% 7% 103.00 -1% N 18.1 15.6 4.3 30% 13% 3% Allen Chang Mediatek 2454 TT 15,341 77 297.00 -7% 13% 400.00 35% O 15.5 13.6 1.6 12% 13% 5% Patrick Liao Luxshare 002475 CH 10,194 61 21.28 -10% 10% 34.00 60% O 21.6 15.0 3.4 25% 43% 1% Verena Jeng Lens Tech 300433 CH 7,653 57 19.28 -18% -33% 39.00 102% O 15.7 9.8 2.2 25% 56% 3% Verena Jeng O-Film 002456 CH 6,127 98 14.95 -23% -13% 19.00 27% N 19.9 14.5 3.1 23% 26% 1% Verena Jeng CCTC 300408 CH 6,062 33 23.06 -7% 12% 30.00 30% O 23.3 16.8 4.6 30% 39% 1% Verena Jeng Goertek 002241 CH 4,826 61 9.85 -16% -48% 12.60 28% N 12.5 10.1 1.6 17% 24% 2% Verena Jeng Sunway 300136 CH 4,371 70 29.46 -21% -25% 41.00 39% O 21.7 14.4 5.0 41% 40% 1% Verena Jeng Goodix 603160 CH 4,341 35 62.93 -10% -36% 70.00 11% U 31.1 28.1 5.6 22% na 1% Lynn Luo Tianma 000050 CH 4,227 44 13.67 -18% -28% 18.00 32% O 11.9 8.5 1.1 13% na 2% Verena Jeng Win Semi 3105 TT 2,986 49 216.00 -23% 36% 350.00 62% O 18.5 14.1 3.0 22% 28% 6% Lynn Luo BYDE 285 HK 2,906 15 10.12 -20% -37% 12.50 24% N 6.5 5.7 1.0 19% 16% 4% Allen Chang Inventec 2356 TT 2,781 6 23.70 0% -5% 28.10 19% O 11.2 10.6 1.5 14% 5% 9% Jeffrey Ohlweiler Wingtech 600745 CH 2,715 36 30.50 na na 24.7 16.7 2.8 16% na na Sunwoda 300207 CH 2,029 23 8.68 -24% -27% 15.00 73% O 12.7 9.2 2.4 29% 38% 2% Chris Yu Sunlord 002138 CH 1,873 20 15.19 -7% -18% 16.00 5% N 28.3 21.7 2.6 13% 30% 1% Verena Jeng Zhen Ding 4958 TT 1,756 6 66.70 -2% -7% 74.00 11% N 9.9 9.9 1.1 11% 3% 5% Kaylin Tsai Everwin 300115 CH 1,736 34 12.64 -18% -56% 21.00 66% O 12.1 7.6 1.8 26% 58% 2% Verena Jeng Tongda 698 HK 1,276 4 1.59 -15% -33% 2.20 38% O 7.2 5.0 1.2 27% 44% 6% Verena Jeng FIH 2038 HK 1,217 3 1.18 -23% -51% 2.20 86% N na 24.6 0.4 2% na 0% Verena Jeng CHPT 6510 TT 854 7 796.00 2% -40% 1,300.00 63% O 25.4 18.1 3.5 21% 44% 2% Lynn Luo Q Tech 1478 HK 826 8 5.73 -18% -21% 14.5 9.7 1.8 18% 38% 2% Elite Material 2383 TT 813 9 77.80 -9% -42% 108.00 39% O 11.3 9.0 1.8 21% 20% 6% Kaylin Tsai Zowee 002369 CH 774 25 8.82 0% 3% 25.2 17.3 na na na na Kinsus 3189 TT 754 5 51.70 -14% -35% 37.00 -28% U 17.4 16.6 0.8 5% 5% 4% Kaylin Tsai Huami HMI US 546 3 9.08 -18% na 12.7 7.6 2.2 na 44% 0% Average -12% -14% 17.4 13.8 2.7 21% 28% 3% Source: Bloomberg, Macquarie Research, July 2018. Price on Jun 28, 2018
9 July 2018 4 Macquarie Research Xiaomi
Fig 5 Xiaomi net income waterfall chart for 2018E Fig 6 Xiaomi net income waterfall chart for 2019E
Rmb m Rmb m 20,000 25,000 18,000 16,000 20,000 14,000 12,000 15,000 10,000 8,000 10,000 6,000 4,000 5,000 2,000 0 0
Source: Macquarie Research, July 2018 Source: Macquarie Research, July 2018
Fig 7 Xiaomi revenue mix in 2018E Fig 8 Xiaomi gross profit mix in 2018E
Other Gaming Gaming Others Air purifier hardwares services Others services 2% 2% 2% 2% 2% 7% Service Ads robots 6% 0.5% Smartphones TV 40% 15% Ads 34% Smartphones Wearables 69% 2% Hardwares ex smartphones 17%
Source: Macquarie Research, July 2018 Source: Macquarie Research, July 2018
Fig 9 Xiaomi revenue mix in 2019E Fig 10 Xiaomi gross profit mix in 2019E
Gaming Other Gaming Others Others services Air purifier hardwares services 1% 1% 6% 2% 2% 2% Service Ads robots 7% 0.6% Smartphones TV 40% 14% Ads 37% Wearables Smartphones 1% 70% Hardwares ex smartphones 16%
Source: Macquarie Research, July 2018 Source: Macquarie Research, July 2018
9 July 2018 5 Macquarie Research Xiaomi
Internet services: monetize user traffic Devices to attract user Xiaomi uses devices to capture user traffic, and monetises the user traffic through internet traffic monetizing user services (advertisement, online gaming services, etc.), a key differences from other traffic smartphone brand makers. The rich profitability of internet services allows Xiaomi to offer devices at competitive prices with similar specification as its peers. For example, Xiaomi’s smartphone blended price was US$132 in 2017 and its latest premium smartphone Mi 8 was priced at US$421 vs. the Huawei P20 at US$759, OPPO Find X at US$755, Vivo NEX at US$589; Mi band 2 at US$23 vs. global peers at US$75 on average; Mi air purifier at US$180 vs. global peers at US$907 on average.
Fig 11 Xiaomi’s competitive pricing is supported by rich GMs from internet services
US$ 1,400
1,200
1,000
800
600
400
200
- Smartphones Wearables Air purifiers Robot vacuum Water purifier Suitcase Induction heating Folding electric cleaner rice cookers bicycle
Xiaomi's selling price Peers' selling price
Source: Company data, Macquarie Research, July 2018
Rich GM in internet Xiaomi monetizes its internet services mainly on advertising and internet value-added services, services supports which is mainly from online game operation services, such as sales of virtual currency that can be devices expansion spent on purchases of virtual items for use in the games. The company’s internet services are mainly generated from China currently, and management aims to expand to overseas, such as India, Indonesia, Russia, etc, in the future. Advertisements contributed 5% / 30% of total revenues / gross profits in 2017, carrying a high GM of 82%, and gaming operation services contributed 2% / 7% of total revenues / gross profits in 2017, carrying a rich GM of 44%.
Fig 12 Xiaomi GM by product line Fig 13 Xiaomi margin trend
90% 82% 20% 80% 70% 15% 60% 50% 44% 40% 10% 30% 16% 20% 13% 9% 8% 5% 10% 0% 0%
-5% 2015 2016 2017 2018E 2019E 2020E
GM OPM NM*
*: excludes non-recurring financial liabilities. Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
9 July 2018 6 Macquarie Research Xiaomi
Xiaomi’s rich user flows Xiaomi’s mobile apps and smart TVs are the main advertising distribution channels that attract advertising Xiaomi monetizes. The company has a strong customer base that attracts advertisers. In March customers 2018, Xiaomi owned 38 / 18 apps with more than 10m / 50m MAUs (monthly active users), such as Mi App Store, Mi Browser, Mi Music, and Mi Video. Xiaomi has a comprehensive list of advertising customers, covering industries like auto, consumer goods, internet services, financial services, etc.
Fig 14 Advertisements on Xiaomi’s mobile apps Fig 15 Advertisement on Xiaomi’s mobile apps
Source: Company data, Macquarie Research, July 2018 xxxxxxxxxxxx Source: Company data, Macquarie Research, July 2018
Advertising as main Xiaomi’s advertising revenues can be divided into three parts: performance-based (65% of contributor in internet advertising revenue, or 3% of total revenue in 2017), display-based (12%, or 1%), and others services (23%, or 1%). For performance-based advertising services, Xiaomi charges on a per-click basis when the users click on the content, on a per-impression basis when the advertising content is displayed to users, or on a per-download basis, when the third-party app is downloaded by users. For display-based advertising services, Xiaomi charges on the length of time the advertisements are displayed on Xiaomi’s internet platform. The other advertising services are mainly pre- installation of mobile apps for third-party app developers on Xiaomi’s smartphones.
