Summary. Xiaomi’s 2Q19 revenue/adj. net profit grew 15%/72% YoY. Revenue was 6% below our estimates but in-line with consensus, while adj. net profit was 50%/30% above our/consensus mainly due to better GPM and investment gains of RMB1.4bn (vs. loss of RMB511mn in 2Q18). Given slower growth and smartphone/ads uncertainty in 2H19E, we maintain HOLD with new TP HK$9.38.
- Slower 2Q19 across all segments despite better GPM. Xiaomi revenue growth decelerated to 15% YoY (vs +27% in 1Q19) in 2Q19 with smartphone /IoT/internet services of 5%/44% /16% YoY (vs +16%/56%/32% YoY in 1Q19). GPM recovered QoQ to 14% in 2Q from 12% in 1Q, thanks to better smartphone GPM (8.1% vs 3.3% in 1Q19) with better mix.
- Smartphone: Shipment/ASP still under pressure. Xiaomi’s smartphone delivered a lackluster 2Q19 with 5% YoY, due to weak ASP/shipment of 5%/0.2% YoY. We believe headwinds will persist into 2H19E: 1) stalling volume due to pressure from Huawei in China and Samsung in India, 2) ASP decline on deteriorating mix with new roll-outs of lower prices, and 3) limited near-term contribution from 5G smartphone models in China and network expansion into carrier retail channels in Europe. We expect sluggish Xiaomi shipment in 2H19E before 5G boom in 2Q20E.
- AIoT: Solid pipeline with integrated ecosystem. IoT biz continues robust growth on back of 1) broader scope of categories, ranging from best-selling smart TV (ranked 1st in China/India) to large home appliances (e.g. air-con) to smart kitchen appliance; 2) AI-empowered new launches, such as AI translator/door lock/wash and dryer. We believe Xiaomi’s IoT products will continue to gain traction and deliver 38% FY18-21E revenue CAGR.
- Internet: Soft ads/gaming offset by robust fintech/e-commerce. Internet services decelerated to 16% YoY in 2Q19. Advertising/gaming revenue dropped by 0.6%/4% YoY, while revenue from fintech (consumer/supply chain finance) and Youpin e-commerce saw strong momentum of 90% YoY, accounting for 30% of 2Q internet revenue (vs 27%/20% in 1Q19/FY18).
- Maintain HOLD with new TP of HK$9.38. Overall, we maintain our neutral view on the stock given slower growth and outlook uncertainty on mobile/ads in 2H19E. We slightly revised our FY19-21E EPS and revised TP to HK$9.38, based on 18x FY20E P/E (vs prev 16x on better growth/margin outlook).
