"Xiaomi" has arrived? UBS: Valuation already includes the most optimistic expectations, capacity may limit the explosion of electric vehicle business

Since the beginning of 2025, Xiaomi's stock price has risen nearly 60%, significantly outperforming market expectations. There are currently differing opinions in the market regarding the company's future prospects. On March 10, UBS downgraded Xiaomi's stock rating to Neutral while raising the target price to HKD 60.

UBS analysts stated that Xiaomi's current stock price has reached the most optimistic scenario expected by analysts. The company's current valuation has reached a forward price-to-earnings ratio (NTM PE) of 40 times, far exceeding its 5-year average of 22 times. There are catalysts for further increases in Xiaomi's stock, but the execution conditions required are extremely stringent. Analysts believe that Xiaomi's electric vehicle business will be constrained by capacity bottlenecks, and the current valuation already includes high growth expectations for the electric vehicle business in 2026.

Based on optimistic expectations for Xiaomi's future growth, UBS raised its 12-month target price from HKD 33.50 to HKD 60. However, considering that the current stock price is close to the target price, the company's valuation has fully reflected its future growth potential, leaving limited room for further increases. Analysts downgraded Xiaomi's rating from "Buy" to "Neutral."

Under current valuation, risk and return are basically balanced

UBS believes that multiple factors have driven Xiaomi's current market performance.

First, the Chinese government's subsidy policy for electric vehicles has provided strong support for Xiaomi's electric vehicle business. Second, Xiaomi's layout in the high-end market has begun to show results, and the launch of the SU7 Ultra has further solidified its brand positioning. In addition, Xiaomi's continued expansion in the smart home and Internet of Things (IoT) sectors has also provided momentum for its performance growth.

However, after experiencing a significant rise in stock price, Xiaomi's current valuation is at a historical high. UBS stated that Xiaomi's stock is currently trading at a forward price-to-earnings ratio (NTM PE) of 40 times, far exceeding its 5-year average of 22 times. This valuation level indicates that the market has a rather optimistic expectation for Xiaomi's future growth. Analysts believe that under the current valuation, the risk and return are basically balanced, hence the downgrade in rating.

UBS also warned that as of February 28, 2025, Xiaomi is one of the most "crowded" stocks among offshore Chinese stocks in the artificial intelligence concept. This means that once market sentiment changes, there may be a risk of "stampede."

There are upward catalysts, but execution conditions are harsh

Despite the downgrade, UBS also acknowledges that Xiaomi still has several potential "catalysts" in the future, which, if successfully implemented, could reignite its stock price:

AI glasses "emerging"? If Xiaomi launches AI glasses on a large scale, it will enhance its edge AI ecosystem, drive growth in Internet of Things (IoT) sales, and improve the valuation multiples of its core business.

Can YU7 become a hit? The market has high hopes for Xiaomi's YU7 model, which is planned for launch in the second quarter (UBS estimates annual deliveries at 305,000 units, with buyers possibly expecting even higher), with high expectations for its sales and pricing. If YU7 sells well, it will significantly boost Xiaomi's revenue in 2025 and the valuation of its electric vehicle business based on price-to-sales (P/S) ratio.

Although Xiaomi's prospects seem bright, UBS also pointed out potential challenges.

First, while Xiaomi's electric vehicle business is growing rapidly, its capacity expansion may face bottlenecks. UBS expects Xiaomi's electric vehicle deliveries to reach 580,000 units by 2026, but this forecast is based on its existing factories operating at full capacity. If capacity expansion falls short of expectations, Xiaomi may lose market share in the fierce competition.

Secondly, the Chinese government's subsidy policy may gradually weaken its stimulating effect on Xiaomi's smartphone and IoT businesses. As the subsidy policy exits, Xiaomi's core business growth may face pressure. Additionally, Xiaomi's further penetration into the high-end market also faces challenges, especially with competitors ramping up their efforts.

Growth prospects remain optimistic

Despite the challenges, UBS remains optimistic about Xiaomi's IoT and electric vehicle businesses.

Analysts believe that Xiaomi's IoT business is expected to achieve over 30 billion RMB in revenue in the fourth quarter of 2024, mainly driven by China's "trade-in" subsidy policy. Furthermore, Xiaomi's expansion into overseas markets also provides new growth points for its IoT business.

In the electric vehicle sector, UBS expects Xiaomi's SU7 model to be released in the second quarter of 2025 and hopes it will become a new growth engine. Analysts predict that Xiaomi's EV deliveries will reach 305,000 units in 2025, and this number may be further adjusted upward due to market demand. If SU7 performs strongly in sales, Xiaomi's EV business valuation is expected to further increase.

Risk warning and disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account individual users' specific investment objectives, financial conditions, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk