Inventory is starting to be digested and supply and demand are moving towards balance (Xiaomi 22Q3 conference call)
Xiaomi Group (1810.HK) released its Q3 2022 financial report (as of September 2022) after the Hong Kong stock market closed on the evening of November 23, 2022 Beijing time, with the following highlights:
Quarterly Core Data vs. Market Expectations:
1) Revenue End: Xiaomi Group-W.HK achieved quarterly revenue of RMB 70.5 billion, a year-on-year decrease of 9.7%, compared with market expectations of RMB 70.2 billion;
2) Gross profit margin: The quarterly gross profit margin was 16.6%, a year-on-year decrease of 1.7 percentage points, compared with market expectations of 16.7%;
3) Adjusted net profit: The quarterly adjusted net profit was RMB 2.117 billion, a year-on-year decrease of 59.1%, compared with market expectations of RMB 2 billion.
4) Sub-business situation:
① Smartphone Business: Quarterly revenue was RMB 42.514 billion, a year-on-year decrease of 11.1%; gross profit margin was 8.9%, a year-on-year decrease of 3.9 percentage points;
②IoT and consumer products business: Quarterly revenue was RMB 19.1 billion, a year-on-year decrease of 9%; gross profit margin was 13.5%, a year-on-year increase of 1.9 percentage points;
③Internet service business: Quarterly revenue was RMB 7.1 billion, a year-on-year decrease of 3.7%; gross profit margin was 72.1%, a year-on-year decrease of 1.5 percentage points.
Detailed financial report information can be found in Dolphin Analyst's review "[Xiaomi has been lying down for too long and is finally about to see the light] (https://longbridgeapp.com/topics/3680818?channel=t3680818&invite-code=294324)"
I. Summary of Conference Call Information:
1) Inventory level: The current inventory level is relatively healthy, and it is expected to return to normal inventory levels by the end of this year or 23Q1. In terms of raw material inventory, it is currently at a healthy level, and there has been a slight increase this quarter. This is due to the need to reserve SoC to produce more products. In terms of finished product inventory, the mainland China region has basically returned to normal in this quarter, and inventory in India has steadily decreased to a healthy level;
2) Smart Electric Vehicle Business: Expenditures have been increasing, and more talents have been attracted to strengthen R&D. The current size of the R&D team is more than 1,800 people. There is no update on production planning for the time being;
**3) The reason for the 70% YoY growth of smart home appliances: **The sales of air conditioners are related to the weather. Currently, there are more extreme weather conditions, with hotter summers and colder winters, resulting in stronger demand for air conditioning.
II. Conference Call Q&A
Smartphones
Q: The latest progress in the company's smartphone destocking, and Q4 smartphone demand and profit margin expectations.
A: (1) Inventory level
The company has been actively reducing inventory levels and will continue to push destocking measures in the future, such as launching more activities during the promotional season to reduce inventory. There will be many promotional opportunities in Q4. Overall, the current inventory level is relatively healthy, and it is expected to return to normal inventory levels by the end of this year or 23Q1. Although the current inventory seems to be high, it is not a stagnant inventory, but rather very good products, so it is possible to quickly reduce the inventory level. Specifically, in terms of raw material inventory, it is currently at a healthy level and has slightly increased this quarter. This is due to the need to reserve SoCs to produce more products. In terms of finished goods inventory, the mainland China region has basically normalized this quarter, while the inventory in India has steadily decreased to a healthy level.
(2) Profit margin
In Q3, the gross profit margin improved significantly quarter on quarter. As more measures are taken to reduce inventory and inventory levels return to normal, the gross profit margin will become even healthier.
Q: What was the abnormal reason for the Q3 smartphone gross margin and what are the expectations for Q4?
A: Last year, the headwinds of shipping, transportation and logistics impacted the smartphone gross margin. This year, the situation has changed greatly and overall development is relatively healthy.
The gross margin in mainland China has reached a healthy level due to the launch of more high-quality products (with little promotion in China). Currently, overseas inventory is quite healthy, except in the Indian market, which still needs improvement. The gross margin in the Indian market has decreased significantly quarter on quarter and inventory will be further reduced to a healthy level. As overseas inventory returns to a healthy level, growth will also become healthier.
Q: Outlook for the smartphone market in 2023 and ways to improve smartphone profits for the company
A: Last quarter, the global market declined by about 10%, with a 11% decline in China, greater than the global decline. Currently, there are many uncertain factors (inflation, exchange rates, etc.). The normal shipment level of the global mobile phone market will rebound by 10% and then increase by more than 10%, and other aspects of the market cannot be predicted.
The company is confident in further increasing its market share. In the future, it will focus on mid-to-high-end products and provide beloved products in a competitive market. In some markets, entry-level products will be provided first, followed by mid-to-high-end products. Data from the past few quarters shows that the company's smartphone shipments are stable, and although the month-on-month growth rate is not high, its resilience can be seen in headwinds.
Q: Outlook for the Chinese smartphone market in 2023
A: Next year will be similar to this year.
Although many people may upgrade their phones next year, due to the economic downturn, they may choose to buy second-hand phones instead of new ones, and the life cycle of existing products will be extended, further delaying the upgrading cycle. Third-party data shows that in 2017, the life cycle of a phone was 22 months, and in 2022, it is expected to be 27 months.
In this environment, a conservative attitude is held towards forecasts and specific predictions are not made.
Q: The impact of the end of the pandemic on smartphones and IoT products
A: The pandemic-led city lockdowns led to the closure of about 2,000 retail stores.
