Xiaomi delivered in-line 3Q19 revenue with 6% YoY, while adj. NP grew 20% YoY, 18%/17% above our/consensus estimates, thanks to better GPM in smartphone/IoT segment and higher investment income. Despite near-term headwinds in ads/mobile, we are increasingly positive on mgmt. strategy in 5G product roadmap and overseas expansion in 2020. We raised FY19-21E EPS by 4-8% to reflect better GPM in smartphone and internet service. Maintain Hold as we think valuation of 17.2x FY20E P/E is fair before shipment recovery in 2Q20E.
- Margin expansion despite slower growth. Xiaomi posted revenue growth of 6% YoY in 3Q19, thanks to IoT/internet services growth of 44%/12% YoY which is offset by 7.8% decline in smartphone. GPM climbed to 15.3% (vs 14% for CMBI/cons est.) as smartphone/IoT GPM improved YoY to 9%/12.8% (vs 8.1%/11.2% in 2Q), resulting in stronger adj. NP growth of 20% YoY.
- Smartphone share loss continued; Expect 5G recovery with 8-9% GPM. Smartphone fell 7.8% YoY (vs +5% in 2Q), due to 3.5% shipment decline and 4.3% ASP drop (China/overseas +4.6%/-4.1% YoY). Thanks to prudent inventory management and 5G first-mover advantage, mgmt. is confident to achieve GPM of 8-9% in FY20-21E, which is positive to the stock in our view.
- Internet: fintech takes off but slower ads dragged margin. Internet services decelerated to 12% YoY due to weak ads offsetting strong VAS. While revenue outside China ad/gaming accounted for 37% of internet sales, mgmt. expects more diversified revenue from fintech. GPM declined to 62.9% due to lower-margin fintech and pilot test of advertising network. Mgmt. guided 60% GPM in near future, easing concern on continued pressure.
- Well-positioned to capture 5G cycle. Xiaomi has been preparing for 5G since 2017 and debut two 5G models in 2019 in Sept. Looking ahead, Xiaomi anticipates China will account for 40-50% of the 5G global market and plans to launch 1) 10+ 5G models in 2020, and 2) sub-RMB1,000 models and IoT mass adoption in 2021-22. We believe Xiaomi’s pricing strategy and solid IoT pipeline will offer distinct competitive advantage in 5G market in 2020.
- Maintain Hold with new TP of HK$9.12. We lifted our FY19-21 EPS by 4-8% to reflect better GPM. Overall, we maintain our neutral view mainly due to rich valuation at 17.2x FY20E P/E. Our new TP of HK$9.12 is based on same 18x FY20E P/E. Upside risks include better shipment and margin recovery.