Fig 16 Xiaomi’s internet service revenue trend Fig 17 Xiaomi’s internet service gross profit trend
Rmb m 12,000 7,000 9% 39% 10,000 6,000
5,000 58% 8,000 10% 4,000 6,000 3,000 77% 4,000 5% 2,000 2,000 1,000
- - 2015 2016 2017 -1,000 Other internet value-added services Gaming operation services 2015 2016 2017 Other ads Display-based ads Performance-based ads Ads Gaming operation services Other internet value-added services
% at the top of bar chart is the total internet services revenues contribution % at the top of bar chart is the total internet services GP contribution to to Xiaomi. Source: Company data, Macquarie Research, July 2018 Xiaomi. Source: Company data, Macquarie Research, July 2018
9 July 2018 7 Macquarie Research Xiaomi
Online gaming services Xiaomi’s internet value-added services are mainly from sales of online gaming virtual currency as another rev stream in that can be spent to buy virtual items for use in the games (2% of total 2017 revenue). The internet services revenue is subject to revenue-sharing agreements with third-party game developers. Xiaomi owns several comprehensive online gaming customers, with the top five customers accounting for 31% of its total online gaming services revenue in 2017. Other internet value-added services Xiaomi provides (2% of total revenues in 2017) are subscriptions paid by users of premium entertainment content (such as online videos, literature and music) and live streaming and internet financial services.
Fig 18 Xiaomi’s top five online gaming customers in 2017 Fig 19 Xiaomi app: Xiaomi live streaming
King of Glory 20% AION 4% Clash of Kings 3% Others Anipop 69% 2% Cross fire 2%
Source: Company data, Macquarie Research, July 2018 xxxxxxxxxxxx Source: Company data, Macquarie Research, July 2018
Rising online We model Xiaomi’s advertising revenue to register a 60% CAGR in 2018-20E driven by advertising markets rising MIUI active users, ARPU, and a growing market. Global internet services are expected to register a 10% revenue CAGR in 2018-20E to US$2.2tn, with online advertising posting a 13% CAGR in 2018-20E to US$461bn. The China internet services market is expected to show a faster 16% CAGR in 2018-20E to US$538bn, with online advertising chalking up 24% CAGR in 2018- 20E to US$108bn. Xiaomi’s online advertising revenue hit US$685m in 2017, accounting for 0% / 2% market share globally / in China, showing substantial potential upside.
Fig 20 Growing global online advertising market Fig 21 Strong online advertising market growth in China
US$bn US$bn 500 +13% Cagr in 2018-20E 120 +24% Cagr in 2018-20E 450 100 400 350 80 300 250 60 200 40 150 100 20 50 - - 2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E
Global online advertising market size China online advertising market size
Source: Company data, Macquarie Research, July 2018 xxxxxxxxxxxx Source: Company data, Macquarie Research, July 2018
9 July 2018 8 Macquarie Research Xiaomi
Rising MIUI MAUs Xiaomi’s MIUI monthly active users (MAUs) rose from 135m in Dec 2016 to 171m in Dec 2017, or driven by Xiaomi’s net adds of 36m. In March 2018, MAUs rose further to 190m, or net adds of 19m compared to growing number of Dec 2017, already tracking 53% of the net adds in 2017. We model MAUs rising to 247m / devices 347m in Dec 2018 / 2019 driven by Xiaomi’s market share gains in smartphones, IoT devices, and lifestyle products. Xiaomi’s strong position in smartphones also helps it attract the most user flow given smartphones are the main portal for the mobile internet, and the mobile internet enjoys a high and growing penetration rate. According to the company, mobile internet users totalled around 3,880m in 2017 globally, or 51% of the global population with around 753m users in 2017 in China, or 54% of the global population. The penetration rate is guided to rise to 61% / 65% in 2020E globally / in China.
Fig 22 Growing global mobile internet users Fig 23 Growing China mobile internet users
m users m users 6,000 70% 1000 70% 900 5,000 60% 60% 800 50% 700 50% 4,000 600 40% 40% 3,000 500 30% 30% 400 2,000 20% 300 20% 200 1,000 10% 10% 100 - 0% 0 0% 2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E
Global mobile internet users Penetration rate (RHS) China mobile internet users Penetration rate (RHS)
Source: Company data, Macquarie Research, July 2018 xxxxxxxxxxxx Source: Company data, Macquarie Research, July 2018
9 July 2018 9 Macquarie Research Xiaomi
Competitive edge
Ecosystem and 5G upside Mi ecosystem drives We identify Xiaomi’s competitive edge in market share gains: 1) in-house smartphone market share gains processor, 2) competitive MIUI OS, 3) multiple connected devices across consumer electronics and lifestyle products supported by multiple partners (such as Huami for wearables, Zhimi for air purifier, etc.), 4) comprehensive channels include online, offline, and new retail (O2O), 5) local production to accelerate expansion, 6) fan culture to drive device sales and internet services (advertisement, gaming operation services), and 7) competitive hardware pricing supported by internet services. We expect Xiaomi’s ecosystem across products, channels, members, internet services, and supply chains to be best equipped for market share gains and lead to more upside when 5G arrives.
Fig 24 Xiaomi’s competitive edge in market share gains Edges Details In-house Lower dependence on single supplier and lower costs processor Only four smartphone brands own in-house processors: Apple, Samsung, Huawei, Xiaomi 30% of IPO funds (US$916m) to develop core products, including smartphones, smart TVs, AI speakers, etc. MIUI MIUI update covers most Xiaomi devices (even 5-year old Xiaomi smartphones) Better system optimization to save power consumption Forum, allows end-users to participate in product development Devices Multiple connected devices across consumer electronics (smartphone, wearables, smart speaker, service robots, drone, VR, NB, TV, camera, etc.) and lifestyle products (air purifier, balance scooter, smart light, rice cooker, smart scale, etc.) Ecosystem, all devices could be connected to each other, upside in 5G era (IoT, smart home) Use partnership to accelerate product coverage, such as Huami for wearables, Zhimi for air purifier, etc. By March 2018, Xiaomi had invested and managed over 210 companies 30% of IPO funds to expand and strengthen ecosystem: internet services, AI, IoT and lifestyle products Channels Extends from online to offline and new retail (O2O) Offline channels include authorized store, which owns pricing rights Target to expand to 1,000 stores by 2020E 30% of IPO funds to global expansion, including investing in retail partners and expand local teams 2018 targets Southeast Asia, Europe, and for 2019 and forward will continue to expand to other areas Local production Accelerate overseas market expansion Tax benefits, local government support Fan culture MIUI monthly active users at 190m in Mar 2018 MIUI Forum owns 9m+ monthly active users in Mar 2018 Mi fans with 5+ Xiaomi connected products (excludes smartphones and notebooks) at 1.4m by Mar 2018 Loyalty program Internet services Advertisement Gaming operation services Price High cost-to-performance ratio Source: Macquarie Research, July 2018
Fig 25 Xiaomi Smart Home, IoT: upside in 5G era Fig 26 Xiaomi in-house mobile processor
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
9 July 2018 10 Macquarie Research Xiaomi
In-house mobile processor: Surge S Xiaomi is the fourth Mobile processor is one of the key components in a smartphone, determining the smartphones’ global brand to own in- performance and possibly leading to higher costs or product launch delays if supply tightens. house mobile processor Among numerous smartphone brands, only four brands own in-house processors: Apple, Samsung, Huawei, and Xiaomi. Xiaomi launched its first processor, Surge S1, in Feb 2017, and adopted it in its smartphone Mi 5c (priced at US$231). Xiaomi Surge S1 is a mid-range SoC. The CPU displays an octa-core ARM Cortex-A53 configuration with clock speed of 2.2GHz and 1.4GHz, similar speed to Qualcomm Snapdragon 626, MediaTek Helio P25, or Huawei HiSilicon Kirin 655. The GPU features a fast ARM Mali-T860 design, doubling the core count over MediaTek Helio P25 and is also faster than Huawei’s HiSilicon Kirin 655. The processor is built on a 28nm process, which is an older process compared to other mid-range SoC, which are in 14 / 16nm process; however, we expect Xiaomi to continue drive its in-house processor with the potential for a next generation Surge S2 upgrade to the 16nm process (expected to be released in 2H18).
MIUI: outstanding Android ROM Most popular and allows Most China smartphones have their own Android ROM, re-designing the user interface to better fit users to participate in Chinese consumer habits, such as Xiaomi’s MIUI, Meizu’s Flyme, Huawei’s EMUI, OPPO’s Color smartphone design OS, Vivo’s Funtouch OS, etc. Xiaomi’s MIUI registers outstanding performance and high brand awareness. MIUI updates can be applied to many Xiaomi devices. For example, the MIUI 9 launched in July 2017 can be updated on 40 Xiaomi devices, including the 5-year old Xiaomi smartphone, Mi 2 (launched in Aug 2012). MIUI is also good at system optimization to save on power consumption. Also useful is the MIUI Forum, which connects end users to Xiaomi, allowing end users to provide feedback and participate in product development. In March 2018, MIUI monthly active users (MAUs) totalled 190m with 9m in the MIUI Forum.
