Xiaomi's second-quarter financial report is lower than expected. Can AIoT be its lifeline?

The growth rate is still slowing down, Lei Jun sighed.

On August 20, Xiaomi closed at HK$9.43 per share, with a market value of HK$226 billion. Compared with the issue price of HK$17 a year ago, it has fallen by 45%. After successfully listing, Xiaomi briefly rose to a peak of HK$22, then turned around and began to fall all the way - HK$19! HK$14! HK$11! HK$9! The lowest point was HK$8.37, becoming the first stock that young people cut in half.

After the market closed, Xiaomi released its second quarter financial report for 2019. The report showed that Xiaomi's second quarter revenue was 51.951 billion yuan, a year-on-year increase of 14.8%; net profit was 1.955 billion yuan, and adjusted net profit was 3.64 billion yuan, a year-on-year increase of 71.7%.

From the financial report, we can see that although Xiaomi's adjusted net profit in the second quarter increased significantly, the overall revenue growth rate has slowed down significantly compared with the 22.7% in the previous quarter. In terms of revenue structure, Xiaomi's smartphone business revenue was 32.021 billion yuan, a year-on-year increase of 5%; IoT and consumer products business revenue was 14.944 billion yuan, a year-on-year increase of 44%; Internet service revenue was 4.58 billion yuan, a year-on-year increase of 15.7%.

Compared with the first quarter, the revenue growth rates of Xiaomi's three main businesses have all declined, with the mobile phone business declining the most significantly. Mobile phones are the business with the largest share of Xiaomi's revenue, accounting for 61.6% in the second quarter, so the main reason for the slowdown in Xiaomi's revenue growth is also due to the mobile phone business.

In this regard, Xiaomi Group CFO Zhou Shouzi said in an interview with reporters that the company is currently on the eve of the 5G explosion and is also in the stage of making a series of adjustments to its brand structure, so the entire company has adopted a steady development strategy. In addition, after rapid development in the past few years, Xiaomi's revenue base has become very large, so a slowdown in growth is reasonable.

When talking about the stock price issue, Zhou Shouzi said that there are many factors that affect the stock price, such as the impact of the external market environment. For Xiaomi, what it needs to do now is to persist in doing its own business well and believe that the value will be reflected in the stock price sooner or later.

Will Xiaomi fall further?

The dangers and opportunities of mobile phone business

At the beginning of 2019, Xiaomi Group officially launched the dual-engine strategy of "smartphone + AIoT ", among which the mobile phone business is still the top priority of Xiaomi. According to the financial report, Xiaomi's smartphone shipments in the second quarter were 32.1 million units, which was basically the same as the same period last year.

The slowdown in shipments is also the current situation of the entire mobile phone industry. The latest data from IDC shows that in the second quarter of 2019, China's smartphone market shipments were approximately 97.9 million units, a year-on-year decrease of 6.1%; and shipments in the first half of the year were approximately 180 million units, a year-on-year decrease of 5.4%.

Zhou Shouzi told reporters that since the fourth quarter of last year, Xiaomi's mobile phone business has been focusing on structural adjustment and has not simply pursued shipment volume.

At present, Xiaomi is implementing a multi-brand strategy in its mobile phone business, with Xiaomi and Redmi being the main brands. According to different positioning, the Xiaomi brand will focus on the research and development of advanced technologies and be based in the mid-to-high-end market, while the Redmi brand will pursue the ultimate cost-effectiveness.

A person in charge of Xiaomi's related business told reporters that the Redmi brand will be more like the previous "Xiaomi brand". The purpose of this is to allow the new Xiaomi brand to break free from price constraints and make more attempts.

The financial report stated that thanks to the implementation of the multi-brand strategy, the gross profit margin of Xiaomi's mobile phone business has increased from 3.3% in the previous quarter to 8.1%. At the same time, the average selling price of Xiaomi's smartphones in the second quarter also increased to 998.7 yuan from 952.3 yuan in the same period last year, and smartphones priced at 2,000 yuan and above accounted for 32.3% of the total revenue of the mobile phone business.

