How far can Xiaomi go

How long can high-end mobile phone strategy go?

It has been 11 years since Xiaomi was founded in 2010. Many people are asking, what kind of company is Xiaomi?

If it is an Internet company, the market value of Xiaomi is far less than that of Alibaba (HK$4.6 trillion) and Meituan (HK$1.79 trillion). If it is a mobile phone company, the market value of Xiaomi is far less than that of Apple (US$2.49 trillion) and Samsung Electronics (US$487.5 billion).

Xiaomi, an Internet company with mobile phones, smart hardware and IoT platforms as its core, has built itself into one of the world’s largest smart home platforms.

The market value of Xiaomi Group was 380.4 billion Hong Kong dollars at the beginning of its listing in Hong Kong in 2018. The current market value is 706.1 billion Hong Kong dollars, which has nearly doubled in three years. It has already left some smart home head manufacturers on the market , such as Gree’s market value of 300.7 billion yuan and Midea’s market value. 491.3 billion yuan, Haier Zhijia Port stock market value of 267.2 billion Hong Kong dollars.

There is still a big gap between Xiaomi’s net profit and the leading Internet and mobile phone companies, but the gap with smart home manufacturers from traditional home appliance companies is not large or even greater. In 2020, Xiaomi’s net profit is 13 billion yuan, which is less than Midea’s 27.2 billion yuan, approaching Gree’s 13.6 billion yuan, and surpassing Haier Zhijia’s 8.877 billion yuan.

How does Xiaomi make money? What is the deep logic of development? After building a car, where will Xiaomi go in the future? Millet worthwhile investment capital it? This article attempts to analyze and interpret Xiaomi from several aspects such as mobile phones, Internet services, AIoT, advertising, and investment.

How long can high-end mobile phone strategy go?

In 2020, Xiaomi’s smartphone revenue was 152.2 billion yuan, a year-on-year increase of 24.6%; IoT and living consumption was 67.4 billion yuan, a year-on-year increase of 8.6%; Internet business revenue was 23.8 billion yuan (of which advertising revenue was 12.7 billion yuan, a year-on-year increase of 19.2%, games Business income was 4.2 billion yuan, a year-on-year increase of 31.4%), a year-on-year increase of 19.7%; other income was 2.5 billion yuan, a year-on-year increase of 38.3%.

Due to chip supply, Huawei’s mobile phone shipments in 2020 fell by 21.5% compared to 2019, and Xiaomi quickly launched a high-end smartphone strategy and became the mobile phone company that benefited the most. In 2020 Q4, millet phone in the smartphone market share in mainland China rose to 14.6% from 9.2%, it is attention . Xiaomi’s mobile phone shipments reached 147 million units in 2020, an increase of 17.6% compared to the same period in 2019.

Xiaomi’s high-end mobile phone strategy has increased the gross profit of the mobile phone sector in 2020 by 8.2 billion yuan year-on-year in 2019, a growth rate of 28.7%, and an increase in gross profit margin from 7.2% to 8.7%. With the completion of the Xiaomi Changping Smart Factory, the gross profit margin of Xiaomi mobile phones will undoubtedly continue to increase. The vacancy window for Huawei’s high-end models will not be very long. Honor , an independent company from Huawei , has gotten rid of the chip’s dilemma, and has clearly announced its positioning of high-end products. The hardware configuration will exceed Huawei’s Mate and P series. Under the counterattack of Honor, it remains to be seen whether Xiaomi can stand firm.

However, the high-end machine strategy also dragged down the net profit margin of Xiaomi Group. In 2020, Xiaomi will spend 5.5 billion yuan on external advertising, mainly to promote high-end models. The increase in advertising expenditures will make Xiaomi’s net profit margin in 2020 at 5.28%, which is slightly lower than 5.58% in 2019.

Internet services contribute high gross profit

In 2020, the gross profit margin of Xiaomi mobile phones will be 8.7%, the gross profit margin of IoT and consumer products will be 12.8%, and the gross profit margin of Internet services will be 61.6%. The gross profit margin of Xiaomi Internet services is 7 times that of smartphones. Calculated by the amount of gross profit, the gross profit contributed by 1/6 of the revenue of the mobile phone segment for Internet services has exceeded the gross profit of the mobile phone segment, and the gross profit of the IoT segment has approached 60% of that of the mobile phone segment.

The gross profit of advertising in Xiaomi Internet Services is very high, as high as 80%. This supports the gross profit margin of Xiaomi Internet Services to exceed Baidu and Tencent and approach Alibaba. The high gross profit of Xiaomi’s advertising depends on MIUI’s highly digitalized interaction between Xiaomi mobile phones and users, and a large amount of low-cost traffic has been obtained. Undoubtedly, Xiaomi’s advertising is the best mobile phone manufacturer has done.

