Xiaomi posted better-than-expected 2Q20 adj. net profit of RMB3,373 (-7% YoY), 28%/43% above our/market estimates, thanks to improving smartphone ASP (+12%), stronger advertising (+23%) and internet GPM recovery to 60%+ level. 2Q20 revenue growth of 3% YoY is largely in-line, driven by -1%/+2%/+29% YoY in smartphone/IoT/internet. Backed by new 5G product launches, “Smartphone x AToT” ecosystem and expanding overseas channels, we believe Xiaomi is set to take global share form Huawei and smartphone shipment will grow 24%/16% YoY to 161mn/189mn in FY21E/22E. We lifted our FY20-22E EPS by 4-13% for stronger smartphone and internet monetization, and raised TP to HK$22, based on unchanged 25x FY21E P/E. Reiterate BUY.
- 2Q20 solid results with better smartphone ASP and advertising. We believe solid 2Q20 is a result of Xiaomi’s strong execution of 5G & premium strategy (higher ASP), IoT category expansion and diversification of internet revenue. We think smartphone’s strong ASP hike (+12% YoY) is a positive surprise, while IoT delivered slower growth at 2% YoY due to launch delays on COVID-19. Internet remained solid at 29% YoY, thanks to advertising recovery (+23%) and solid gaming/other VAS (youpin, fintech) (+36%/+30%).
- Share gain to accelerate in China/Europe on Huawei weakness. We believe Xiaomi is poised to benefit from Huawei’s weakness in China/Europe in 2H20E given Xiaomi’s strong 5G pipeline in China and multi-channel expansion in Europe. We believe Xiaomi will start to expand market share in China in 3Q20E after share loss in past 10 quarters (10% shr in 2Q20, vs 15% in 1Q18). Overall, we estimate Xiaomi smartphone to recover with 13%/12% YoY in 3Q/4Q20E, and accelerate with 24%/17% YoY to 161mn/ 189mn in FY21E/22E. In addition, we expect increasing shipment mix in China/Europe will help boost internet monetization and improve profitability given higher ARPU in China/Europe (vs India).
- Our FY20-22E EPS are 15-22% above consensus; Lift TP to HK$22. We believe Xiaomi is well positioned to regain share in China and outperform its Chinese peers overseas with solid 5G roadmap and stronger omni-channel sales network. We raised FY20-22 EPS by 4-13% to reflect rapid smartphone share gain and better internet monetization. Our new TP of HK$22 is based on 25x FY21E P/E given 32% EPS FY20-22E CAGR, China 5G leadership and market share gain. Catalysts include 5G product launches and faster demand recovery.
