Xiaomi (Minutes): Mobile phones target 200 million units, no strict profit target for cars

The following is the summary of the conference call for the Q4 2024 financial report of $XIAOMI-W(01810.HK) compiled by Dolphin Research. For the financial report interpretation, please refer to “Xiaomi: Claimed to be the 'Strongest in History', Is It Really That Impressive?”

1. Core Financial Information Review

1. $Xiaomi Corporation(XIACY.US) Overall Performance: Revenue of 109 billion, a year-on-year increase of 49%, better than market expectations (104.4 billion).

2. Mobile Phones: 51.3 billion, market expectations were around 50 billion, especially since the shipment volume is public data, the main reason is that the mobile phone ASP exceeded expectations, which also indicates that Xiaomi is gradually making progress in high-end products, with an average price of over 1200 yuan, which is very good.

3. IoT: 30.9 billion, driven by national subsidies, with a low base last year, a year-on-year increase of 52%; although air conditioner sales have seasonally declined, TV sales surged by 33% quarter-on-quarter, benefiting significantly from national subsidies.

4. Internet Services: 9.3 billion, about 300 million higher than market expectations; driven by overseas internet services, while domestically mainly relying on advertising; value-added services have been quite average, with no growth for several consecutive quarters.

5. Automotive Business: In Q4, automotive-related revenue totaled 16.7 billion, with a gross margin of 20.4% and, adjusted net loss of 700 million. Although it has not turned profitable yet, the speed of loss reduction is already very impressive.

6. Profit: Core operating profit of 5.8 billion, which in Dolphin's view is not particularly stunning. Despite revenue exceeding expectations, core operations did not show significant release, mainly due to high growth in R&D and sales expenses, which eroded some profits.

Shareholder Returns: Cumulative stock repurchase amount of 3.7 billion HKD in 2024.

Guidance: Plans to launch YU7 in the middle of the year, striving to achieve the annual delivery target of 350,000 new cars, and continue to invest in core technology R&DII. Detailed Content of the Earnings Call

2.1 Key Information from Executives

1. Core Achievements:

① Automotive Business: The Xiaomi SU7 has achieved delivery volume growth nine months after its launch, and monthly orders continue to rise a year after its release.

② Mobile Phone Business: Shipment volume increased by over 15% year-on-year, leading the growth rate among the top five manufacturers globally, maintaining a position in the global top three for 18 consecutive quarters, with global market share rising to 13.8%.

③ AIoT Business: Tablet shipment volume grew by over 70%, with a global share of 15.2%, ranking second; major appliance business grew by over 55% year-on-year; IoT business annual operating profit margin increased by 3.9 percentage points to 20.3%, becoming a profit stabilizer.

④ Significant breakthroughs in high-end positioning, with a market share of 16.8% in the 4000-6000 yuan price range for mobile phones; the SU7 Ultra priced at 529,900 yuan set a new brand high, with over 10,000 orders locked in within three days.

2. Capability Building:

① Business Philosophy: In 2022, the focus was on balancing scale and profit, moving away from scale-first to achieve long-term sustainable high-quality growth; in 2023, a comprehensive strategy for the entire ecosystem of people, vehicles, and homes was clarified.

② R&D Investment: Approximately 24.1 billion yuan in R&D investment in 2024, with an expected 30 billion yuan in 2025.

③ Management System: Systematically building multiple internal process management systems, using the DSD system to plan and coordinate internal goals, introducing the IPD process to ensure stable output of popular products, implementing the IPS system for internal collaboration and value realization, and establishing a management committee to create a transparent collective decision-making mechanism, improving the operational decision-making system.

④ Deepening High-End Expansion: Continuously deepening the high-end process over the past five years, extending from mobile phones to the automotive sector.

⑤ New Retail Capability: Expanding the new retail model from the consumer electronics sector, gradually building a large offline store network to solidify the foundation for product sales and brand promotion.

3. Strategic Outlook

① Fully promoting all product categories towards high-end positioning, striving to break the scale bottleneck for mobile phones priced above 6000 yuan, while expanding the high-end strategy from mobile phones and automobiles to more categories, shaping a comprehensive high-end brand image.

② New Retail Strategy: In China, planning to add 5,000 stores by 2025, with a future goal of establishing 20,000 Xiaomi stores; overseas, starting from the existing 500 stores, gradually expanding to 10,000.

③ Focusing on hardcore technology over the next decade, continuously increasing investment in technological innovation, with AI as the core driving force, planning to complete the evolution of the AI operating system within 2-3 years, aiming to become a global leader in the next generation of hardcore technology.

