On March 22, 2022, Xiaomi Group (01810. HK) announced its 2021 annual results.
The data is very solid, first of all, the total annual revenue reached RMB328.3 billion, an increase of 33.5% year-on-year, followed by the net profit of RMB22 billion, an increase of 69.5% year-on-year.
In terms of various businesses, in 2021, smartphone shipments slightly exceeded expectations, driven by high-end and product forces, revenue increased by 37.2% year-on-year to 208.9 billion yuan, gross profit margin increased by 3.2pct to 11.9%; IoT and consumer products business revenue growth increased by 26.1% year-on-year to 85 billion yuan, gross profit margin slightly rose 0.3pct to 13.1%, overseas business hit a record high; while benefiting from the number of MIUI users increased by 28.4%. Internet services increased by 18.8% to 28.2 billion yuan, accounting for 17.8% of revenue, driven by the contribution of advertising business, and gross margin increased by 12.5pct to 74.1%.
Before and after the release of this good report card, the capital market cast a vote of trust in Xiaomi. It closed up 6.13% on March 22 and 5.35% on March 23.
Looking back at Xiaomi in 2021, it seems that there are two parallel worlds.
In a world where "evolution" is breaking through, the basic disk of mobile phone business accelerates the transformation to high-end, opening new car manufacturing business, AIoT business gradually changes the face of the world at the same time, driving more users to join the MIUI ecosystem, and the business coverage is steadily expanding;
The other world is like a mirror universe, the price does not fully reflect the value, and it has been continuously suppressed by bears since the beginning of 2021. If the technology market from 2020 to 2021 is a stampede event of growth and price divergence under the expectation of tightening liquidity, then specific to Xiaomi, the cold logic of the capital market expecting returns and Xiaomi's long-term vision constitute a set of contradictions and conflicts.
But even so, Xiaomi will still choose to "move forward" - just as from the beginning of its birth, in the face of countless difficulties, to bring the science and technology dividend into the real human survival, and thus establish a solid commercial moat.
01
The "evolution" that must be achieved
The central idea of the 2021 Xiaomi 12 series mobile phone conference is very clear, that is, to benchmark the high-end mobile phone overlord Apple. Soon after, the high-end strategy also came to the front of the stage: the formation of a high-end strategy working group, ready to be under the traction of the "three-year mobile phone sales in the world first" strategy, clear high-end strategic goals: products and experiences should be fully benchmarked iPhone, within three years to win the first domestic high-end mobile phone market share.
In fact, 2021 is only the year that Xiaomi's mobile phone business has begun to accelerate its "evolution". From 2015, the Note series of mobile phones priced in the range of 3,000 yuan was launched, and the price of mobile phones in the follow-up period was also in the 2500+ price band; in early 2019, Xiaomi began to implement a dual-brand strategy, and the Xiaomi brand entered the high-end market.
The trial yielded good results. High-end flagship phone sales priced at 3,000+ yuan or 300+ euros accounted for 6.8% of total shipments at the beginning of 2020, and this figure increased to 13% by 2021; smartphone revenue increased by 37.2% year-on-year to 208.9 billion yuan; and smartphone gross margin increased from 8.7% in 2020 to 11.9%.
Obviously, the high-end strategy means switching from high revenue and high turnover to high ASP and brand power. The smartphone market has entered the stage of stock competition, and global shipments in 2021Q3 fell by 6.7% year-on-year, even so, it has been higher than market expectations. Therefore, under the stock dome, players must break the circle in order to develop. Apple is based on the basic disk of high-end mobile phones, breaking the circle downwards, trying to seize market share with cost-effective new models; brands that focus on cost-effectiveness must explore upwards and open the road of high-end exploration.
But for Xiaomi, the high-end of its mobile phone has a deeper internal driving force, that is, the laying groundwork of strategic layout.
"High-end" does not simply refer to "high price", but brings stronger product power in hardware configuration and technical level, thereby supporting a higher product premium. Therefore, the improvement of product strength is the core of high-end.
At present, Xiaomi attaches great importance to the cultivation and incentive of technical talents, and its R&D expenditure in 2021 reached 13.2 billion yuan, a substantial increase of 42.3% year-on-year; in 2021, a new equity incentive plan was announced, including young engineers, technical experts, middle and senior managers and inductees of the New Decade Entrepreneur Program.
