Through the storm, Xiaomi is ready to "take off"

On March 24, Xiaomi handed over an expected and unexpected financial report.

According to CINNO Research monitoring data, in 2022, the smartphone market will be weaker overall due to the global economic environment, with shipments falling by 11.7% year-on-year.

Among them, in 2022, the sales of smartphones in the Chinese market will only be about 255 million units, down 19% year-on-year, and sales in all quarters will show negative growth year-on-year, falling between 14% and 21%, setting the worst annual sales performance since 2015, and falling below 300 million units for the first time in 8 years.

This has put pressure on smartphone sector valuations, with price-to-earnings ratios at historically low levels.

Being in it, it is difficult for Xiaomi to be alone.

According to the 2022 financial report, Xiaomi Group's total revenue fell by 14.7% year-on-year to 280.044 billion yuan, and net profit fell by 61.4% year-on-year to 8.518 billion yuan.

Looking at financial indicators alone, the picture does not seem very promising. But aside from the financial data fluctuating due to the environment, Xiaomi's earnings report also conveys a lot of information worth looking forward to. Combined with Xiaomi's actions at the organizational, strategic, product, and research and development levels this year, these dark lines will dominate Xiaomi's valuation repair in the new fiscal year.

The broader market is bleak, and the high-end strategy is effective

On March 24, Xiaomi Group released its 2022 annual results announcement, achieving total revenue of RMB 280 billion and adjusted net profit of RMB 8.5 billion in 2022.

In terms of sub-regions, in 2022, the revenue from overseas markets will be 137.8 billion yuan, accounting for 49.2% of the total revenue.

In terms of segments, smart phones are still the largest in revenue, with annual revenue of 167.2 billion yuan, followed by IOT and consumer products with 79.8 billion yuan, accounting for 28.5%, Internet services and other revenues of 28.3 billion yuan and 4.7 billion yuan, accounting for 8.6% and 1.9% respectively.

From the perspective of revenue structure, the proportion of revenue of smartphone business decreased from 63.6% in the same period last year to 59.7%, while the proportion of revenue of IOT and consumer goods and Internet services increased and the revenue structure was adjusted in the direction of diversified support.

The year-on-year decline in Xiaomi's revenue in 2022 was mainly due to the decrease in smartphone shipments, but Xiaomi's global smartphone shipments remained third at 150 million units in 2022 against the backdrop of external factors suppressing the demand for the global mobile phone market.

It can be said that under the dismal cycle of the broader market, Xiaomi's market position is basically stable and shows strong development resilience.

Given the solid market position, three key pieces of information in the earnings report are particularly noteworthy.

The first is that ASP is at an all-time high.

The financial report disclosed that in 2022, Xiaomi's global average smartphone selling price (ASP) reached a record high, reaching 1111 yuan. At the same time, in 2022Q4, Xiaomi's smartphone ASP in mainland China increased by more than 14% year-on-year, and the proportion of high-end smartphone shipments (RMB 3,000 and above) in the overall smartphone shipments increased by 6.8 percentage points year-on-year.

According to third-party data, in Q4 2022, Xiaomi's smartphone sales ranked first in the Chinese mainland market in the RMB 3,000-4,000 price segment and second in the RMB 4,000-5,000 price segment.

Among them, the Xiaomi 13 and Xiaomi 13 Pro high-end models launched in 2022 have joined hands with Leica for in-depth research and development to unlock the image strategy upgrade, and the market feedback is relatively enthusiastic, and the praise rate of the Jingdong platform exceeds 99%.

Consumers have voted in Xiaomi's high-end strategy with practical actions. ASP's record high is the most powerful illustration of Xiaomi's high-end strategic effect. At the same time, ASP improvement will also increase the profit space of enterprises, inject more protection into the long-term investment of enterprises, and the value of ASP enhancement is very significant in the long run.

Secondly, the growth of overseas Internet business is strong.

Lin Shiwei, CFO of Xiaomi Group, introduced in the results conference call that Xiaomi's overseas Internet will grow strongly in 2022, with annual revenue reaching RMB 6.8 billion, a year-on-year increase of 35.2%. Q4 revenue reached a record high of RMB1.9 billion, accounting for 26.1% of total Internet revenue.

Under the background of the pressure on the advertising and gaming market, Xiaomi's advertising revenue and game revenue both had bright spots, of which the annual game revenue reached RMB 4.1 billion, a year-on-year increase of 4.4%.

In the context of the decline in mobile phone shipments, Xiaomi's Internet services have achieved contrarian growth, which is a very powerful signal and shows that Xiaomi's soft competitiveness continues to increase.

Compared to hardware revenue, which is susceptible to market impact, Internet services can contribute more sustainable growth and will effectively improve the Group's gross profit performance. With the continuous growth of smartphone shipments and user scale, combined with the promotion of high-end strategy, Xiaomi's Internet business still has room for growth.

The third is that the number of global and Chinese mainland MIUI monthly active users has exceeded a new high.

The financial report disclosed that as of December 2022, Xiaomi's global MIUI monthly active users increased by 14.4% year-on-year to 582 million, and the number of Chinese mainland MIUI monthly active users increased by 10.7% year-on-year to 144 million. The number of users ushered in new growth, with the net new MIUI monthly active users worldwide and Chinese mainland reaching 73.3 million and 13.8 million respectively.