Fig 27 MIUI 10, designed for full screen smartphones Fig 28 MIUI Forum
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
9 July 2018 11 Macquarie Research Xiaomi
Multiple devices beyond smartphones Global IoT leader with Xiaomi provides multiple connected devices across consumer electronics, such as devices, APPs, and IoT smartphones, wearables, notebooks, smart speakers, TVs, service robots, drones, VRs, etc, and platform lifestyle products, such as air purifier, balance scooter, smart light, rice cooker, smart scale, etc. These devices can be connected through MIUI, with related apps on Xiaomi smartphones. Take Mi Air Purifier, for example. Through the Mi Home app, users can monitor their home air quality in real time, control the purifier remotely, and watch how air is being purified. The app also shows outside air quality, suggests when to switch the purifier off and open windows, remind users to change filters, and notifies users when it detect problems when working, such as open windows, etc. Xiaomi has launched various smart devices despite its short 8-year history thanks to its innovative strategy – invests in startups and jointly develops products under the Xiaomi brand. The partnerships have helped expand its product lines and the startups have created a strong Mi ecosystem. Under its partnerships, Xiaomi and the startup develop products together, and the startup is in charge of the production. Xiaomi then procures products from the startup at a price close to cost, sells them through Xiaomi’s channels, and finally shares the profit with the start-up. The Mi ecosystem chain has grown quickly and robustly. By March 2018, Xiaomi had invested and managed over 210 companies, mainly in 1) smartphone accessories: power bank, earphones, etc, 2) smart devices: wearables, service robots, air purifiers, electric scooters, balance scooters, rice cookers, etc, and 3) lifestyle products like suitcases, stationery, electric toothbrushes, etc. For example, Huami (HMI US, NR, report link, Xiaomi and Xiaomi’s chairman own ~30% stakes) for wearables & smart scales, Zhimi for air purifier, Zmi for power bank, 1More for earphones, etc.
Fig 29 Huami Mi Band: 15% global market share in 1Q18 Fig 30 Zhimi Mi Air Purifier: global top market share
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
Fig 31 Roborock Mi robot vacuum, top 3 in China online Fig 32 Zmi Mi power bank: global top market share
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
9 July 2018 12 Macquarie Research Xiaomi
Fig 33 Ninebot Mi self-balancing scooter Fig 34 Soocas Mi sonic electric toothbrush
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
Fig 35 1More Mi earphones Fig 36 Viomi Mi water purifier
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
IoX, upside in 5G era As highlighted in our IoX theme report (Io’X’ – Connecting the opportunities, link, Mar 14), we expect IoT (Internet of Things) market growth to accelerate along with continuous development in Technology (hardware, software, semiconductors) and Telecom (all approaches of connections, 5G). We view 2018 as a great time to review IoT, as new products and services emerge and 5G approaches. We see IoT as a door to the Intelligent Era, where devices can interact with each other and humans. IoT also carries Big Data, driving data analytics and creating new products, services, and business models, such as Smart Home, Smart City, IoV (Internet of vehicles), etc.
30% IPO funds in IoT Xiaomi ranks as the world’s largest consumer IoT platform in terms of the number of and AI functions connected devices (excluding smartphones and notebooks), according to iResearch, and Xiaomi launched its IoT developer platform in Nov 2017, attracting 580 developers by Mar 2018. The platform allows devices to connect to each other, provides cloud platform, storage, IoT module, apps remote control, voice command, content sharing, etc. Xiaomi will also allocate 30% of its IPO funds to expand and develop IoT products, including AI functions, showing the company’s determination in this area. We expect Xiaomi’s strong IoT devices accelerated by the Mi ecological chain will best position the company in the upcoming 5G era, bringing upside in IoT, Smart Home and Big Data.
9 July 2018 13 Macquarie Research Xiaomi
Channels: extends to offline and O2O new retail Strong growth in offline Xiaomi starts from online channels and extends to offline and O2O new retail, driving and distribution market share expansion. Xiaomi’s revenue from smartphones, IoT devices, and lifestyle products channels grew strongly at +70% YoY in 2017, thanks to strong growth in offline direct sales (+226% YoY), offline distribution (+129% YoY), and online distribution (+91% YoY). The offline direct sales growth has been driven by the growing number of offline stores (Mi Home), up from 51 stores in 2016 to 331 stores by March 2018 in China. Managers target to drive Mi Home in China to 1,000 stores by 2020E. The offline distribution growth has also been driven by the growing number of offline stores, especially Mi authorised stores overseas. Managers also target Mi authorised stores overseas to reach 1,000 stores by 2020E. The offline distributor contribution rose by 269% YoY in 2017, with similar same store sales (SSS) as 2016 at Rmb44m. Online distribution growth in 2017 was driven by both more distributors (+21% YoY) and higher annual revenue per distributor (+42% YoY).
Fig 37 Xiaomi’s hardware revenue by channel 2015 2016 2017 2017 YoY 2017 Mix Store name
Xiaomi's hardware revenues (Rmb m) 62,406 61,180 104,011 70% 100% Online direct 43,019 25,865 29,232 13% 28% Mi.com, Youpin, Xiaomi Tmall Offline direct 361 1,660 5,414 226% 5% Mi Home Online distribution 10,998 20,113 38,422 91% 37% JD.com, Suning, Flipkart, Amazon, etc. Offline distribution 8,027 13,541 30,944 129% 30% China Mobile, China Telecom, China Unicom, Mi authorized stores, retail stores, etc. Xiaomi's numbers of stores (store) Online direct 2 2 3 50% 0% Offline direct 51 286 461% 19% Online distribution 58 90 109 21% 7% Offline distribution 93 299 1,103 269% 73% Xiaomi's SSS (Rmb m) Online direct 21,510 12,933 11,693 -10% 96% Offline direct 33 32 -1% 0% Online distribution 190 272 386 42% 3% Offline distribution 86 45 44 -3% 0% Source: Company data, Macquarie Research, July 2018
Fig 38 Xiaomi revenue by channel: rising distribution Fig 39 Xiaomi hardware rev. YoY change by channel in 2017
Rmb m 120,000 250%
100,000 200% 30% 80,000
150% 60,000 37%
40,000 100% 5% 20,000 28% 50% - 2015 2016 2017 0% Online direct Offline direct Online distribution Offline distribution Offline direct Offline Online Total Online direct distribution distribution
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
9 July 2018 14 Macquarie Research Xiaomi
Xiaomi opened 231 Mi Xiaomi’s offline channel is providing strong revenue support with rapid store expansion Home outlets in China and sustainable same-store sales. Xiaomi started its first offline store (Mi Home) in 2H11 as a within 10 months service centre, providing maintenance services, technology support, and store pick-ups. The service centre extends to 20~30 stores in China in the latter 1~2 years. In Nov 2013, Xiaomi’s service centre in Zhuhai was upgraded to a flagship service centre, with larger space (350 square meters) and more functions, including product sales. In Sep 2015, Xiaomi opened its first Mi Home in a shopping mall at 380 sqm, signaling Mi Home is transforming itself from a service centre to an offline retail store, upgrading from a costs centre to a revenues generator. In 2016 and 2017, Xiaomi aggressively expand Mi Home, opening its 100th Mi Home in Shanghai in May 2017 and 300th Mi Home in Henan in Jan 2018. Mi Home grew to 331 stores by Mar 2018. Integrate online and O2O new retail is the key strength Xiaomi owns in offline channel expansion. Leveraging its offline channel leading market position in online channel, Xiaomi connects its online and offline stores, leading its online customer flows to offline stores and attract new customers in offline stores and back to online stores. Customers can buy products in the store through a QR code scan and opt for direct home delivery. This not only improves customer convenience, but also integrates the consumption data between online and offline, enhancing Xiaomi’s operation in offline channels, such as inventory management, product display optimisation, etc. Multi-products in the Multiple products is another key strength Xiaomi owns in offline channel expansion. Xiaomi is not store, beyond only selling smartphones in Mi Home, but also IoT devices and lifestyle products, which are smartphones expanding fast through the Mi ecosystem, driving revenue per store. Stylish, fashion, and Brand image marketing is another key function of Xiaomi’s Mi Home. Stylish, fashion, and premium as Mi Home premium are the key features of Xiaomi’s Mi Home, which are mostly located in premium brand image shopping malls with glass walls. The glass walls not only add a stylish flavour to the store but also allow customers to see into the store from outside the mall, including products, people flow, how many floors it has, etc. driving revenue per store.
Fig 40 Xiaomi Mi Home in Nanjing Fig 41 Xiaomi Mi Home: O2O new retail + multiple products
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
9 July 2018 15 Macquarie Research Xiaomi
Smartphone: Riding on India Share gains in multiple markets Riding on India market As highlighted in our Smartphone Tracker v.12 (link, New flagship models in 1Q18, April 9), we and market share gains expect global smartphone shipments to continue to show flattish growth in 2018-20E; however, we in SEA, Europe, China expect Xiaomi to post a 30% shipment CAGR in 2018-20E to 221m units in 2020E, or 14% global market share from 6% in 2017, driven by India market growth and Xiaomi’s market share gains in Southeast Asia (SEA), Europe, and China. We expect Xiaomi’s investment in channels (including operator channel Three in Europe), time-to-market and innovative models, and growing ecosystem across devices, members, and internet services to drive market share gains. We also expect the evolving ecosystem to provide upside opportunities for the Xiaomi brand in the 5G era. For pricing, Xiaomi is known as a brand with high cost-to-performance products; however, we believe the street might underestimate Xiaomi’s ability to raise prices, especially in a rising price environment. We see Xiaomi’s premium models displaying aggressive specifications as an avenue to lift Xiaomi’s brand image and support its pricing. In 2017, the price of Xiaomi’s high-end models (priced at Rmb2,000+) rose 39% YoY with shipments still up 6% YoY.
Fig 42 Xiaomi’s smartphone shipment trend Fig 43 Xiaomi’s ability to raise smartphone prices
m units Shipment Cagr at 250 120% 30% in 2017-20E 100% 100% 200 80% 61% 150 60% 39% 40% 100 20% 6% 1% 50 0% -2% -20% - High-end Mid-end Entry 2015 2016 2017 2018E 2019E 2020E (Rmb2,000+) (Rmb800-1,999) (Rmb799 and below)
China India SEA EMEA ROW Shipment YoY in 2017 ASP YoY in 2017
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
Shipment drivers: India, SEA, EMEA, China Despite the flattish global smartphone market, emerging market shipments grew 4% YoY in 2017 to 44% of global market share, up from 42% in 2016. The emerging markets exclude Australia, Canada, China, Japan, Korea, the US, and western European countries.
Among the emerging markets, India enjoyed the strongest growth of 14% YoY in 2017 to 8% of global market share, up from 7% in 2016. The smartphone penetration rate in India was at 43% in 2017, showing ample upside to grow. We model 15% CAGR for unit smartphone shipments in India in 2018-20E, driven by rising population and smartphone penetration rates.
Fig 44 Global smartphone shipment by market in 2017 Fig 45 Global smartphone shipment CAGR in 2018-20E
16% 14% ROW China 12% 30% 30% 10% 8% 6% EMEA 4% 25% India 8% 2% ASEAN 0% India EMEA Global China ROW SEA 7% Source: IDC, Macquarie Research, July 2018 Source: Macquarie Research, July 2018
9 July 2018 16 Macquarie Research Xiaomi
Fig 46 China smartphone leading brand flagship model pipeline
*: expected launch month. Source: Company data, Macquarie Research, July 2018
Fig 47 Xiaomi smartphone pipeline
*: expected launch month. Source: Company data, Macquarie Research, July 2018
ASP upside: Xiaomi’s ability to raise smartphone prices
We believe the street may underestimate Xiaomi’s ability to raise smartphones prices, especially in an environment of rising smartphone prices. Xiaomi raised its high-end model selling price by 39% YoY in 2017, and shipments still rose 6% YoY. High-end models are now priced at or above Rmb2,000 (US$302), or series MIX, Mi, and Mi Note. We expect the company’s shift toward Europe to further enhance its ability to raise prices.
9 July 2018 17 Macquarie Research Xiaomi
India, riding on a growing smartphone market Leader in India, the 3rd India was the world’s third-largest smartphone market after China and the US and enjoys much largest market, with 15% stronger growth compared to China and the US in 2017. India smartphone shipments rose 14% unit CAGR in 2018-20E YoY in 2017 to 124m units, or 8% of global market share. We model India smartphone shipments to post a 15% CAGR in 2018-20E driven by rising population and smartphone penetration rates. Low smartphone India’s smartphone penetration rate, or smartphone to mobile phone portion, was 43% in 2017 penetration rate, rising (vs. 94% in China), showing rich upside now. The growing population and GDP supports consumption power consumption upgrades to smartphones. India is on track to enjoy one of the world’s fastest GDP growth rates of 7.4% in 2018E around the world and to further expand to 7.8% in 2019E, according to the IMF. In addition, India’s population is mostly young people, with 41% of the population aged at 25-54 years old.
Fig 48 Rich upside for India’s smartphone growth Fig 49 Smartphone sales in India: online vs. offline
100% 94% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 43% 50% 40% 40% 30% 30% 20% 20% 34% 36% 10% 10% 0% 0% Smartphone to total mobile phone 4Q17 1Q18
India China Online Offline
Source: IDC, Macquarie Research, July 2018 Source: IDC, Macquarie Research, July 2018
Rising internet and 4G The rising internet penetration rate is another key support to smartphone sales as it drives coverage online channel consumption. Internet users in Indian cities rose 10% YoY in 2017 but in rural areas the pace was faster at 14% YoY. Overall internet users stayed low at around 480m in 2017, or 35% of the total population, showing rich upside to grow. The portion of online channel sales of smartphones in India rose to 36% in 1Q18 from 34% in 4Q17. Operator investments in 4G networks and 4G service price cuts (e.g. Reliance Jio) have accelerated 4G market growth. Xiaomi gains share in Xiaomi enjoys the largest market share in India with high cost-to-performance smartphone both online and offline models and comprehensive distribution channels both online and offline. Riding on the growing online channel market trend (up from 34% in 4Q17 to 36% in 1Q18), Xiaomi also gained market share in eTailer shipments, to 53% in 1Q18 from 32% in 1Q17, according to IDC. Around 70% of Xiaomi’s smartphones sales are from online channels. Xiaomi started its offline channel in India in 2017 by establishing its first ‘Mi Home’ in India in May 2017. By Jan 2018, the Mi Home extended to 17 stores, and management aims to further grow this to 100 stores by mid-2019.
Fig 50 India smartphone market share by vendor in 1Q18 Fig 51 Xiaomi aggressive in offline channels in India
stores 120 100 100 Others Xiaomi 80 27% 30% 60 40 17 OPPO 20 1 7% Samsung 0 by May 2017 by Jan 2018 by Mid 2019E Lenovo Vivo 25% 4% 7% Xiaomi numbers of offline stores Mi Home
Source: IDC, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
9 July 2018 18 Macquarie Research Xiaomi
Riding on India market Xiaomi has taken the largest market share in India in three years, and going forward, we are growth not positive on further market share gains in India for Xiaomi. We model Xiaomi’s smartphone shipments in India to register a 22% CAGR in 2018-20E with market share gradually rising to 34% in 2020E from 30% in 2018E. The smartphone market is the main growth driver in India.
Emerging Southeast Asia (SEA) and EMEA, the next two regions to earn market share Market share gains in Apart from India, we are positive that Xiaomi will gain market share in other overseas SEA and Europe markets, especially SEA and EMEA, where Xiaomi’s current market share is below 5% in both markets. We model Xiaomi’s smartphone shipments in SEA and EMEA to register a 67% CAGR in 2018-20E from a low base; Xiaomi’s aggressive move in overseas markets; Xiaomi’s high cost-to-performance products to meet market demand; Xiaomi’s online and offline channels, and forming ecosystem across device, software, and members to attract users. Xiaomi’s success and track record in India (it became the market leader in three years) also shows its aggressive nature and strong execution.
Fig 52 Global smartphone shipment CAGR in 2018-20E: Fig 53 Xiaomi market share by region: Xiaomi to ride on Xiaomi to ride on strong market growth in India market share gain in SEA and EMEA
16% 14% 40% 35% 12% 30% 10% 25% 20% 8% 15% 6% 10% 5% 4% 0% 2% India SEA EMEA 0% 2018E 2020E India EMEA Global China ROW SEA
Source: Macquarie Research, July 2018 Source: Macquarie Research, July 2018
9 July 2018 19 Macquarie Research Xiaomi
Xiaomi’s expansion in SEA Flattish SEA but strong Emerging Southeast Asia (SEA) includes Indonesia, Malaysia, Myanmar, the Philippines, Thailand, mid-end model growth and Vietnam. Total smartphone shipments in SEA fell 0.6% YoY in 2017 to 101m units, or 7% of global market share. The top five smartphone brands in SEA were Samsung, OPPO, Vivo, Huawei, and Apple in 2017, with Samsung enjoying 29% market share. Mid-range models showed strong increases in 2017, with shipments up 54% YoY in 2017 to 27m units, or 27% of total smartphone shipments. This showed consumption upgrade in this area and consumers’ rising willingness to pay for new features, such as dual cameras, thin bezels, AI, etc. Mid-range models such as Samsung’s Galaxy J series, OPPO’s F series, Vivo’s V series, and Huawei’s Nova series, priced at around US$200~400, equal to Xiaomi’s mid-end models, Mi Max or Redmi series, which are the primary volume models of Xiaomi, contributing 59% of total shipments in 2017.
