Xiaomi will report 3Q19E results on 27 Nov. We expect 3Q19 results largely in-line with market expectations of 6%/ 2% YoY revenue/ adj. net profit growth. We expect 3Q weakness was a result of 1) smartphone sales decline with shipment/ margin pressure and 2) slower internet services due to advertising softness and MAU slowdown, while 3) IoT could maintain growth momentum with category expansion and overseas growth. We lowered our FY19-21 EPS by 2-10%, and our new TP of HK$8.4 is based on same 18x FY20E P/E. Maintain Hold.
- Smartphone: shipment decline on Huawei aggressive strategy. Xiaomi 3Q shipment declined 3% YoY to 32.7mn, based on IDC, mainly due to China market weakness (-31% YoY) on Huawei market share gain. Xiaomi’s India shipment remains healthy at 9% YoY with 27.1% market share. While Xiaomi announced to launch 10+ 5G models with low-pricing strategy in 2020, we believe Huawei’s aggressive 5G strategy will lead to ASP/GPM pressure in China market in 2020. Overall, we expect Xiaomi sluggish shipment to continue until 5G-driven recovery in 2Q20E.
- IoT: Solid growth with category/overseas expansion. We expect IoT segment to maintain robust growth with 44% YoY backed by 1) strength in smart TV (ranked 1st in China/India), 2) broader categories in home appliances and kitchen appliance, and 3) international expansion, e.g. India. We believe Xiaomi’s IoT products will continue to gain traction with stable margin, delivering 36% FY19-21E revenue CAGR.
- Internet: Ads/gaming softness with margin pressure. We expect internet services growth to slow to 10% YoY in 3Q19 (vs +16% YoY in 2Q), due to weak smartphone pre-installs, advertising pressure and MAU slowdown, while revenue from fintech (consumer/supply chain finance) and Youpin e-commerce will maintain strong momentum.
- Maintain Hold with new TP of HK$8.40. To reflect near-term pressure in smartphone and advertising as well as more conservative GPM, we trimmed our FY19-21 EPS by 2-10%. Overall, we maintain our neutral view on the stock given slower growth and outlook uncertainty on mobile/ads before 5G upcycle in 2020. Our new TP of HK$8.40 is based on unchanged 18x FY20E P/E. Upside risks include stronger smartphone cycle and margin recovery.
