If a ranking of Chinese entrepreneurs' reputation and influence is to be made, Lei Jun's ranking should be very high. And the Xiaomi Group, under his leadership, is not only a global leader in the mobile phone market, ranking in the top three in market share, but also a rising star in the new energy automobile industry, attracting a lot of attention in the capital markets.

At the beginning of Xiaomi's listing, Lei Jun once boasted that investors who bought Xiaomi stock on the first day of its listing would double their investment. However, Xiaomi's stock price trend was full of drama, halving a year after listing, disappointing investors greatly, but then continuing to rise significantly over the next year, eventually doubling.

Now, with the rebound of Chinese concept stocks, Xiaomi's own performance is also coming out of a slump, and its stock price is also experiencing a strong uptrend. Recently, Xiaomi will release its latest earnings report. Every time a company releases its earnings, it may also mean a good opportunity for trade or investment. Before that, investors need to understand how to interpret its earnings. How should we interpret Xiaomi's earnings? Like most company earnings, we need to focus on three key points: fundamentals, growth drivers, and profitability.

1. Base

The cornerstone of a company is generally its most important business sector. Xiaomi currently has 4 main business sectors: mobile phone business, IoT business, internet service business, and the smart automobile business that started generating revenue only in 2024Q2.

The most important cornerstone of the company currently is undoubtedly the mobile phone business. In terms of revenue composition, Xiaomi's mobile phone business accounts for nearly 60% of total revenue, and is the absolute mainstay of current revenue.

From a business ecosystem perspective, Xiaomi's service business is largely dependent on traffic from Xiaomi phone users, while the IoT business is to some extent built around creating an IoT ecosystem for Xiaomi phones. As for the automobile business, it relies on the brand and user base built around Xiaomi phones, and is closely integrated with Xiaomi phones in terms of smart applications.

As the fundamental driver of the company's business, Xiaomi's mobile business revenue has experienced a process of significant growth, continuous decline, and then returning to growth in recent years. In 2024 Q2, Xiaomi's mobile business revenue increased by 32% year-on-year, accelerating growth for four consecutive quarters.

So, how is the growth prospect of Xiaomi's smartphone business? Is the foundation stable? It mainly depends on three points.

The first point is the overall growth of the smartphone industry. Due to the replacement cycle and the impact of economic cycles, the smartphone industry has a certain periodicity. If the smartphone industry is in a growth cycle, it will naturally be bullish for Xiaomi's smartphone shipments. On the contrary, if the industry is declining overall, it will bring pressure to all smartphone manufacturers.

According to IDC data, global mobile phone shipments have stabilized and rebounded in the past 5 quarters after experiencing a decline over the past two years, which is also an important reason for the revenue rebound of Xiaomi's mobile phone business.

The second point is the trend of Xiaomi's market share in the smartphone industry. If the company continues to expand its market share in the smart phone industry, it is beneficial for revenue growth, and also means that the company's brand influence is increasing, and its impact among users is getting stronger.

As each mobile phone manufacturer has a set new product release schedule, their market share will exhibit some seasonality. Therefore, we mainly focus on the quarterly year-on-year market share changes. According to data from Canalys and company earnings reports, Xiaomi's market share has seen consecutive increases for 4 quarters, reaching approximately 14.6% in 2024Q3, showing a good trend of continuous improvement.

The third point is the change in the average selling price (ASP) of Xiaomi smartphones. If the ASP can rise simultaneously with the increase in shipment volume, it will be the biggest driving force for revenue growth. We can see that Xiaomi's ASP has not shown a trend of increase, fluctuating overall between 1000-1200 yuan.

This is mainly because, on one hand, Xiaomi is implementing a high-end strategy, with the proportion of high-end smartphones priced over 3000 yuan accounting for over 20% of shipments. This undoubtedly benefits the increase in ASP. On the other hand, Xiaomi's shipments in Latin America and Africa markets are increasing, where consumer purchasing power is weaker, which also brings down the ASP level.

In 2024Q2, Xiaomi's ASP was about 1102 yuan, slightly down year-on-year, but still above the median of 1100 yuan.

Overall, we need to focus on whether the mobile phone industry can continue its growth trend, observe if Xiaomi's market share can continue to expand, and see if Xiaomi's ASP can steadily increase with the ongoing high-end strategy in terms of the revenue trend of Xiaomi Group's mobile business base.

2. Growth points Among Qualcomm's existing businesses, the only product that has continuously grown is the automobile chip product.

In terms of growth drivers for Xiaomi's mobile phones, we should pay special attention to two business segments, including existing Internet service business and the more important newly developed smart automobile business.

Regarding the current business, both Xiaomi's mobile phone business and IoT business show a certain cyclicality, with several quarters of revenue decline exceeding 10% in the past two years, and quarterly revenue has not yet returned to historical highs.

The revenue growth of the internet service business is relatively stable, with quarterly revenue declines never exceeding 5%, and has been rapidly growing continuously in the past 4 quarters, setting new historical highs in quarterly revenue. It serves as a stabilizing factor in Xiaomi's revenue growth and an important source of profit, contributing over a third of gross profit with a revenue share of over 10%.