Fig 54 SEA smartphone market share by brand in 2017 Fig 55 SEA smartphone market: strong mid-end models
m units 30 +54% YoY
25
Others Samsung 20 33% 29% 15
10
OPPO 5 Xiaomi 17% Vivo 4% 0 Apple 7% 2016 2017 5% Huawei Mid end smartphones (US$200~400) shipments in SEA 5%
Source: IDC, Macquarie Research, July 2018 Source: IDC, Macquarie Research, July 2018
Local production and Indonesia is the largest smartphone market in SEA. Xiaomi entered Indonesia in 2H14 and offline channel drives started local production in 2017, as management started to see Indonesia as a key target market. market share In 1Q18, Xiaomi’s smartphone shipments in Indonesia grew 1,455% YoY to 1.7m, or 18% market share, only after Samsung with 26% market share. In 1Q17, Xiaomi’s Indonesia smartphone shipments totalled 0.1m, well behind Samsung’s 2.0m, OPPO’s 1.5m, and Vivo’s 0.5m. Local production, offline service centre and offline channels all helped drive Xiaomi’s success in Indonesia. By late 2017, Xiaomi had established 61 Mi service centres and 5 Mi stores in Indonesia.
Fig 56 Xiaomi Mi authorised store in Vietnam Fig 57 Xiaomi’s Mi authorised store expansion in SEA
Mi stores 6 5 5
4
3 2 2 2 1 1 1
0 Indonesia Thailand Malaysia Philippines Vietnam (by late 2017) (by Oct 2017) (by Nov 2017) (by Feb 2018) (by Apr 2018)
Xiaomi Mi stores
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
9 July 2018 20 Macquarie Research Xiaomi
Xiaomi’s market share Apart from Indonesia, Xiaomi has expanded to other countries in SEA. For example, Xiaomi in SEA rises to 17% in opened its first Mi store (authorised store) in Thailand in Oct 2017, its second store in Malaysia in 2020E (vs. 4% in 2017) Nov 2017, its first store in the Philippines in Feb 2018 and its second store in Vietnam in Apr 2018. In addition, Xiaomi’s smartphones in Myanmar already ranked top 2 in 2017. We expect offline channel investments and its local production base in Indonesia to further drive Xiaomi’s market share gains in SEA. We model its market share in SEA to rise to 17% by 2020E from 4% in 2017.
9 July 2018 21 Macquarie Research Xiaomi
Xiaomi’s expansion in EMEA Penetrated Europe EMEA, Europe, the Middle East and Africa smartphone shipments totalled 361m in 2017, or 25% operator (Three) and global market share with an average selling price at US$300. Samsung, Apple, Huawei, and Nokia retail channels are the main brands in EMEA. We do not expect strong market growth in EMEA in 2018-20E but see Xiaomi’s market share gains, driven by offline channel expansion and the global strategic alliance with CK Hutchison, which drives Xiaomi to penetrate the operator channels in European markets. We model Xiaomi’s market share in EMEA to rise from 1% in 2017 to 10% in 2020E. Xiaomi ranked top 4 in In Europe, Xiaomi’s smartphone shipments rose 999%+ YoY in 1Q18 to 2.4m units, or 5% market Europe in 1Q18 share, after Samsung’s 33%, Apple’s 22%, and Huawei’s 16%. Xiaomi’s online channel in Europe started in 2015 and the first offline store opened in July 2017 in Greece ahead of Spain and Russia in Nov 2017, Poland in Mar 2018, Czech in Apr 2018, and France and Italy in May 2018.
Fig 58 Europe smartphone market share by vendor in 1Q18 Fig 59 Xiaomi aggressive in offline channels in India
Mi stores 2 Others 20% 1 1 1 1 1 1 1 Nokia 1 4% Samsung 33% Xiaomi 0 5% Greece Spain Russia Poland Czech France Italy Huawei (by Jul (by Nov (by Nov (by Mar (by Apr (by May (by May 16% Apple 2017) 2017) 2017) 2018) 2018) 2018) 2018) 22% Xiaomi Mi stores
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
Mi authorised store According to management, Xiaomi also ranked among the top 5 vendors in the European expansion in EMEA countries below: Belarus (ranked No. 1 by smartphone shipments), Ukraine (top 2), Russia (top 3), Greece (top 3), Czech (top 4), Lithuania (top 4) and Latvia (top 5). In the Middle East and Africa, Xiaomi opened its first Mi authorised store in Dubai in Aug 2017 and expanded to Egypt in Nov 2017.
Fig 60 Xiaomi’s first Mi authorised store in France Fig 61 Xiaomi smartphone market share ranking
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
9 July 2018 22 Macquarie Research Xiaomi
Partnered with CK Xiaomi also formed a global strategic alliance with CK Hutchison (1 HK, Outperform, Hutchison in May 2018 covered by David Ng, link) in May 2018, covering Xiaomi smartphones and IoT and lifestyle for Europe expansion products for sale in CK Hutchison’s telecom and retail divisions across the world. CK Hutchison has over 17.7k retail and telecom stores worldwide, close to 130m active mobile customers and 140m loyal retail customers. Through CK Hutchison’s telecom operator, Three, Xiaomi’s products will be sold in Three’s stores in Austria, Denmark, Hong Kong, Ireland, Italy, Sweden and the UK. Through CK Hutchison’s retailers (A S Watson’s Fortress, Superdrug, Kruidvat), Xiaomi’s products will be sold in Hong Kong, Ireland, the UK and the Netherlands. With Xiaomi’s self- owned offline channel expansion and its global strategic alliance with CK Hutchison to penetrate both operator channels and retailer channels in European markets, we are confident of seeing Xiaomi gain market share in Europe.
Fig 62 Xiaomi gains operator channel in UK Fig 63 Xiaomi has retail channel in UK
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
9 July 2018 23 Macquarie Research Xiaomi
China: Xiaomi to win back leadership by 2020E Share gainer in flatish China is the largest smartphone market in the world. In 2017, smartphone shipments to China China market totalled 444m units, or 30% of the global market for smartphones. We do not expect strong market growth in China given the already high smartphone penetration rate of 95% in May 2018, but we expect Xiaomi to gain share in the China market. Xiaomi’s smartphone shipments to China increased by 33% YoY in 2017 to 55m units, or market share of 12% (vs. 9% in 2016), trailing Huawei at 20%, OPPO at 18%, and Vivo at 15%. We model Xiaomi’s market share in China to gradually expand to 23% in 2020E driven by its comprehensive channels (online, offline, and new retail), product lines (smartphones, IoT and lifestyle devices), and evolving ecosystem across devices, internet services and membership base.
Fig 64 Smartphone shipments in China Fig 65 Smartphone shipment market share in China
m units 70 40% 100% 30% 60 90% 20% 80% 50 10% 70% 1.7% 40 0% 60% 30 -10% 50% -20% 20 40% -30% 30% 10 -40% 20% 0 -50% 10% 15% 9% 12%
0%
Jul-16 Jul-17
Oct-16 Apr-17 Oct-17 Apr-18
Jun-16 Jan-17 Jun-17 Jan-18
Mar-17 Mar-18
Feb-17 Feb-18
Dec-16 Sep-16 Nov-16 Aug-17 Sep-17 Nov-17 Dec-17
Aug-16 2015 2016 2017
May-16 May-17 May-18
Smartphone shipment in China YoY (RHS) Xiaomi Huawei OPPO Vivo Apple Others
Source: MIIT, Macquarie Research, July 2018 Source: IDC, Macquarie Research, July 2018
Xiaomi rebounded in In 2016, Xiaomi’s smartphone units to China fell 36% YoY to 42m units, or 9% of market share. 2017 right after 1-year This was the year that Xiaomi lost its market share leadership position in China as it fell behind struggle OPPO (17% market share), Huawei (16%), Vivo (15%), and even Apple (10%). In the competitive China smartphone market, a brand’s market share decline in one year can lead to it vanishing in the next 1 ~ 2 years; however, Xiaomi rebounded in 2017 with China shipments rising 33% YoY in 2017 to 55m units with its market share rebounding to 12% in China. Fast rebound on flexible We attribute Xiaomi’s revival to its flexible marketing strategy. Xiaomi extended its channels strategy, fast change, to offline, using more offline ads in public areas, such as subways, railways stations, airports, etc. and strong execution with celebrity endorsements. Xiaomi extends its brand image from the online virtual world to offline real world, with stylish store designs, prime locations and celebrity endorsement to enhance its brand image to more consumers. This flexible culture, timely decision and strong execution helped save Xiaomi from the downcycle, and propelled it to new heights. We believe this flexible nature will contribute to Xaiomi’s long-term success in the dynamic smartphone market.
