Xiaomi hosted a conf call to update business outlook amid recent nCov outbreak. Overall, we believe mgmt. is cautious on smartphone supply chain disruption in 1Q20E and demand slowdown in FY20E. We expect China market to decline significantly in 1Q20E and 5G replacement cycle will postpone in China. We trimmed FY19-21E EPS by 2-9% to reflect impact on smartphone and IoT. We lifted TP to HK$11.47 on higher 25x FY20E P/E, but maintain Hold as we think valuation of 27.5x P/E is fair given supply uncertainty and demand slowdown.
- Supply chain disruption: 1-2 week delay on production and logistics. All factories across supply chain are now delayed by 10 days and Xiaomi expected some factories to resume production on 10 Feb, implying 30% loss of production time in February. Despite Xiaomi’s multi-supplier strategy and overseas factories, mgmt. believes production impact on hardware products is significant but still manageable with channel inventory in near term.
- Weak NT demand: China offline sales halted, Europe/India growth intact. Mgmt. indicated that Xiaomi’s offline sales of smartphone/IoT are seriously impacted due to quarantine across China. However, given higher exposure to online channel (~60%, vs 10-30% for Chinese peers), Xiaomi believes it will significantly outperform Chinese smartphone peers in 1Q20E. Also, Xiaomi is confident to continue share gain in overseas markets, backed by offline expansion in India and operator channels in Europe. In terms of GPM, mgmt. maintained 8-9% guidance in FY20-21E. Also, Xiaomi expects internet business to benefit as people will spend more time home and consume more online content, which will partly offset smartphone weakness.
- China smartphone to slump in 1Q20; 5G upgrade cycle to postpone. Mgmt. estimates China smartphone market will likely decline significantly in 1Q20E and 10% YoY in FY20E, which will delay 5G replacement cycle in FY20E. In view to recent situation, we believe China market recovery will resume in 2H20E, and brands with high China exposure (60%+ for Huawei/ Oppo/ Vivo, vs 30% for Xiaomi) will face significant challenges in 1Q20E.
- Maintain Hold with new TP of HK$11.47. We cut FY19-21E EPS by 2-9% to reflect smartphone/IoT in 1H20E. We lifted TP to HK$11.47 on higher 25x FY20E P/E for 5G beneficiary and improving 2H20E sales, but maintain our neutral view due to rich valuation of 27.5x FY20E P/E. Downside risk is further production delay and disruption in overseas factory (e.g. India).