Xiaomi's Internet service business mainly includes advertising revenue and gaming revenue, both essentially relying on the monetization of MIUI system traffic. Therefore, while the revenue growth of Internet service business will also be influenced by economic cycles in the short term, in the long term, it mainly depends on the scale of MIUI system users.

Due to the addition of new shipments of Xiaomi phones and tablets, which are usually more than upgrades from existing users, Xiaomi's MIUI system monthly active users (MAU) are generally in a continued growth state. This is a key reason for the overall stable growth of Xiaomi's internet service business revenue. In 2024Q2, Xiaomi's MIUI MAU is approximately 0.676 billion, maintaining a year-on-year growth rate of over 10%. Moving forward, we can continue to observe if the MAU can maintain stable growth.

In terms of exploring new business areas, Xiaomi's smart automobile business is considered by Lei Jun as Xiaomi's second entrepreneurial venture and is the most anticipated growth point in the market. From the initial stage, Xiaomi's automobile business has undoubtedly been very successful, with nearly 100,000 orders in the first month of listing. The company announced plans to aim for the delivery of 0.12 million vehicles within the first year of listing, with monthly deliveries now exceeding 20,000. As a result, Xiaomi's smart automobile business may bring in over 30 billion yuan of revenue growth for Xiaomi in 2024, accounting for over 10% of total revenue.

Xiaomi's strong brand effect, technological reserve, supply chain advantages, and low-cost marketing channels accumulated from its previous experience in mobile phones and other smart products are important reasons for the rapid surge in orders for Xiaomi automobiles and the rapid increase in production capacity.

Can Xiaomi Automotive's business continue to surge? In the short term, it is necessary to observe whether the current model SU7 can sustain its hot sales. In the medium to long term, it is necessary to see if the second pure electric SUV model and the third extended-range SUV model to be introduced in the future can once again become phenomenal products, thereby elevating Xiaomi Automotive's revenue level to a new level.

Profitability

It is widely known that car manufacturing is an extremely capital-intensive business, with almost all new car makers having experienced significant losses, most of which are still deeply in the red. Xiaomi announced car manufacturing in Q1 2021 and began a large-scale investment in Q3 2021. The market has been concerned that the car manufacturing project might drag down its overall profitability.

From the actual profit performance perspective, the market's concerns are not unfounded. Xiaomi's adjusted net profit margin level once fell from 7.2% in 2021Q2 to 2.2% in 2022Q4, almost falling into a loss, and its stock price also approached a historical low during that time. However, Xiaomi's profit capability rebounded significantly afterwards, and the adjusted net profit margin is currently maintained at around 7%.

From 2021Q2 to 2024Q2, Xiaomi invested over a hundred billion in the car-making sector, with its research and development expense ratio increasing from 3.5% to 6.2%, a nearly 3-percentage-point increase. In this context, Xiaomi's net profit margin level can still be improved. The core reason is that its gross margin level during the same period increased from 17.3% to about 20.7%, an increase of about 3 percentage points.

Of course, the improvement in Xiaomi's gross margin and net profit margin may not be sustainable. It can be foreseen that, in the initial period of large-scale delivery of Xiaomi automobiles, it is almost inevitable to incur losses as each car is sold, which will significantly drag down the levels of gross profit and net profit. In fact, in 2024Q2, Xiaomi's gross margin and adjusted net profit margin have both slipped compared to the previous quarter. Only with the continuous increase in production, the leveling of research and development costs and fixed costs under the effect of economies of scale, as well as the continuous reduction of per unit costs, can the breakeven point be reached.

In future quarters, what we need to observe is when Xiaomi's profitability, after the expected continuous decline, will reach a turning point upwards. If this turning point arrives as scheduled, and profits are quickly released, perhaps it will mark the real success of Xiaomi's second venture.

By this point, you may have some new insights on how to read Xiaomi's earnings. It is worth mentioning that every time a star company releases its earnings, it may represent a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors think that the bullish and bearish direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance release, then investors may consider the straddle strategy of buying call and put options to capture potential opportunities.

In conclusion, when it comes to Xiaomi's performance, we can focus on three key points: the fundamental base, growth drivers, and profitability.

Xiaomi's fundamental base is its mobile business, where we can observe three factors influencing its revenue: whether the mobile industry can sustain growth, if the company's market share can continue to expand, and whether the mobile ASP can maintain steady growth.

Xiaomi's previous stable growth point was its internet service business, where we can focus on whether MIUI users can continue to grow. Xiaomi's future core growth point is its smart automobile business, where we can observe if the SU7 can continue to sell well, and whether the upcoming new car models can once again become phenomenal products.

Xiaomi's profitability has recently hit a new high, but it will inevitably be impacted by the expanding losses in the automobile business in the future. We need to observe when the automobile business can achieve a balance between profits and losses, as well as the duration of Xiaomi's overall profitability decline and the turning point from decline to growth.