Fig 66 Xiaomi Mi store in Shenzhen Fig 67 Xiaomi railway station ad with celebrity endorsement
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
9 July 2018 24 Macquarie Research Xiaomi
Financial analysis 34% revenue CAGR in Xiaomi delivered strong revenue growth of 67% YoY in 2017 driven by strong smartphone, IoT 2018-20E on market devices and lifestyle products and advertisements, rebounding from the trough year in 2016. Going share gains forward, we see revenue momentum continuing at a 34% CAGR in 2018-20E with 1) smartphone revenues posting a 34% CAGR driven by India smartphone market growth and Xiaomi’s market share gains in Southeast Asia, Europe, and China, 2) other hardware revenue generating a 30% CAGR driven by wearable and TV market share gains, service robots and air purifiers in strong market growth and upside in growing product lines driven by the Mi ecological chain, 3) advertising revenue registering a 60% CAGR supported by rising active users on a growing number of Xiaomi devices with upside in ARPU. GM expansion on larger Xiaomi’s GM rose from 4.0% in 2015 to 13.2% in 2017, and we expect it to further expand to scale and product mix 16.4% in 2020E, driven by improving GM in other hardware excluding smartphones, which grew to upgrade 12.7% in 1Q18 from 8% in 2016 / 17, given more product lines, larger scale, and GM improvements in both TVs and notebooks. Going forward, we expect GM to gradually improve to 12.0% in 2020E driven by improving GM in other hardware excluding smartphones and better product mix (more internet services income). The internet service income is mainly from advertisements and gaming operating services, enjoying GM at 81.8% / 43.6% in 2017, respectively, vs. the company’s blended GM at 13.2%. We expect Xiaomi’s growing hardware / MIUI MAUs will drive its advertising income up to 8% of income by 2020E from 5% in 2017, boosting gross profit contribution to 41% in 2020E from 30% in 2017.
Fig 68 Xiaomi revenue and GM trends Fig 69 Xiaomi revenue and OPM trends
RMBm RMBm 352,000 18% 352,000 10%
16% 302,000 302,000 8% 14% 252,000 252,000 6% 12%
202,000 10% 202,000 4%
152,000 8% 152,000 2% 6% 102,000 102,000 0% 4% 52,000 52,000 -2% 2%
2,000 0% 2,000 -4% 2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E
Revenue GM (RHS) Revenue OPM (RHS)
Source: Company data, Macquarie Research, July 2018 Source: Company data, Macquarie Research, July 2018
Stable opex ratio and Xiaomi’s opex ratio was stable at around 8% in 2016–17, and we expect a similar opex ratio lower financial liabilities in 2018-20E. The company’s operating income reached Rmb5.6bn in 2017; however, pretax once listed income fell to negative Rmb42bn in 2017 due to non-recurring financial liabilities of Rmb54bn caused by the fair value changes in convertible redeemable preferred stock, given Xiaomi’s rising market value. The convertible redeemable preferred stock will convert to common shares once Xiaomi is listed and thus won’t generate financial liabilities afterwards. This will thus support the EBIT to turn positive in 2018 and drive FCF to turn positive. The financial liabilities are a non-cash item and do not affect Xiaomi’s cash flow. We model net income excluding the non- recurring financial liabilities to register a +40% CAGR in 2018-20E, driven by revenue growth and margin expansion.
9 July 2018 25 Macquarie Research Xiaomi
Fig 70 Xiaomi P&L (Rmb m) 1Q17 1Q18 2Q18E 3Q18E 4Q18E 2015 2016 2017 2018E 2019E 2020E
Revenue 18,532 34,412 38,189 43,479 47,120 66,811 68,434 114,625 163,200 222,884 294,370 Gross profit 2,464 4,301 4,794 6,501 7,083 2,700 7,249 15,154 22,679 34,297 48,274 Operating profit 892 1,330 1,586 3,023 3,313 -1,491 1,196 5,555 9,251 16,466 24,725 Financial liabilities* -9,464 -10,071 0 0 0 -8,759 -2,523 -54,072 -10,071 0 0 Pretax income -7,522 -6,689 1,596 3,033 3,323 -7,473 1,176 -41,829 1,262 16,507 24,768 Net income -7,846 -7,005 1,690 3,198 3,503 -7,581 553 -43,826 1,386 14,912 22,347 NI ex financial liabilities 1,619 3,066 1,690 3,198 3,503 1,178 3,077 10,246 11,457 14,912 22,347 EPS (Rmb) -0.80 -0.31 0.08 0.14 0.16 -0.78 0.06 -4.49 0.06 0.67 1.00 Margin Gross margin 13.3% 12.5% 12.6% 15.0% 15.0% 4.0% 10.6% 13.2% 13.9% 15.4% 16.4% Opex ratio 8.5% 8.6% 8.4% 8.0% 8.0% 6.3% 8.8% 8.4% 8.2% 8.0% 8.0% OP margin 4.8% 3.9% 4.2% 7.0% 7.0% -2.2% 1.7% 4.8% 5.7% 7.4% 8.4% Net margin -42.3% -20.4% 4.4% 7.4% 7.4% -11.3% 0.8% -38.2% 0.8% 6.7% 7.6% QoQ Revenue 11% 14% 8% Gross profit 11% 36% 9% Operating profit 19% 91% 10% Net income na 89% 10% EPS na 89% 10% YoY Revenue 6% 2% 67% 42% 37% 32% Gross profit 1% 169% 109% 50% 51% 41% Operating profit 49% na 364% 67% 78% 50% Net income na na na na 976% 50% NI ex financial liabilities 89% 161% 233% 12% 30% 50% EPS na na na na 976% 50% *Financial liabilities caused by the market value change of convertible redeemable preferred stock. Source: Company data, Macquarie Research, July 2018
Fig 71 Xiaomi balance sheet RMB m 2015 2016 2017 2018E 2019E 2020E
Cash & equivalents 8,461 9,864 14,274 17,221 22,381 33,314 Receivables 4,690 8,436 25,008 48,960 66,865 88,311 Inventory 8,643 8,378 16,343 28,104 37,718 49,219 Other current assets 3,158 3,958 5,513 5,513 5,513 5,513 Total current assets 24,953 30,636 61,138 99,798 132,477 176,357 Fixed assets 290 848 1,731 2,609 3,315 3,882 LT investments 10,120 14,202 20,568 20,568 20,568 20,568 Other non-current assets 3,774 5,079 6,433 6,433 6,433 6,433 Total non-current assets 14,184 20,129 28,731 29,609 30,315 30,882 Total assets 39,137 50,766 89,870 129,407 162,792 207,239 Short term debt 0 3,769 3,551 3,551 3,551 3,551 Payables 15,501 19,454 38,227 54,003 72,476 94,576 Other current liabilities 964 2,841 5,355 5,355 5,355 5,355 Total current liabilities 16,464 26,063 47,133 62,909 81,381 103,482 Long term debt 3,247 390 7,251 7,251 7,251 7,251 Other liabilities 106,064 116,370 162,696 162,696 162,696 162,696 Total LT liabilities 109,311 116,760 169,948 169,948 169,948 169,948 Total liabilities 125,775 142,823 217,080 232,856 251,329 273,430 Common stocks -86,714 -92,192 -127,272 -103,511 -88,599 -66,252 Minority equity 76 134 62 62 62 62 Total equity -86,638 -92,058 -127,211 -103,449 -88,537 -66,190 Total liabilities and equity 39,137 50,766 89,870 129,407 162,792 207,239 Source: Company data, Macquarie Research, July 2018
9 July 2018 26 Macquarie Research Xiaomi
Fig 72 Xiaomi cash flow RMB m 2015 2016 2017 2018E 2019E 2020E