④ Organizational Management Optimization and Upgrade: While advancing the high-end process across all categories, simultaneously optimizing the organizational and management systems, deepening the application of processes such as IPD and IPS.

2.2 Q&A

Q: Is Xiaomi's electric vehicle plan to add 350,000 units of capacity based on improving the efficiency of existing production lines, or will new production lines be built to meet the demand including the Ultra series?

A: Regarding production capacity, there are currently multiple starting points. Recently, we convened over a hundred people for a meeting, hoping they would assist in ensuring product supply, thereby increasing capacity from 300,000 vehicles to 350,000 vehicles. Moreover, we are not only focusing on the Ultra series but covering all products.

Q: Can you share the regional expansion plan, strategy, and overseas business resource allocation strategy?

A: In terms of IoT business, the overseas market accounts for about one-third, while the Chinese market accounts for two-thirds. However, its potential is twice that of the domestic market, which means there are four times the growth space overseas. Currently, Xiaomi Home is developing rapidly and effectively in multiple countries, and users are willing to log onto the official website for shopping.

I believe that in the second quarter of this year, Xiaomi Home will emerge in large numbers in Southeast Asia, Europe, Japan, and South Korea. The AIoT strategy is crucial, and the potential of the overseas market should not be underestimated. Additionally, the IoT business is expected to grow by 30% in 2024. Although overseas growth is slower than domestic, progress has been made, opportunities are increasing, and the growth momentum is accelerating.

Q: The company has launched a series of AI products covering areas such as the integration of AI and IoT, which have been applied to varying degrees. AI will play an important role in the future. What are your thoughts on this?

A: Currently, we are still far from the widespread adoption of artificial intelligence; it will take two to three years to become a true AI powerhouse. Many products on mobile phones have AI features and functions, but user stickiness is not strong. However, applications of AI products like those from Xiaomi and related projectors have brought many surprises, helping us solve numerous problems, and these areas are expected to yield significant results in the future. Xiaomi possesses three core technologies: AI, OS, and chips, and AI is crucial for Xiaomi.

Q: What are the goals regarding investment in AI research and development, and which areas are primarily being invested in? Additionally, I heard the company plans to expand its factory in Wuhan. Can you share the progress in this regard?

A: Capital expenditures have exceeded 10 billion; compared to 2023, the incremental portion is related to AI spending. It is expected that capital expenditures will be even higher in 2025, with the main increment in the AI field, but specific amounts cannot be disclosed at this time. All related R&D investments are directed towards AI.

Q: Will national subsidies promote growth in IoT and mobile phone businesses in the first quarter? Can they benefit from the subsidies?

A: Regarding national subsidies, first, subsidies vary by product category, and different products are affected differently. There have been subsidies for mobile phones since the first quarter of this year, which were very few last year, so the growth of the mobile phone business in the fourth quarter of last year was unrelated to subsidies, while laptops and tablets were significantly affected by subsidies.

Overall, categories like large appliances, tablets, and laptops do not show outstanding growth. Under the same subsidy conditions, Xiaomi's growth is faster, especially for high-end products, which benefit significantly, with some high-end products leading in growth. However, no device can achieve a significant leap solely based on subsidies; for DDR memory (DDR4, DDR5), there is a certain impact in the short term due to the industry's poor performance in previous years.

Q: Aside from demand factors, what changes have occurred in the company's product structure, and can you share any predictions? This year, investors are concerned about costs. How is the company managing expense control? Compared to last year, are component prices stable? How is the situation?

A: In 2025, we need to pay attention to the impact of rising component prices on the business; compared to 2024, overall short-term price fluctuations are expected to ease in the second and third quarters.

Q: The company's automotive business gross margin exceeds 20%, and losses are narrowing. With the launch of the SU7, what is the outlook for the automotive business's final gross margin in 2025, and when can we expect profitability?

A: The current profit margin for the automotive business is 20%, and it is expected to align with the first quarter level in 2025 and subsequent quarters. We are currently in a heavy investment phase, with significant investments in core technologies, factories, and intelligent driving, and there is no strict profitability timeline at this moment.

Q: The internet business has reached a new high, particularly in advertising. What are the reasons for this?

A: First, the existing customer base continues to grow; second, the optimization of high-end equipment improves the user structure, laying a solid foundation for the Internet of Things (IoT) business. The advertising business has performed strongly, especially overseas, where we have relatively strong bargaining power with advertisers. Over the past year or two, the advertising business's gross margin has been high, driving overall improvement and healthy profit growth.

