Written by | Zhao Chenxi
Edit | Lee Shin Ma
Cartography | Dong Hanxue
On March 16, Beijing time, Xiaomi issued an announcement that the original "Xiaomi Sports" application was renamed "Zepp Life" (Huapp Life' health application), and was subsequently operated independently by Huami Technology (hereinafter referred to as "Huami"). Xiaomi will launch "Xiaomi Sports Health" as the official application of Xiaomi's follow-up wearable products, at the same time, Xiaomi's new application will gradually support the user's original data migration.
Just one day after Xiaomi and Huami publicly "demarcated the line", on the night of March 17, Huami announced its 2021 Q4 and 2021 annual performance reports.
According to the financial report data, Huami's revenue in Q4 2021 was 260.7 million yuan (US dollars, the same below), down 15.8% from the same period in 2020; operating profit was 1.5788 million, down 84.2% from 9.6332 million in the same period of 2020. Huami shipped a total of 8.3 million units in the quarter, compared with 13.3 million units in the same period last year, down 37.6% year-on-year. The earnings report said that the decline in revenue was mainly due to the decline in Xiaomi wearable device shipments, as well as the sales of private label products affected by the new crown pneumonia epidemic and the shortage of semiconductors in the industry. Specifically, Unit shipments of Xiaomi wearable products fell by 47.3%, and Unit shipments of Huami's own brands Amazfit and Zepp increased by 14.3%.
In terms of full-year data, Huami's total revenue in 2021 was $980 million, down 2.8% from the full year of 2020. With the same exchange rate of 6.525 yuan against the US dollar as in the previous year, and excluding the impact of the dissolution of the smart toothbrush company on the revenue of the previous year, Huami's revenue in 2021 increased slightly by 1% compared with 2020 (Non-GAAP, non-GAAP). Operating profit was 14.7344 million, down 46.07% from 26.6971 million for the full year of 2020. Huami shipped 36.1 million units in 2021, compared to 45.7 million units in 2020, down 21% year-on-year. Among them, private label shipments increased by 59.6%, and Xiaomi wearable device products fell by 30.5%.
Huami's financial report can be described as mixed.
As early as 2015, Huami began to "de-milletize", and the past seven years have achieved remarkable results. As Huami CEO Huang Wang said, in 2021, Huami's private label shipments increased by 60%, overseas expansion momentum is strong, more than 80% of its own brands come from the international market, and North America's private label shipments increased by 200% year-on-year. However, on the other hand, the sales volume of Xiaomi wearable device products still has a greater impact on Huami's overall revenue structure, and even becomes a "barometer" of Huami's overall performance. Huami CFO Deng Cheng said that although Huami's private label unit shipments achieved net growth, this growth was offset by the decline in unit shipments of Xiaomi wearable devices, which is still an important partner of Huami.
Huami's pain after leaving Xiaomi continues, especially since 2022, Huami's "de-milletization" process has accelerated, in this entangled relationship of both cooperation and competition, both wanting to get rid of and deeply involved, where will Huami go?
"De-milletization" in the tangle
At the end of 2013, Huami was established, and in 2014, Huami and Xiaomi cooperated for the first time to launch the 1st generation of Xiaomi bracelet. In the early days of its establishment, Huami planned to get rid of its excessive dependence on Xiaomi in terms of business revenue, brand endorsement, sales channels and other dimensions. Similar to Xiaomi's other ecological chain enterprises such as No. 9 Company and Stone Technology, Huami tries to establish and build its own brand, and to make the company's operational risks controllable through independent development. In 2015, Huami launched its own brand Amazfit, began to break away from Xiaomi, trying to walk on two legs, and in 2018, Huami acquired the smart wear brand Zepp. With the increase of Huami's share of its own brands year by year, the competitive relationship between Huami and Xiaomi has become increasingly prominent.
The competitive relationship between the two is related to the overall market increment.
According to IDC statistics, the shipment volume of China's wearable market in 2021 will reach nearly 140 million units, an increase of 25.4% year-on-year. It is expected that in 2022, the shipment volume of China's wearable market will exceed 160 million units, an increase of 18.5% year-on-year. Among them, the watch market shipped 39.56 million units, an increase of 21.4% year-on-year. Adult watches in 2013 million units, an increase of 31.0% year-on-year. The bracelet market shipped 19.1 million units, down 26.3% year-on-year.
Xiaomi wearable devices mainly include Xiaomi bracelets, Xiaomi watches and other items.
Sun Yanbiao, chairman of Rising Sun Big Data, told DoNews that when the global wearable device market increases significantly, the competitive relationship between Huami and Xiaomi will not be highlighted. Once the entire market increment becomes smaller, Huami, Xiaomi, plus other manufacturers such as Apple, OPPO, vivo, Huawei, etc. will form a very strong competitive relationship.
"When the entire market shows signs of shrinking, the phenomenon of left-right hand mutual knowledge between Huami and Xiaomi will be more prominent, at this time, the relationship between Huami and Xiaomi is more sensitive and tricky for both sides." On the one hand, Xiaomi's investment in Huami can indeed bring value to Xiaomi from the perspective of investment income, but in addition to investment, Xiaomi has undoubtedly cultivated an opponent who competes directly with it in terms of products and price points. Especially when facing the head competition such as Apple, Huami and Xiaomi stand on the same starting line. Sun Yanbiao further said.