For all mobile phone manufacturers, including Xiaomi, they are facing the same 5G opportunities as the industry market size begins to shrink. During the reporting period, the Ministry of Industry and Information Technology has issued 5G commercial licenses to operators, and 5G technology has officially entered the commercial stage.

Zhou Shouzi said that Xiaomi has made a lot of preparations for the 5G era. The financial report shows that Xiaomi has established a 5G pre-research team since 2016 and has started research on 5G standards in advance. Currently, Xiaomi's first 5G smartphone, MIX 3 5G version, has been officially launched in many European countries. According to Zhou Shouzi, Xiaomi will also launch its second 5G phone in the Chinese market in the second half of this year.

However, a communications industry analyst told reporters that competition in the mobile phone industry in the future 5G era will be more brutal than it is now. This brutality is not because the market has become more crowded, but because the gap in technological reserves may intensify the polarization of the industry.

Investment targets extended to supply chain companies

Unlike the mobile phone market, which has reached its peak, Xiaomi's IoT business is in a rapidly developing market. In terms of revenue, Xiaomi's IoT and consumer products business grew by 44%, far exceeding other businesses. At the same time, it accounted for 28.8% of total revenue, an increase from 22.9% in the same period last year.

A Xiaomi manager told reporters, "AIoT proposed by Xiaomi is actually AI+IoT. We believe that this will be the super Internet of the next era. It will enter thousands of households in the 5G era and will generate massive traffic. At present, interconnection is what Xiaomi is focusing on, and we also believe that this field has very broad prospects."

A research report by China Merchants Securities shows that by 2023, the number of connected IoT devices (including industrial and consumer IoT devices) in the world will reach 23 billion, and IoT revenue will jump to US$860 billion.

At present, thanks to Xiaomi's early layout, it has also accumulated a relatively large user system in the AIoT field. The financial report shows that as of June 30, 2019, the number of IoT devices connected to the Xiaomi IoT platform (excluding smartphones and laptops) reached 196 million, a year-on-year increase of 69.5%. Among them, the number of users with five or more Xiaomi IoT products increased to 3 million, a year-on-year increase of 78.7%.

Among all IoT products, Xiaomi's smart TV and laptop revenue was 5.5 billion yuan, accounting for 36% of the total IoT business revenue. During the reporting period, Xiaomi TV's global shipments reached 2.7 million units. According to data from Aowei Cloud Network, Xiaomi TV's shipments in the first half of this year ranked among the top five in the world, and its market share in China was also the first.

However, Xiaomi has recently faced a strong rival in the IoT field. On August 10, Honor Smart Screen was officially released. So far, Honor's IoT products have begun to take shape, including mobile phones, tablets, notebooks, smart screens, etc., and it is not ruled out that it will enter more fields in the future.

In this regard, Zhou Shouzi did not directly answer the question of competition with Honor, but only said that Xiaomi is very confident in the overall strength of its TV products and is also very confident in this business. He also revealed that the Redmi-branded TV will be released at the end of the month and described the TV as "particularly good and absolutely cool."

In fact, Honor is definitely not the only player eyeing the IoT market, and this track is bound to become more and more crowded in the future. From the financial report, we can see that Xiaomi's response strategy can be divided into two parts: one is to expand into more fields, and the other is to increase the layout of the upstream of the industrial chain.

For example, this year, Xiaomi started to sell Mijia air conditioners on a large scale. In the first half of this year, the shipment volume of Mijia air conditioners was about 1 million units. At the same time, Xiaomi is also preparing to enter the smart kitchen appliance market.

In terms of investment layout, as of June 30, Xiaomi has invested in more than 270 companies with a total book value of approximately 28.7 billion yuan. Xiaomi said that it will expand its investment to supply chain companies in the future to strengthen its cooperative relationship with major component suppliers and enhance its advanced technology procurement and manufacturing capabilities.

Zhou Shouzi said that Xiaomi is a strategic investor and the starting point of all investments is to strengthen the main business. The financial report shows that Xiaomi has invested in 12 supply chain companies so far, three of which have been listed on the Science and Technology Innovation Board.