Brokers' take: UOBKH starts Xiaomi at 'buy', expects stock to outperform peers

UOB Kay Hian (UOBKH) has commenced coverage on Hong Kong Stock Exchange (HKSE) listed Xiaomi with a "buy" rating and target price of HK$21.80 based on an estimated FY2022 price-to-earnings ratio of 20.5 times, on par with the stock's historical mean.

In an initiation report on Tuesday (Jan 11), analyst Johnny Yum said he expects the Chinese smartphone maker to outperform its peers with continued growth in global market share.

He is particularly positive on Xiaomi's Internet of things (IoT) and lifestyle products segment, which he believes will remain a major competitive edge due to its early entry, wide range of SKUs (stock keeping units) and large market share.

The analyst notes that Xiaomi's IoT products such as wearables and television sets typically provide dealers higher gross margins of 10 to 20 per cent as compared to smartphones, whose margins range from 7 to 10 per cent.

"Due to the synergies generated by its IoT products segment and its efficient inventory management system as well as improved turnover rate, Xiaomi can provide retailers a higher return on investment versus peers, which has become one of the reasons behind the heightened interest in Mi store openings in the past year," he commented.

Yum is projecting Xiaomi's adjusted net profit to grow 61.9 per cent to 21.1 billion yuan (S$4.5 billion) in FY2021, 0.8 per cent to 21.2 billion yuan in FY2022, and 12.3 per cent to 23.8 billion yuan in FY2023.

In his view, the anticipated bottomline growth will be mainly driven by higher revenue, albeit offset in part by gross margin contractions as well as higher expenses related to Xiaomi's ongoing investments in its electric vehicle (EV) business.

Highlighting Xiaomi's recent spike in global smartphone market share in 2021 after Huawei Technologies was hit by sanctions, Yum said it will be difficult for latecomers to replicate Xiaomi's success overseas without an event as significant as Huawei's downfall.

"Xiaomi's established overseas sales channel and brand image will offer it advantages over its peers. This in turn allows Xiaomi to continue capitalising on its expanding foothold in key overseas regions such as Europe, Latin America and India," he said.

In Yum's view, Xiaomi's competition will largely be confined to China - where its peers such as realme, Honor and Oneplus have also invested heavily in expanding their offline channels and high-end, premium markets.

"We expect online brands to be the eventual winners with their efficient and digitalised offline channels, while offline giants Vivo and Oppo will be the ultimate losers due to their less-efficient incumbent offline channels," said the analyst.

Xiaomi's outperformance of these close competitors in the global market is also a "clear showcase" of the group's "strong product competitiveness and exceptional execution capabilities in multiple regions", he added.

Shares of Xiaomi were trading HK$0.26 or 1.4 per cent lower at HK$18.24 on the HKSE as at 11.38 am on Tuesday.

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