The number of MIUI monthly active users broke a new high, on the one hand, it is a reflection of the continuous increase in the number of Xiaomi users, and at the same time, it also shows that users' stickiness to Xiaomi products and services is increasing.

More and more loyal users are undoubtedly the most valuable asset of the enterprise, they will greatly enhance Xiaomi's anti-risk ability and lay a solid foundation for Xiaomi to further tap user value.

The continuous release of high-end strategic effects, the optimization and adjustment of revenue structure and the continuous growth of user scale have superimposed, and the certainty of Xiaomi's improvement in revenue and greater flexibility on the profit side has been greatly enhanced.

At the investor day on February 9, Xiaomi first proposed a new business strategy that places equal emphasis on scale and profit, which is an important reference for understanding the future development of Xiaomi.

When the market is in the expansion dividend period, scale is a more core consideration for enterprises. However, the smartphone industry has entered the post-dividend era, and the quality of operation must be placed in a more important position, and Xiaomi's new business strategy of paying equal attention to scale and profit is not only a response to the current market situation, but also a layout for future trends.

Steady progress, value release can be expected

Focusing on the new business strategy of both scale and profit, after entering 2023, Lei Jun repeatedly emphasized that Xiaomi's keyword is "steady progress, ready to go", and some major moves are also around these keywords.

At MWC 2023 in February, Xiaomi officially released the Xiaomi Wireless AR Glasses Discovery Edition, equipped with product innovations such as touch-and-connect mobile phones, as well as a large-screen application ecology and rich interconnection scenarios.

On March 1, Xiaomi announced that it has pre-developed solid-state battery technology, which not only exceeds 1000Wh/L energy density by replacing the electrolyte with a solid electrolyte, but also greatly improves the performance and safety of low-temperature discharge, "which is expected to solve the three major pain points of mobile phone batteries in one fell swoop."

The release of cutting-edge new products and breakthroughs in underlying technology are the concentrated embodiment of Xiaomi's investment in research and development.

Financial report data shows that Xiaomi invested 16 billion yuan in R&D in 2022, with a five-year compound growth rate of 38.4%. The proportion of R&D personnel among Xiaomi's employees has also increased year by year, and as of December 2022, the proportion of R&D personnel in the total employees has increased to nearly 50%. In the financial report, Xiaomi made it clear that the total R&D investment in the next five years is expected to exceed RMB 100 billion.

Investment in R&D is the foundation of building a solid foundation for enterprise development, and under the reality of continuous adjustment of market structure, investment in R&D will further consolidate Xiaomi's high-end strategy and help it better grasp the smartphone market.

In response to the new characteristics of the market, Xiaomi's corporate governance is also continuing to evolve.

At the beginning of the year, Xiaomi established the Group Operation Management Committee and the Group Human Resources Committee. Among them, the Group Operation and Management Committee will coordinate and manage business strategy, planning and major business decisions, and the Group Human Resources Committee will coordinate and manage human resources strategy, formulate major human resources policies and approve major organizational restructuring and the appointment and dismissal of senior cadres.

Xiaomi has entered the professional management stage of further improving internal collaboration and decision-making efficiency.

Lei Jun said in an internal letter that the combination of the company's founding team members, external introduction of senior executives, and internal promotion of young senior cadres ensures the breadth of governance decisions and reflects the thickness of the group's governance echelon. The stability and evolution of the organization and team is the most powerful guarantee for the stability and long-term development of the enterprise.

From a macro perspective, compared with 2022, the smartphone market has a more certain favorable development environment in 2023.

The first is the general market stop falling. According to the forecasts of a number of third-party institutions, in 2023, under the condition that the global economy will stabilize, the smartphone market is expected to stop the downward trend and achieve a certain degree of growth.

Second, the impact of the pandemic on the global economy continues to wane, especially in the domestic market. A more relaxed socio-economic environment will not only further stimulate the release of market demand, but also provide a more certain guarantee for enterprise production, manufacturing, and sales.

Lu Weibing, president of Xiaomi Group, also believed at the earnings performance meeting that external macro challenges still exist, and consumption is still gradually recovering, depending on the recovery of the market.

Lin Shiwei, CFO of Xiaomi Group, remains optimistic about the overall market in 2023, the industry competition pattern will become rational, the inventory level will gradually return to normal and healthy, and product capabilities will continue to improve.

With a more comprehensive and healthy business and revenue structure, as external risk factors weaken, Xiaomi's value will be more fully released in the new fiscal year.

In the future car manufacturing business of the group, Xiaomi has stabilized the course and driven towards the set goal.

According to the financial report, Xiaomi's innovative businesses such as smart electric vehicles are advancing as scheduled, with an investment of RMB 3.1 billion in 2022 and a R&D team of about 2,300 people in the automotive business. Xiaomi said that the goal of maintaining the formal mass production of smart electric vehicles in the first half of 2024 remains unchanged.

It can be predicted that after the successful mass production of smart electric vehicles, the possibilities contained in the opening of mobile phones, automobiles, and smart homes will surely promote Xiaomi to usher in another moment of reevaluation.