At present, whether from the market share or from the gross profit margin, Apple has been leading the wearable market.
IDC statistics show that Apple wearable device shipments reached 161.8 million units in 2021, accounting for 30.3% of the global market share, followed by Xiaomi, Samsung, and Huawei. As early as 2015, foreign media estimated that Apple's wearable products such as smart watches may have a gross profit margin of more than 60%, or one of its most profitable businesses.
According to Sun Yanbiao, the wearable device market is classified in three price segments of high, medium and low, Apple occupies most of the market share in the high-end and mid-end markets, and Xiaomi and Huami are mainly based on the lower price level of the third category. In contrast, Huami, leaving aside the market share, the gross profit margin has been maintained at about 20%.
After Huawei's absence from the 5G mobile phone market, mobile phone manufacturers have targeted the target to Apple, and how Xiaomi balances the competitive relationship of the ecological chain is bound to affect xiaomi's future strategic direction. For Huami, how to balance the share of Xiaomi's ODM business and how to make its own brands more profitable will also be a difficult point.
The road to getting rid of Xiaomi is not easy
Since 2015, the proportion of Xiaomi wearable products in Huami's total revenue has gradually declined from 97.1% to 53.5% in 2021, but it still accounts for half of the country. In the financial report, Huami also mentioned that whether it is Q4 of 2021 or the decline in profit for the whole year of 2021, it is related to the decline in Xiaomi wearable device shipments, which shows that Huami's revenue and Xiaomi are still "deeply" bound.
Huami Technology's revenue composition over the years Data source: Huami Technology Financial Report Draft: DoNews
On the other hand, with the continuous decline in the proportion of Xiaomi products, although Huami's revenue has increased more than sevenfold from $138 million in 2015 to $980 million in 2021, Huami's operating profit, net profit and net profit margin on sales have shown negative growth in 2020 and 2021. In 2020, Huami's operating profit fell by 71.28% year-on-year and net profit fell by 60.23%; in 2021, its operating profit fell by 46.07% year-on-year and its net profit fell by 39.76%. Net profit margin on sales also fell from a high of 9.86% in 2019 to 2.19% in 2021.
Huami Technology Operating Income and Net Profit (MILLION DOLLARs) Data Source: Huami Technology Financial Report Chart: DoNews
This is also reflected in the ROE value, which was as high as 36.7% in 2017, and by 2021, the Huami ROE value fell to single digits, only 4.88%.
Huami Technology Equity Net Profit Margin (ROE) (%) Data Source: Huami Technology Financial Report Chart: DoNews
Whether it is net profit, net profit margin on sales or ROE value, it is an important indicator to measure whether a company's business structure is healthy and whether the market competitiveness is strong. Shen Meng, executive director of Chanson Capital, once told DoNews that the decrease in net profit margin and ROE indicates that there are problems in its business structure, its competitiveness has deteriorated, or its costs have risen and yields have declined.
The decline in profits will further affect the development strategy of enterprises, after Huami continued to invest heavily in scientific research and achieved corresponding results. For example, in 2018, Huami launched the Huangshan No. 1 artificial intelligence chip based on the RISC-V instruction, in 2020, the second-generation chip Huangshan No. 2, which joined the NPU and coprocessor, was released, and in 2021, Huami released the Huangshan 2S, as well as the health-focused native smart watch operating system Zepp OS.
However, the 2021 financial report shows that Huami's annual research and development expenses were $81 million, down 4.3% from the whole of 2020, while sales and marketing expenses increased sharply to $69 million, up 22.2% from the whole of 2020, and the operating expenses of the whole of 2021 also increased by 4.6% compared with 2020.
Huami Technology Research and Marketing accounted for the proportion of revenue Data source: Huami Technology Financial Report Chart: DoNews
In this regard, the explanation given by Huami's financial report is that the comprehensive product development process optimization and some government subsidies are confirmed; the global marketing expansion of amazfit and Zepp brands, product promotion activities and recruitment of overseas employees; and the increase in brand recognition and marketing channel expansion, resulting in increased expenses.
However, the reasonable guess is that in the process of "de-milletization", the sales volume of Huami's own brands is not ideal, so it can only increase marketing to open up the market, and even squeeze out the funds for scientific research. One of the facts underpinning this speculation is the change in Huami's inventory. In recent years, Huami's inventory has increased year by year, with its net inventory value of US$196 million in 2021, an increase of 2.54% over 2020, and the asset turnover rate has also been declining. Because Xiaomi wearable devices use OEM and order models, they will not generate inventory, so this part of the inventory basically comes from Huami's own brand. Inventory is too high, increasing warehousing, labor, production costs, putting pressure on the cash flow of enterprises, inventory products with the decline in value over time, will also produce losses.
Huami Technology Inventory and Asset Turnover Data Source: Huami Technology Financial Report Chart: DoNews
In summary, it can be seen that Huami wants to achieve "de-milletization" through the development of its own brand, it must withstand stronger market competition, after all, this industry giant is lined up, it is not easy to get out, and Huami's revenue, cost structure and profit will pay a certain "sacrifice" for the implementation of this strategy.
With the continuous "unbundling" of Huami and Xiaomi in the future, it can be met that its own brands will bear greater commercial pressure, and the decline in Huami's performance in 2021 may be just the beginning.