However, Xiaomi Finance’s poor gross profit performance due to loan impairment provision in 2020 has dragged down the rapid growth of Xiaomi’s Internet services. In addition, the lack of overseas Internet service layout has not kept up with the pace of Xiaomi’s overseas mobile phone layout, resulting in the low profit contribution of Xiaomi’s overseas business.

AIoT opens up new traffic space

The mobile phone × AIoT strategy is the moat of Xiaomi’s business model. AIoT uses more valuable and long-sticky devices to generate valuable interactions with users to obtain new traffic, and then transform into high-margin businesses such as advertising, games, and finance. This strategy is currently paying off. The number of MIUI monthly active users of Xiaomi Internet Services is 396 million, a year-on-year increase of 28%, while Xiaomi’s AIoT platform has connected devices (excluding mobile phones and laptops) to 324 million, a year-on-year increase of 38%. The AIoT strategy has opened up new sources of traffic for Xiaomi, and the growth rate has exceeded MIUI.

Xiaomi’s smart TVs, smart speakers, routers, household appliances, etc. are all part of Xiaomi’s AIoT strategy. According to data from Aowei Cloud Network, in 2020, Xiaomi smart speakers ranked second in mainland China in terms of retail volume, with a market share of 29.4%; Xiaomi routers ranked second in terms of online retail volume in mainland China, with a market share of 29.4%. 20.6%; Xiaomi TV’s 2020 shipment volume ranks first in mainland China, and Xiaomi and Redmi brand TVs rank first in the retail volume of large-screen TVs over 70 inches in mainland China, with a market share of 27.7%.

Xiaomi has four strategies in the field of AIoT:

1. Focus on products that can enhance the connectivity of smart homes, allowing Xiaomi to be at the center of smart homes, such as smart speakers and routers.

2. The strategy of occupying the living room, focusing on the development of high-end Xiaomi TVs with large screens above 70 inches.

3. Displaced competition with traditional home appliance manufacturers, launching big-explosive smart light-life appliances, occupying the minds of users, such as air purifiers, sweeping robots, smart cameras, smart lights, etc.

Fourth, increase the linkage between mobile phones and IoT devices. Xiaomi has successively launched the “Yizhilian” based on UWB technology, the “Funny Connect” for automatic search and network distribution, and the Xiaomi Vela software platform for collaborative management of smart home devices, continuously improving the interaction capabilities of mobile phones and smart home devices.

A well-deserved cash cow in the advertising business

According to data from CTR Media Intelligence, the epidemic has hit the entire advertising market severely. In 2019, the cost of advertising cases in China has dropped by 7.4% year-on-year. In 2020, the epidemic has made the advertising business worse, and the cost of advertising cases in China has dropped by 11.6% year-on-year.

However, Xiaomi’s advertising business has surged against the trend! In Q4 2020, Xiaomi’s advertising revenue reached a record high, reaching 3.7 billion yuan, and in 2020, Xiaomi’s advertising revenue reached 12.7 billion. In the top ten of China’s Internet advertising revenue in 2020, Xiaomi ranks eighth. The top seven are Alibaba, Tencent, Baidu, JD , Pinduoduo , Kuaishou , and Meituan Dianping . Almost all of them are Internet companies.

Xiaomi’s core is mobile phone manufacturing, but the comprehensive after-tax net profit margin of Xiaomi’s hardware in 2020 is only 1%, and the advertising business revenue is Xiaomi’s heavyweight to make up for its net profit.

Xiaomi’s advertising business is focused. In 2020, Xiaomi’s advertising revenue in the education industry will increase by more than 70%, and K12 and pre-school education advertising revenue will be the highlight. In Q4 of 2020, Xiaomi Advertising will focus on the real estate industry APP, achieving a year-on-year growth of over 230% in advertising revenue. There is also a year-on-year growth of 128% in the advertising revenue of the dating industry in 2020. Xiaomi focuses on social advertising in the recruitment industry, especially for targeted pushes during the recruitment season. The effect is very good.

Xiaomi Advertising has implemented vertical solutions for sub-industries such as education, games, e-commerce, real estate, finance, and life services. It has implemented hierarchical and grouped refined advertising for customers at different levels, existing customer groups and new customer groups. Distribution has also achieved multiple leapfrogs from pull new to pull live, from application store resources to non-app store resources, and from shallow advertising to deep advertising.