In 2021, Xiaomi has gained a lot in this field. For example, in terms of hardware, in 2021, on the two high-end flagship models of Xiaomi MIX FOLD and Xiaomi Mi 12 Pro, the first self-developed professional imaging chip Peng Peng C1 and the first self-developed charging chip Peng Peng P1 were launched; the "All Things Focus" algorithm was launched to continuously optimize the image experience.
There are also some interesting phenomena to see.
For example, in terms of software, with the release of Xiaomi Mi 12, the slogan of MIUI 13 updated in December 2021 is "Start and Connect Everything", which supports the seamless flow of all-scene video and audio applications, personalized widgets and other functions; MIUI Family, for individuals, families, enterprises and other different scenarios, provides differentiated functions and services to further enhance the interconnection between different intelligent terminals.
In terms of corporate governance structure, in November 2021, Xiaomi will be responsible for the integration of the software and experience department of the MIUI system, the software department of the mobile phone department and the IoT platform department, and place it under the mobile phone department, and is committed to further strengthening the coordination of mobile hardware and software and improving the user experience. According to the core strategy of "mobile phone × AIoT", mobile phones will become the core of Xiaomi's IoT business.
From this perspective, the evolution of mobile phones seems to be a reserve of capabilities for their smart IoT business.
02
Anchoring the "Tech Life"
Compared with the stability of the mobile phone business, in the 2021 financial report, the acceleration of the AIoT business can be clearly felt. The company released new products in 2021H1, including high-performance notebooks, the first adaptive noise-canceling headphones Xiaomi3 Pro, watch Redmi 2, etc., which were widely recognized by the market; smart TV revenue increased by more than 25% year-on-year, and smart major appliances increased by more than 60%; although the impact of overseas shipping logistics has not decreased, AIoT's overseas revenue is expected to further increase, and profitability is bound to pick up. Therefore, it must be admitted that the progress of AIoT is better than expected, and the penetration rate is steadily increasing.
When it comes to the concept of the Internet of Everything, this is still a commercial map full of imagination.
Connecting life scenarios through the Internet of Things, people can easily interact with their living environment without needing their hands. More importantly, the resulting massive data and traffic will become a new blue ocean for the Internet industry to achieve growth and feed back scientific and technological innovation.
The digital economy has become a key force in reorganizing global factor resources, reshaping the global economic structure and changing the global competitive landscape, and in January 2022, the State Council launched the "14th Five-Year Plan for the Development of the Digital Economy", which clarified the guiding ideology, basic principles, development goals, key tasks and safeguard measures for the healthy development of the digital economy. It can be seen that the attention paid to the national and enterprise levels. The IoT is an important carrier of the digital economy in people's daily lives, although the gradual landing still needs time, but it is indeed a certain track, China and overseas markets have many players entered.
In fact, in theory, it is not difficult to make the logic of ioT run, and dozens of yuan of Internet of Things suites are everywhere on e-commerce platforms. But how to ensure that countless scenes produce massive Corner Cases (extreme cases), achieve the stability of the entire logic, and how to finally solve the problem of application scenarios and monetization, so time is a friend and an enemy.
This is also why the advanced layout of the IoT track requires a solid foundation.
At that time, Xiaomi's decision to establish an IoT department was very decisive; now it seems that the determination to increase AIoT is also very firm. Xiaomi's IoT layout has covered many aspects from white goods to smart wear and consumer electronics.
In 2021, excluding smartphones, tablets and notebook computers, the number of Xiaomi AIoT connected devices reached 434 million units, an increase of 33.6% year-on-year, and 8.8 million users with five or more devices connected to the AIoT platform, an increase of 40.4% year-on-year. In December, the number of monthly active users of the artificial intelligence assistant "Xiao Ai Classmate" increased by 23.3% year-on-year to 107 million, and the number of monthly active users of Mijia App increased by 42.0% year-on-year to 63.9 million. Among Chinese IoT companies, this is an excellent result.
Looking ahead, the car will also be an important component of its AIoT. In March 2021, Xiaomi entered the car with a capital of 10 billion US dollars. New energy vehicles are the intersection of cutting-edge technologies such as big data, cloud computing, AI and chips, and can also become an important link in the interconnection between home, travel, work and other scenarios. You can imagine such a scene - on the way home to call out to Xiao Ai classmates, help you turn on the heaters, lights and curtains in your home... Such a scene is gradually pushing to the ground.
