We believe Xiaomi is poised to benefit from Huawei’s smartphone weakness in China/Europe in 2H20E given recent US restrictions on Huawei and Xiaomi’s strong 5G pipeline in China. We expect Xiaomi smartphone shipment to recover with -6%/5% YoY in 3Q/4Q20E (vs -11% in 2Q20E) and accelerate with 16%/16% YoY growth to 142mn/166mn in FY21E/22E. We revised up FY21-22E EPS by 7-8% to factor in better shipment and margin outlook, and raised our TP to HK$21 based on higher 25x FY21E P/E (vs 20x prev.) given stronger 37% EPS FY20-22E CAGR and accelerated market share gain. Recommend to accumulate ahead of 2Q20 results.
- 2Q20E Preview. Xiaomi will announce 2Q20 results on 26 Aug, and we estimate revenue/adj. net profit of RMB53,292mn/2,640mn (+3%/-27% YoY), 4%/10% above consensus. Gross margin could stay flattish YoY at 14.3% and opex ratio will be slightly higher at 9.9% (vs 8.8% in 2Q19) due to more promotion and India COVID-19 impact. We expect smartphone shipment to decline 11% YoY given better overseas sales despite 22%/48% YoY decline in China/India. We expect IoT/internet service to grow 12%/26% YoY in 2Q20E (vs 8%/39% YoY in 1Q20) as China demand recovery remains on track in 2Q20E.
- Worst is over; Expect share gain in China/Europe on Huawei weakness. We believe Xiaomi’s earnings will bottom in 2Q20E, as we expect smartphone demand recovery in China/India and Xiaomi’s share gain in Europe/SEA given Huawei’s overseas weakness since 3Q19 (-24%/-30%/-28% YoY in 4Q19/1Q20/2Q20). In particular, we believe Xiaomi will start to regain market share in China after share loss for the past 10 consecutive quarters (10.4% mkt shr in 2Q20, vs 15.1% in 1Q18). Overall, we estimate Xiaomi smartphone to recover with -6%/5% YoY growth in 3Q/4Q20E, and then grow 16%/16% YoY to 142mn/166mn in FY21E/22E, thanks to solid execution of 5G strategy and strong value proposition.
- Our FY20-22E EPS are 5-22% above consensus; Raise TP to HK$21. We believe Xiaomi will outperform its peers with share gain from Huawei and solid 5G product roadmap. We raised FY20-22 EPS by 7-8% to reflect higher shipment and better margin outlook. We lifted TP to HK$21 based on higher 25x FY21E P/E given stronger 37% EPS FY20-22E CAGR, China 5G leadership and market share gain. Catalysts include 5G product launch and demand recovery.