Xiaomi Investment made 60% of operating profit

Xiaomi established the Jinmi Investment Company, which specializes in investing in “companies with potential and recognition of Xiaomi’s values” in the market. In 2020, Xiaomi’s investment income will reach 14.5 billion yuan, accounting for 60% of Xiaomi Group’s profits. If excluding investment income, Xiaomi’s operating profit in 2020 will not change much from 2019.

Xiaomi has invested in 310 ecological chain companies with a total book value of 48 billion yuan, a year-on-year increase of 60.1%. Xiaomi’s investment track is very focused, focusing on IoT-related smart home companies, and the business synergy with these companies is extremely deep. Xiaomi mobile phones and these IoT devices interact through AI technology to expand the scale of Xiaomi’s user ecology and enhance users to obtain more functions and value through Xiaomi phones, thereby enhancing user stickiness. The linkage between Xiaomi ecological chain companies is relatively good, and each company also has obvious complementary differences. For example, cloud-meter science and technology focus family of intelligent, science and technology do the smart meter supplier of commercial equipment, stone technology to do at home with intelligent cleaning robots, intelligent Nine companies do shorter transportation equipment, scientific and technological interest sleep do sleep products, Chinese rice do the smart bracelet, Junmi is a smart rice cooker, Zhimi is an air purifier, Yeelight is a smart bedside lamp, and Lumi is a smart socket and smart switch.

At present, No. 9 company (market value of 45.7 billion yuan), Stone Technology (market value of 71.2 billion yuan), Huami Technology (692 million US dollars), Yunmi Technology (490 million US dollars) have all been listed, and Fun Sleep Technology is preparing for the GEM IPO .

Xiaomi has a strong ability to drive the smart home industry by investing in cultivating “smart” home equipment.

Unlike manufacturers such as Midea and Gree, which have natural exclusivity, Xiaomi focuses on mobile phones and smart home connectors (routers, smart speakers), and can connect to devices from all manufacturers in a neutral position. In terms of smart home ecology, Xiaomi is currently better than Huawei. However, with the release of Huawei Hongmeng OS, with the advantages of self-developed microkernels, compilers, and powerful 5G technology, Huawei Hongmeng OS will pose a big challenge to the Xiaomi IoT software platform Vela in the smart home market.

Focus on technology investment

Compared with Huawei’s R&D expenditure of 141.8 billion yuan in 2020, Xiaomi’s R&D investment of 9.3 billion yuan in 2020 is not much. Huawei has a large number of independent technologies in the field of mobile phone chips, such as power management-HiSilicon Hi6421, audio decoder-HiSilicon Hi6405, LNA/RF switch-HiSilicon Hi6H11, Wi-Fi / BT / GNSS wireless combo IC-HiSilicon Hi1103 , Processor-HiSilicon Kirin 995, Huawei NM memory card, etc., so the gross profit margin (20%) of Huawei mobile phones is higher than that of Xiaomi mobile phones (8.7%).

Huawei has authorized over 100,000 patents worldwide, and Xiaomi has authorized 16,000 patents worldwide. Xiaomi’s patents have comparative advantages in the field of AI, ranking 11th in the number of global AI patent applications.

Xiaomi is very focused on technology development. Compared with giants such as Apple, Huawei, and Samsung, it is light technology. Specifically, cameras, screens, charging, IoT, and voice intelligent interaction are all technologies that interact with mobile phones and humans. Among them, Xiaomi has a research and development team of nearly 1,000 people in the camera field. In terms of software, Xiaomi has created the IoT embedded software platform Xiaomi Vela, and has developed 120W wired fast charging, 80W wireless fast charging, and air-space charging in the charging field. Xiaomi has invested heavily in voice intelligent interaction. The artificial intelligence assistant “Xiao Ai” based on the famous voice recognition framework Kaldi can be used in scenarios such as mobile phones, Xiaomi TVs, and Xiaomi speakers. The number of monthly active users reaches 86.7 million.

The intelligence of Xiaomi’s “Xiao Ai” is clearly ahead in China. I have compared the recognition accuracy, naturalness of interaction, and voice processing of Xiaomi’s “Xiaoai” smart speakers, “Xiaoyi” of Huawei smart speakers, “Xiaodu” of Baidu smart speakers, and Xiaomi’s “Xiaoai” The technology is obviously better. But compared to Amazon Echo’s “Alexa”, Xiaomi’s “Little Ai” is still slightly inferior.

Building a car, an uncertain future

Xiaomi Automobile is positioned as a smart electric vehicle, with an initial investment of 10 billion yuan, and plans to invest 10 billion US dollars in the next 10 years. The talents that Xiaomi Motors are recruiting are mainly in the field of autonomous driving, involving 20 positions including data platforms, vehicle infrastructure, decision-making and planning, millimeter wave algorithms, front-end platform development, embedded software, control, perception, and high-precision maps. According to media reports, Lei Jun led a team to inspect BYD , Great Wall, Changan, SAIC-GM-Wuling and many other auto companies.