Net profit -7,581 553 -43,826 1,386 14,912 22,347 Depreciation 142 140 167 340 512 651 Amortization 554 1,120 2,274 2,274 2,274 2,274 Associate share of (profits)/ loss 3,158 3,958 5,513 5,513 5,513 5,513 Total gross cash flow -3,727 5,771 -35,872 9,513 23,212 30,785 Change in net working capital 0 472 -5,763 -19,937 -9,046 -10,846 Others 1,126 -1,712 40,639 -7,804 -7,788 -7,788 Total operating cash flow -2,601 4,531 -996 -18,228 6,378 12,151 Capex -2,524 -1,826 -1,218 -1,218 -1,218 -1,218 (Purchase) Sale of ST investment 0 -799 -1,556 0 0 0 (Purchase) Sale of LT investment 0 -4,082 -6,366 0 0 0 Others 3,398 2,972 6,462 0 0 0 Total investment cash flow 873 -3,735 -2,678 -1,218 -1,218 -1,218 Increase (decrease) in debt 0 912 6,644 0 0 0 Cash dividends 0 0 0 0 0 0 Change in share capital 0 0 0 22,376 0 0 Others 568 -984 -429 16 -0 0 Total financing cash flow 568 -72 6,215 22,392 -0 0 Net cash flow -1,160 724 2,542 2,946 5,160 10,933 FX change 289 679 1,869 0 0 0 Net cash flow after FX change -871 1,403 4,410 2,946 5,160 10,933 Source: Company data, Macquarie Research, July 2018
Fig 73 Xiaomi key financial ratios RMB m 2015 2016 2017 2018E 2019E 2020E
Revenue 66,811 68,434 114,625 163,200 222,884 294,370 Gross profit 2,700 7,249 15,154 22,679 34,297 48,274 EBIT -7,387 1,262 -41,856 1,215 16,466 24,725 EBITDA -7,180 1,502 -41,495 1,555 16,978 25,375 Pretax profit -7,473 1,176 -41,829 1,262 16,507 24,768 Net profit -7,581 553 -43,826 1,386 14,912 22,347 YoY (%) Revenue 2% 67% 42% 37% 32% Gross profit 169% 109% 50% 51% 41% Net profit -107% -8022% -103% 976% 50% Per share data (Rmb) Sales per share 6.90 7.06 11.75 7.29 9.96 13.16 EPS -0.78 0.06 -4.49 0.06 0.67 1.00 BVPS -8.95 -9.49 -13.04 -4.62 -3.96 -2.96 DPS 0.00 0.00 0.00 0.00 0.00 0.00 FCF PS -1.02 -0.16 -4.00 0.91 1.04 1.45 Net cash PS 0.87 1.00 0.92 0.53 0.76 1.25 Net debt/Equity 9.7% 10.5% 7.1% 11.5% 19.3% 42.3% Margin (%) Gross margin 4.0% 10.6% 13.2% 13.9% 15.4% 16.4% EBIT margin -11.1% 1.8% -36.5% 0.7% 7.4% 8.4% EBITDA margin -10.7% 2.2% -36.2% 1.0% 7.6% 8.6% Pretax margin -11.2% 1.7% -36.5% 0.8% 7.4% 8.4% Net margin -11.3% 0.8% -38.2% 0.8% 6.7% 7.6% Valuation multiples (x) P/E -20.3 294.2 -3.7 259.9 23.0 15.1 P/B -1.8 -1.8 -1.3 -3.5 -3.9 -5.1 FCF yield -6.4% -0.9% -23.9% 5.6% 6.8% 9.6% ROE (%) 9% -1% 40% -1% -16% -29% Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Payout ratio 0% 0% 0% 0% 0% 0% Source: Company data, Macquarie Research, July 2018
Baidu (BIDU US, US$246.25, Outperform, TP: US$308.00, Wendy Huang) Alibaba Group Holding (BABA US, US$186.36, Outperform, TP: US$249.00, Wendy Huang) Tencent (700 HK, HK$390.80, Outperform, TP: HK$560.00, Wendy Huang) CK Hutchison (1 HK, HK$81.90, Outperform, TP: HK$109.27, David Ng)
9 July 2018 27 Macquarie Research Xiaomi
Xiaomi (1810 HK, Outperform, Target Price: HK$30.00) Interim Results 2H/17A 1H/18E 2H/18E 1H/19E Profit & Loss 2017A 2018E 2019E 2020E
Revenue m 57,312 81,600 81,600 111,442 Revenue m 114,625 163,200 222,884 294,370 Gross Profit m 7,577 11,340 11,340 17,148 Gross Profit m 15,154 22,679 34,297 48,274 Cost of Goods Sold m 49,735 70,260 70,260 94,294 Cost of Goods Sold m 99,471 140,521 188,588 246,095 EBITDA m -20,748 777 777 8,489 EBITDA m -41,495 1,555 16,978 25,375 Depreciation m 83 170 170 256 Depreciation m 167 340 512 651 Amortisation of Goodwill m 97 0 0 0 Amortisation of Goodwill m 194 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m -20,928 608 608 8,233 EBIT m -41,856 1,215 16,466 24,725 Net Interest Income m 13 24 24 21 Net Interest Income m 27 47 41 43 Associates m -116 8 8 0 Associates m -231 16 0 0 Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0 Forex Gains / Losses m -72 -14 -14 0 Forex Gains / Losses m -144 -28 0 0 Other Pre-Tax Income m 188 6 6 0 Other Pre-Tax Income m 376 12 0 0 Pre-Tax Profit m -20,915 631 631 8,253 Pre-Tax Profit m -41,829 1,262 16,507 24,768 Tax Expense m -1,030 30 30 -825 Tax Expense m -2,060 59 -1,651 -2,477 Net Profit m -21,945 661 661 7,428 Net Profit m -43,889 1,321 14,856 22,291 Minority Interests m 32 32 32 28 Minority Interests m 63 64 56 56
Reported Earnings m -21,913 693 693 7,456 Reported Earnings m -43,826 1,386 14,912 22,347 Adjusted Earnings m -21,816 693 693 7,456 Adjusted Earnings m -43,632 1,386 14,912 22,347
EPS (rep) -2.25 0.03 0.03 0.33 EPS (rep) -4.49 0.06 0.67 1.00 EPS (adj) -2.24 0.03 0.03 0.33 EPS (adj) -4.47 0.06 0.67 1.00 EPS Growth yoy (adj) % nmf nmf nmf 976.2 EPS Growth (adj) % nmf nmf 976.2 49.9 PE (rep) x nmf 232.1 21.6 14.4 PE (adj) x nmf 232.1 21.6 14.4
EBITDA Margin % -36.2 1.0 1.0 7.6 Total DPS 0.00 0.00 0.00 0.00 EBIT Margin % -36.5 0.7 0.7 7.4 Total Div Yield % 0.0 0.0 0.0 0.0 Earnings Split % 50.0 50.0 50.0 50.0 Basic Shares Outstanding m 9,758 22,376 22,376 22,376 Revenue Growth % 67.5 42.4 42.4 36.6 Diluted Shares Outstanding m 9,758 22,376 22,376 22,376 EBIT Growth % nmf nmf nmf 1,255.2
Profit and Loss Ratios 2017A 2018E 2019E 2020E Cashflow Analysis 2017A 2018E 2019E 2020E
Revenue Growth % 67.5 42.4 36.6 32.1 EBITDA m -41,495 1,555 16,978 25,375 EBITDA Growth % nmf nmf 992.0 49.5 Tax Paid m -2,060 59 -1,651 -2,477 EBIT Growth % nmf nmf 1,255.2 50.2 Chgs in Working Cap m -5,763 -19,937 -9,046 -10,846 Gross Profit Margin % 13.2 13.9 15.4 16.4 Net Interest Paid m 27 47 41 43 EBITDA Margin % -36.2 1.0 7.6 8.6 Other m 48,296 48 56 56 EBIT Margin % -36.5 0.7 7.4 8.4 Operating Cashflow m -996 -18,228 6,378 12,151 Net Profit Margin % -38.1 0.8 6.7 7.6 Acquisitions m 0 0 0 0 Payout Ratio % nmf 0.0 0.0 0.0 Capex m -1,218 -1,218 -1,218 -1,218 EV/EBITDA x -3.1 197.9 18.3 12.3 Asset Sales m 0 0 0 0 EV/EBIT x -3.1 252.5 18.9 12.6 Other m -1,460 0 0 0 Investing Cashflow m -2,678 -1,218 -1,218 -1,218 Balance Sheet Ratios Dividend (Ordinary) m 0 0 0 0 ROE % 39.8 -1.2 -15.5 -28.9 Equity Raised m 0 22,376 0 0 ROA % -59.5 1.1 11.3 13.4 Debt Movements m -218 0 0 0 ROIC % 44.7 -0.9 -12.7 -20.7 Other m 6,433 16 -0 0 Net Debt/Equity % nmf nmf nmf nmf Financing Cashflow m 6,215 22,392 -0 0 Interest Cover x nmf nmf nmf nmf Price/Book x nmf nmf nmf nmf Net Chg in Cash/Debt m 4,410 2,946 5,160 10,933 Book Value per Share -13.0 -4.6 -4.0 -3.0 Free Cashflow m -2,213 -19,446 5,160 10,933
Balance Sheet 2017A 2018E 2019E 2020E
Cash m 14,274 17,221 22,381 33,314 Receivables m 25,008 48,960 66,865 88,311 Inventories m 16,343 28,104 37,718 49,219 Investments m 0 0 0 0 Fixed Assets m 1,731 2,609 3,315 3,882 Intangibles m 0 0 0 0 Other Assets m 32,514 32,514 32,514 32,514 Total Assets m 89,870 129,407 162,792 207,239 Payables m 38,227 54,003 72,476 94,576 Short Term Debt m 3,551 3,551 3,551 3,551 Long Term Debt m 0 0 0 0 Provisions m 0 0 0 0 Other Liabilities m 175,302 175,302 175,302 175,302 Total Liabilities m 217,080 232,856 251,329 273,430 Shareholders' Funds m -127,272 -103,511 -88,598 -66,252 Minority Interests m 62 62 62 62 Other m 0 0 0 0 Total S/H Equity m -127,211 -103,449 -88,537 -66,190 Total Liab & S/H Funds m 89,870 129,407 162,792 207,239
All figures in Rmb unless noted. Source: Company data, Macquarie Research, July 2018
9 July 2018 28 Macquarie Research Xiaomi Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie – South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards). only Macquarie - USA Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return
Recommendation proportions – For quarter ending 30 June 2018 AU/NZ Asia RSA USA CA EUR Outperform 52.87% 61.26% 48.86% 47.54% 69.86% 46.61% (for global coverage by Macquarie, 3.51% of stocks followed are investment banking clients) Neutral 34.10% 27.25% 36.36% 46.72% 21.92% 43.22% (for global coverage by Macquarie, 2.10% of stocks followed are investment banking clients) Underperform 13.03% 11.49% 14.77% 5.74% 8.22% 10.17% (for global coverage by Macquarie, 0.00% of stocks followed are investment banking clients)
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Equities
Asia Research Head of Equity Research Emerging Leaders Technology Jake Lynch (Asia – Head) (852) 3922 3583 Jake Lynch (Asia) (852) 3922 3583 Damian Thong (Asia, Japan) (813) 3512 7877 Hiroyuki Sakaida (Japan – Head) (813) 3512 6695 Kwang Cho (Korea) (822) 3705 4953 Allen Chang (Greater China) (852) 3922 1136 Conrad Werner (ASEAN – Head) (65) 6601 0182 Corinne Jian (Greater China) (8862) 2734 7522 Jeffrey Ohlweiler (Greater China) (8862) 2734 7512 Conrad Werner (ASEAN) (65) 6601 0182 Chris Yu (Greater China) (8621) 2412 9024 Automobiles, Auto Parts Bo Denworalak (Thailand) (662) 694 7774 Kaylin Tsai (Greater China) (8862) 2734 7523 Lynn Luo (Greater China) (8862) 2734 7534 Janet Lewis (China, Japan) (813) 3512 7856 Infrastructure, Industrials, Transportation Allen Yuan (China) (8621) 2412 9009 Patrick Liao (Greater China) (8862) 2734 7515 James Hong (Korea) (822) 3705 8661 Patrick Dai (China) (8621) 2412 9082 Verena Jeng (Greater China) (852) 3922 3766 Amit Mishra (India) (9122) 6720 4084 Eric Zong (China, Hong Kong) (852) 3922 4749 Daniel Kim (Korea) (822) 3705 8641 Kunio Sakaida (Japan) (813) 3512 7873 Abhishek Bhandari (India) (9122) 6720 4088 Banks and Financials James Hong (Korea) (822) 3705 8661 Farrah Aqlima (Malaysia) (603) 2059 8987 Scott Russell (Asia) (852) 3922 3567 Corinne Jian (Taiwan) (8862) 2734 7522 Telecoms Dexter Hsu (China, Taiwan) (8862) 2734 7530 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Keisuke Moriyama (Japan) (813) 3512 7476 Azita Nazrene (ASEAN) (65) 6601 0560 Allen Chang (Greater China) (852) 3922 1136 Prem Jearajasingam (ASEAN) (603) 2059 8989 Chan Hwang (Korea) (822) 3705 8643 Internet, Media and Software Suresh Ganapathy (India) (9122) 6720 4078 Kervin Sisayan (Philippines) (632) 857 0893 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Wendy Huang (Asia) (852) 3922 3378 Nathania Nurhalim (Indonesia) (6221) 2598 8365 Anand Pathmakanthan (Malaysia) (603) 2059 8833 Marcus Yang (Greater China) (8862) 2734 7532 Utilities, Renewables Gilbert Lopez (Philippines) (632) 857 0892 David Gibson (Japan) (813) 3512 7880 Ken Ang (Singapore) (65) 6601 0836 Alankar Garude (India) (9122) 6720 4134 Hiroyuki Sakaida (Japan) (813) 3512 6695 Patrick Dai (China) (8621) 2412 9082 Basic Materials Oil, Gas and Petrochemicals Inderjeetsingh Bhatia (India) (9122) 6720 4087 Polina Diyachkina (Asia, Japan) (813) 3512 7886 Aditya Suresh (Asia) (852) 3922 1265 Karisa Magpayo (Philippines) (632) 857 0899 Yasuhiro Nakada (Japan) (813) 3512 7862 Anna Park (Asia) (822) 3705 8669 Quantitative, CPG Anna Park (Korea) (822) 3705 8669 Polina Diyachkina (Japan) (813) 3512 7886 Sumangal Nevatia (India) (9122) 6720 4093 Yasuhiro Nakada (Japan) (813) 3512 7862 Gurvinder Brar (Global) (44 20) 3037 4036 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Corinne Jian (Taiwan) (8862) 2734 7522 John Conomos (Asia) (612) 8232 5157 Farrah Aqlima (Malaysia) (603) 2059 8987 Ben Shane Lim (Malaysia) (603) 2059 8868 Alvin Chao (Asia) (852) 3922 1108 Yupapan Polpornprasert (Thailand) (662) 694 7729 Tracy Chow (Asia) (852) 3922 4285 Conglomerates YingYing Hou (Asia) (852) 3922 5422 Pharmaceuticals and Healthcare David Ng (China, Hong Kong) (852) 3922 1291 Strategy, Country Conrad Werner (Singapore) (65) 6601 0182 Corinne Jian (China) (8862) 2734 7522 Gilbert Lopez (Philippines) (632) 857 0892 Alankar Garude (India) (9122) 6720 4134 Viktor Shvets (Asia, Global) (852) 3922 3883 Richardo Walujo (Indonesia) (6221) 259 88 369 David Ng (China, Hong Kong) (852) 3922 1291 Consumer, Gaming Hiroyuki Sakaida (Japan) (813) 3512 6695 Property, REIT Linda Huang (Asia) (852) 3922 4068 Chan Hwang (Korea) (822) 3705 8643 Zibo Chen (China, Hong Kong) (852) 3922 1130 Tuck Yin Soong (Asia, Singapore) (65) 6601 0838 Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512 Terence Chang (China, Hong Kong) (852) 3922 3581 David Ng (China, Hong Kong) (852) 3922 1291 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Sunny Chow (China, Hong Kong) (852) 3922 3768 Kelvin Tam (China) (852) 3922 1181 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Stella Li (China, Taiwan) (8862) 2734 7514 Catherine Li (Hong Kong) (852) 3922 1161 Anand Pathmakanthan (Malaysia) (603) 2059 8833 Leon Rapp (Japan) (813) 3512 7879 Keisuke Moriyama (Japan) (813) 3512 7476 Gilbert Lopez (Philippines) (632) 857 0892 Kwang Cho (Korea) (822) 3705 4953 Tomoyoshi Omuro (Japan) (813) 3512 7474 Conrad Werner (ASEAN, Singapore) (65) 6601 0182 Amit Sinha (India) (9122) 6720 4085 Abhishek Bhandari (India) (9122) 6720 4088 Karisa Magpayo (Philippines) (632) 857 0899 Aiman Mohamad (Malaysia) (603) 2059 8986 Find our research at Chalinee Congmuang (Thailand) (662) 694 7993 Kervin Sisayan (Philippines) (632) 857 0893 Macquarie: www.macquarieresearch.com Robert Pranata (Indonesia) (6221) 2598 8366 Roy Chen (Singapore) (65) 6601 0760 Thomson: www.thomson.com/financial Richardo Walujo (Indonesia) (6221) 2598 8369 Reuters: www.knowledge.reuters.com Denise Soon (Malaysia) (603) 2059 8845 Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access
Asia Sales Regional Heads of Sales Regional Heads of Sales cont’d Sales Trading cont’d Miki Edelman (Global) (1 212) 231 6121 Paul Colaco (San Francisco) (1 415) 762 5003 Suhaida Samsudin (Malaysia) (603) 2059 8888 Amelia Mehta (Asia) (65) 6601 0211 Angus Kent (Thailand) (662) 694 7601 Michael Santos (Philippines) (632) 857 0813 Jeffrey Shiu (China, Hong Kong) (852) 3922 2061 Ben Musgrave (UK/Europe) (44 20) 3037 4882 Chris Reale (New York) (1 212) 231 2555 Sandeep Bhatia (India) (9122) 6720 4101 Christina Lee (UK/Europe) (44 20) 3037 4873 Marc Rosa (New York) (1 212) 231 2555 Thomas Renz (Geneva) (41 22) 818 7712 Justin Morrison (Singapore) (65) 6601 0288 Tomohiro Takahashi (Japan) (813) 3512 7823 Sales Trading Daniel Clarke (Taiwan) (8862) 2734 7580 John Jay Lee (Korea) (822) 3705 9988 Adam Zaki (Asia) (852) 3922 2002 Brendan Rake (Thailand) (662) 694 7707 Nik Hadi (Malaysia) (603) 2059 8888 Stanley Dunda (Indonesia) (6221) 515 1555 Mike Keen (UK/Europe) (44 20) 3037 4905 Gino C Rojas (Philippines) (632) 857 0861
This publication was disseminated on 08 July 2018 at 22:00 UTC.