Up to now, the R&D team of Xiaomi's automotive business has exceeded 1,000 people, and will explore core areas such as intelligent driving and intelligent cockpit (the carrier of IoT). The production car is expected to come out in 2024H1, before that, all the preparations are to fight a prepared, foundational victory, with a solid foundation to usher in the industry singularity.
Popularize smart phones with high cost performance, and then install technology on smart terminals such as mobile phones and car machines, and then embed these terminals into their new digital lifestyle of interconnection of everything. Perhaps this is the landing path of Xiaomi's original vision of "allowing everyone in the world to enjoy the good life brought by technology".
03
Hold the reversal bottom line with long-termism
In 2021, capital markets will not be friendly to growth stocks.
Last year, the Hang Seng Technology Index fell 32%, while Xiaomi's stock price fell back from a high of 36 yuan, also falling more than 43%.
Under the cloud of the Fed's interest rate hike and tightening liquidity, global asset prices have fluctuated sharply, and the valuation of the growth direction has retraced, which has caused a big impact on market confidence. At the same time, the rise in the price of chips, commodities, shipping, and the expansion of the CPI and PPI scissors gap have put pressure on the profit margins of middle and lower reaches of the industrial chain, especially multinational manufacturing companies.
In addition to peripheral influences, bearish logic also contains many uncertainties in the process of "evolution". For example, high-end means that Xiaomi is out of the "cost-effective" comfort zone, how much impact will it have on its mobile phone business? Or, spending $10 billion to build a car will continue to increase the cost of millet and compress profit margins, which is one of the most direct variables affecting asset valuation.
Of course, when the 2021 financial report is released, these questions also have answers. And Lei Jun himself before entering the mobile phone industry, he has been in the venture capital industry outstanding a large number of market frontier information, a variety of smart phone model parameters on the market such as a number of family treasures, Xiaomi for many executives are also in the technology industry has a deep experience, many years of precipitation is the basis of its management decision-making. And Xiaomi is also really bringing technology into people's daily lives, and constantly consolidating its own commercial moat. Xiaomi's fundamentals and growth are optimistic.
At present, the large technology stocks of Hong Kong stocks have also entered the stage of shock bottoming. As the cold faded, the panic that pervaded the global capital market also showed signs of dissipating, and last week's shouts from the top were a shot in the arm for the domestic market. JPMorgan chase and company strategist Marko Kolanovic said in a research report that the plunge in technology stocks, biotech stocks and emerging market stocks may be nearing the end, despite the current turmoil, sluggish market sentiment, and low investor positions, but believe that many risks have been fully digested. In fact, the sharp rise in Chinese stocks in us stocks overnight on March 23 has reflected the reversal of market confidence to some extent. From the overall valuation of the market, the Hong Kong market is already a global valuation depression, and the premium of A shares to H shares is also at a high level in the past 10 years.
Holding the bottom line of the reversal with long-termism, there is reason to expect that when Xiaomi strides towards the change trend of artificial intelligence, it will continue to accumulate and develop, and long-term value will continue to receive effective feedback in the capital market, as it has done in the past decade or so.
When people predict the future, they are often subject to past experience. As mentioned earlier, it will take time for AIoT to gradually land and spread in all aspects of people's lives, even if most people can understand why technology will become a reality. This requires a combination of technological proficiency and consumer habits, but it is still a highly deterministic direction of development.
On this road, Xiaomi will still "move forward".
"We insist on innovation-driven technological innovation and continue to increase investment in research and development." Xiaomi's 2021 financial report said so.
Xiaomi will continue to promote technological innovation as part of the company's social responsibility of ESG, has exported intelligent manufacturing, scientific and technological innovation solutions to partners, empowered the industrial chain, driven the upstream and downstream companies of the industrial chain, and formed an ecological cluster of domestic manufacturing equipment supply, covering communication technology, analog semiconductors, touch displays, sensors, integrated electronics, batteries, industrial automation, precision manufacturing and materials.
Xiaomi relies on its ecological chain to successfully land and apply these outputs, and while growing together with domestic manufacturing, it constantly improves the logical closed loop of technology dividend popularization, which is expected to bring a considerable valuation premium.