Investments In AI And New EV Models Like YU7 Will Pressure Margins But May Unlock Future Potential

Key Takeaways

• Expansion into retail and high-end markets could increase costs and pressure net margins, despite potential brand growth benefits.
  
• Major investments in R&D and electric vehicles could delay profitability, with competition and economic factors impacting revenue growth.
  
• Xiaomi's strategic focus on premiumization, IoT growth, aggressive R&D, global expansion, and automotive ventures suggests a promising path for revenue and profit growth.

Catalysts

An investment holding company, provides hardware and software services in Mainland China and internationally.

• Xiaomi plans to significantly expand its retail network with around 5,000 new stores in China and 500 overseas locations, including 20,000 Xiaomi Home stores. This strategy might lead to increased operational expenses, potentially limiting net margins.
  
• The company is increasing its R&D investment significantly, particularly in AI, which accounts for about 25% of their spending. While this could create innovative products, the substantial upfront costs may impact earnings.
  
• Xiaomi's entry into the high-end market and its focus on premiumization across all product categories could impose higher costs and pressure net margins, especially as they aim to enhance their brand positioning.
  
• Intensified competition and economic factors affecting smartphone and IoT markets might result in slower than anticipated revenue growth, particularly in key markets like Western Europe, which puts pressure on overall earnings.
  
• While Xiaomi is making strides in the electric vehicle market, high levels of investment in production and technology development, especially with upcoming models like the YU7, could delay profitability and affect overall net margins.

Xiaomi Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Xiaomi's revenue will grow by 22.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.5% today to 7.4% in 3 years time.
• Analysts expect earnings to reach CN¥49.4 billion (and earnings per share of CN¥2.02) by about March 2028, up from CN¥23.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥64.4 billion in earnings, and the most bearish expecting CN¥39.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.4x on those 2028 earnings, down from 57.4x today. This future PE is greater than the current PE for the HK Tech industry at 19.5x.
• Analysts expect the number of shares outstanding to decline by 0.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.31%, as per the Simply Wall St company report.

Xiaomi Future Earnings Per Share Growth

Risks

• Xiaomi's strategic focus on high-end development and premiumization across product categories has resulted in increased revenues, with significant growth in its higher-priced smartphone segment, potentially contributing to higher net margins.
  
• The company's robust expansion in the IoT segment with significant revenue growth and a higher gross profit margin of 20.3% suggests strong performance that could positively impact its overall earnings and revenue streams.
  
• Xiaomi's aggressive R&D investment strategy, with plans to increase spending to CN¥30 billion in 2025, underscores its commitment to innovation, which could sustain competitive advantage and contribute to future revenue and profit growth.
  
• Successful penetration into international markets, such as Xiaomi's expansion into Southeast Asia and Europe with its retail model, broadens its market base and presents opportunities for increased revenue from these regions.
  
• The positive outlook and increased production targets for Xiaomi's automobile segment, coupled with high demand for new models like the Xiaomi SU7 Ultra, suggest a promising revenue stream that could enhance overall financial performance.

Valuation

• The analysts have a consensus price target of HK$52.247 for Xiaomi based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$73.47, and the most bearish reporting a price target of just HK$22.71.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥669.4 billion, earnings will come to CN¥49.4 billion, and it would be trading on a PE ratio of 30.4x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of HK$58.2, the analyst price target of HK$52.25 is 11.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.