Currently, there are about 10,600 offline retail stores, and offline sales account for a high proportion of smartphone sales. We hope to further expand the offline channels. The impact of the pandemic is significant, but once it ends, more sales can be realized. Current Strategy
The current strategy is to optimize existing offline retail stores to increase sales growth, such as promoting cross-selling. Although new stores are also important, the focus for now is on improving existing offline retail stores, rather than opening more new ones.
IoT and Consumer Products
Q: Planning for Smart Electric Vehicles
A: The company will continue to invest in smart electric vehicles and will launch its first product in 2024. The intelligent electric vehicle business is highly valued, with increased spending and attracting more talent to strengthen research and development. The current research and development team has a size of more than 1,800 people.
There is currently no update on production planning.
Q: Reason for 70% YoY growth in smart appliances and sales strategy for next year
A: Air conditioner sales are related to weather conditions, with more extreme weather conditions these days, such as hotter summers and colder winters, leading to stronger demand for air conditioners. However, this is not the only factor. The company will conduct a more in-depth analysis of supply and demand to improve product competitiveness. The air conditioners and refrigerators provided by the company are excellent, bringing users a more intelligent living experience. In the future, the focus will be on launching high-end smart products (air conditioners, refrigerators, washing machines) to further increase growth, and as a result, the ASP will continue to rise.
Mi Home's offline channels have effectively promoted product sales, and the company is considering how to better achieve cross-selling of other products besides phones, as well as better leveraging the synergy between online and offline channels.
Overall
Q: Expectations for overseas income for different businesses in the future, as well as IoT sales trends and regional distribution
A: IoT and related services have performed well in different markets, such as the 10% growth in global smartphone shipments. The company has a very large scale and hopes to achieve better economies of scale through larger business scale.
- Internet
Although the global advertising market is weak, the company's user base has achieved year-on-year and quarter-on-quarter growth, laying the foundation for achieving more revenue in the future. The current macro environment is not optimistic, and short-term Internet revenue has slowed down. However, based on the healthy growth of the company's users, the development of the Internet business can exceed the industry average.
- IoT Products
The macro economy has had some negative impact, which is particularly evident in the European market (with revenue decline for cleaning robots and scooters in the past 1-2 quarters). However, there is a significant demand for IoT in Europe, and with the improvement of the overall environment, substantial growth is expected in the future. This quarter, preparations have been made for major festivals in Q4 (such as Christmas) to ensure the sales of related products. At the same time, more promotional activities will be launched to reduce inventory.
Xiaomi Group Historical Article Review:
Financial Report Season
November 23, 2022 Financial Report Review "Xiaomi has been dormant for too long and is finally seeing "light"" 2022 August 19 Conference Call "How will management explain the comprehensive decline in the financial report? (Xiaomi 22Q2 conference call)"
2022 August 19 Financial Report Review "Layoffs can't save Xiaomi's numerous predicaments"
2022 May 19 Conference Call "What did Xiaomi's management say about its internal and external difficulties? (Xiaomi 22Q1 conference call)"
2022 May 19 Financial Report Review "Xiaomi with internal and external troubles is not the best choice"
2022 March 22 Conference Call Summary "After a mediocre financial report, what did Xiaomi Group's management say? (Minutes of the conference call)"
2022 March 22 Financial Report Review "Xiaomi that is average: Tasteless to eat, too wasteful to toss"
2021 November 30 Conference Call Summary "What will Ideal Auto rely on to compete with Xiaomi, who just released an EV model shortly after? (Conference call minutes)"
2021 November 23 Conference Call "Does shortage lead to smartphone decline? Listen to how Xiaomi management explains it (Xiaomi Conference Call)"
2021 November 23 Financial Report Review "Where was Xiaomi heading with its ups and downs?"
2021 August 26 Conference Call "What did Xiaomi's management discuss after its outstanding achievements?"
2021 August 25 Financial Report Review "Don't doubt it anymore, Xiaomi once again ascended to the top"
2021 May 26 Financial Report Review "With an excellent record, will Xiaomi be included in the MSCI World Index?"
2021 年 3 月 25 日 phone meeting "Lack of chips, slow internet of things/IoT, car production? This is how Xiaomi answered!"
March 24, 2021 Financial Report Review "What's going on with Xiaomi that the expectations are poor to the point of doubting life?"
In-depth
June 17, 2022 "Consumer electronics 'ripe', Apple tough, Xiaomi struggling."
December 1, 2021 " Honor attacks, Xiaomi suffers another 'life and death ordeal.'"
November 24, 2021 "What went wrong behind Xiaomi's deep decline?"
June 11, 2021 "2021, Xiaomi 'transforms' | Dolphin Analyst."
March 16, 2021 "Dolphin Analyst | The road to recovery, is Xiaomi finally getting rid of bad luck?"
Live
August 19, 2022 "Xiaomi Group-W (01810.HK) 2022 Second Quarter Results Conference Call."
May 19, 2022 "Xiaomi Group-W (01810.HK) 2022 First Quarter Results Conference Call."
March 22, 2022 "Xiaomi Group (1810.HK) 2021 Fourth Quarter and Full Year Results Release."
December 28, 2021 "Lei Jun X Su Bingtian · Xiaomi New Year Live Broadcast." 2021 November 23, Xiaomi Group (1810.HK) Q3 2021 Earnings Conference
2021 September 15, Let the Magic Begin – Xiaomi New Product Launch Event
2021 August 25, Xiaomi Group-W(01810.HK) 2021 Interim Results Announcement Conference
2021 August 10, 2021 Lei Jun Annual Speech
2021 May 26, Xiaomi Group (1810.HK) Q1 2021 Earnings Call
2021 March 30, Xiaomi Spring New Product Launch Event Day 2
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