In February 2020, after Lei Jun announced the construction of the car, the share price of Xiaomi Group once rose by more than 12%, and the closing market value increased by 50 billion Hong Kong dollars that day. This shows that the market is very optimistic about Xiaomi making cars.

There are two ways for Xiaomi to build its own factories or cooperate with car companies. If it is to cooperate with car companies, Xiaomi provides human-computer interaction software and autonomous driving, and car companies produce cars. Of course, it is very possible for Xiaomi to build its own car factory. The completion of Xiaomi’s Changping Smart Factory is likely to explore the way for Xiaomi’s smart car factory. Building a car is risky. Lidar, algorithms, and chips are all huge investments that are heavily invested in the industry. If you build your own factory and build a car, it will be more asset-intensive, and the investment return cycle is very long. From 2004 to 2010, Tesla went public, and its funds faced exhaustion several times. Although Xiaomi has 100 billion yuan in cash, the current market pattern is completely different from the blank of the new energy vehicle market in the early days of Tesla. Nowadays, not only traditional car players, but also technologies such as Apple and Huawei are entering the new energy vehicle market. Powerful giants, as well as professional players such as Xiaopeng and Weilai all in new energy vehicles.

Xiaomi Motors first cooperates with car companies, through AI voice, autonomous driving, smart home interaction, digital content and other added value, through Xiaomi IoT OS to empower traditional car companies, take light capital to build cars, and then sell them on Xiaomi channels (5000 Xiaomi Zhijia is a very good channel for Xiaomi’s offline exhibition industry sales). After obtaining the traffic of the Internet of Vehicles, it can be realized. This road is relatively safe.

The uncertain future is also what is fascinating. Building a car may make Xiaomi Group one of the trillion-dollar market capitalization clubs, or it may drag the group into the abyss because of huge capital investment.

Optimistic about the medium and long-term investment value of Xiaomi

How far can Xiaomi go

The high-end machine strategy in the second half of 2020 has caused Xiaomi’s valuation to soar. However, on January 14, 2021, the US government “blocked” nine Chinese companies, including Xiaomi, which caused Xiaomi’s price-to-book ratio to drop from 7.8 times in November 2020 to the lowest point of 4.22 in Q1 in 2021. Dropped 80 billion Hong Kong dollars. If Xiaomi Auto can succeed and achieve close collaboration with Xiaomi mobile phones, Xiaomi smart homes, and Xiaomi Internet services, supported by the two concepts of new energy and intelligence, it will be able to greatly boost Xiaomi’s market-to-book ratio and market value. The current price-to-book ratio of Weilai is 17.53, and that of Tesla is 27.23.

Xiaomi has outstanding strengths, such as light assets, high degree of Internetization, easy resonance with user needs, strong ecological construction capabilities, ability to make big explosive products, and focus on AI capabilities. However, Xiaomi’s shortcomings are also more obvious, such as the lack of deep-level hard technology such as chips, communications, and OS, which has led to the thin gross profit of Xiaomi’s mobile phone sector.

Fortunately, the gross profit of emerging sectors such as Xiaomi’s Internet services, IoT and consumer consumption can already make up for the small profits of mobile phones. Xiaomi Motors also has a lot of room for imagination to increase the overall gross profit of the Xiaomi Group. You know, the gross profit margin of domestic Tesla cars is 29.4%, and Tesla Motors’ global gross profit margin in 2020 is 25.6%; Weilai’s gross profit margin in 2020 is 12.7%, which is higher than the gross profit margin of Xiaomi mobile phones. Xiaomi Auto focuses on Internet and smart home interconnection features. Although it may not be able to keep up with Tesla’s gross profit margin, with its mobile phone × AIoT ecosystem, it is likely to exceed the gross profit margin of Weilai and Xiaopeng.

Xiaomi’s mobile phone × AIoT strategy has only been proposed for two years, and the performance improvement effect is still gradually showing. The proportion of high-margin businesses continues to increase. Whether Xiaomi Auto can succeed and how far Xiaomi can go, we will wait and see.

On the whole, the Xiaomi Group has a clearer logic of endogenous growth, the medium and long-term investment value is relatively high, and it is more likely to stand firm at the trillion Hong Kong dollar market value.

[Note: There are risks in the market, and investment needs to be cautious. In any case, the information or opinions expressed in this subscription number are only for the exchange of opinions and do not constitute investment advice to anyone. 】

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