As Mr. Lu mentioned, the increase in high-end penetration rates, market improvements in places like Poland, and rising ARPU values overseas have continuously boosted the overall gross margin of the internet business.

Q: Regarding the retail network, what is the actual expansion speed of your stores in China, and what are your plans?

A: This year, we have clear goals, planning to open 20,000 offline stores, including 400 large stores over 500 square meters, while also expanding distribution centers and experience stores. This will enhance our brand image, leveraging Xiaomi's brand power to secure favorable rental terms, bringing numerous benefits. If the property conditions are not good, we will resolutely not open stores.

Q: Recently, there have been many reports about AI intelligent entities. While we have seen their application in the internet field, there is still untapped potential in the IoT field, such as the car-home ecosystem. How can we leverage IoT systems and internet advantages to promote sales and expand networks?

A: In terms of AI intelligent entity applications, Xiaomi products adapt to multiple scenarios, laying a solid foundation for AI. For AI, we need to build a foundation, tackle core technologies like large language models, and also think about the integration of products and industries. Currently, Xiaomi's reputation is thriving.

Q: Regarding major appliances, the IoT field continues to grow at 50%, indicating significant market potential. How do you view its opportunities compared to the mobile phone business?

A: In the major appliance sector, we have clear goals. We incorporated it into our operational strategy in 2023, achieving technical delivery last year, and we will continue to push forward by the end of this year. This field has enormous growth potential, aiming to be in the top three this year and striving for the top one or two in the next two to three years. The gap in traditional appliance technology products has narrowed, and we are leading in the smart field, with 70% of appliances capable of IoT connectivity. Without this, effective results cannot be achieved. For example, our newly launched central air conditioning has pre-sales reaching 5-6 times the target, and overseas expansion in Southeast Asia is going smoothly, presenting limitless opportunities.

Q: The company's mobile phone business continues to rise. What are the reasons, and can it collaborate with the automotive business? The automotive business has already been successful; will this affect Xiaomi's customer base?

A: The synergy between the mobile phone and automotive businesses is significant. During the Spring Festival, traditional car sales are often only 30% of usual levels, but Xiaomi cars exceeded normal sales because most of our stores are located in shopping centers with heavy foot traffic, allowing customers to conveniently check out the cars at the same time, Xiaomi's two Ultra products are selling well, and the high-end and ultra-high-end sectors are promising in the next five years, with current Xiaomi Ultra sales up 80% year-on-year. The average price of traditional products is rising, which is just the beginning of the synergistic business, with more significant results expected in the next three to four years.

Speaking of the Internet of Things, it is expected to increase by 20 billion in 2024 compared to 2023, with diverse growth not limited to major appliances. Last year, tablets and wearable devices were also strong, with major appliances being one of the drivers, and other categories also showing rapid momentum.

Q: Currently, the delivery time for Ultra models is 13 to 16 weeks, and after the launch of the SU7, the waiting period may reach 40 weeks. With strong demand, what is the medium to long-term capacity planning?

A: Currently, delivery is our biggest bottleneck. The company is fully committed to ensuring product safety and quality, which is a long-term goal, and business expansion will not stop.

Q: It is known that growth mainly comes from advertising and ARPU improvement, with a record high in the fourth quarter. Overseas business is mainly based on advertising, and future terminals will be more diverse. Can the mobile phone business bring more surprises, and can other overseas businesses like gaming help?

A: In terms of internet business, the recent proportion has exceeded one-third, with the number of overseas users continuing to rise and operations remaining stable, still primarily based on advertising, covering search business, and there are also areas with performance shortfalls. Looking at shipments and existing customer situations, overseas markets have not yet replicated the Chinese model; the current focus is on resource accumulation rather than expansion.

Q: Regarding this year's mobile phone market, recent sales have been considerable. What is the overall market capacity and your company's share? The market share in Western Europe has declined in the past; what strategies are in place there?

A: Last year, the overall mobile phone market grew by 1% - 3%, and we grew by about 16.9 million units. This year's target is still to grow by 18 million units. We are focused on scale, and Xiaomi should be able to break through the 200 million mark by 2026-2027. Other categories should reach similar thresholds of 100 million, in my opinion.

Although the Chinese market is different, it has reference significance for Western Europe. The decline in the Western European market is mainly due to our adjustments, intentionally controlling the sales of certain products while increasing the sales of mid-to-high-end products. Products priced at 999 yuan and 4999 yuan are selling well, and recently, we also launched entry-level products in Japan. The ASP and market share in Western Europe are expected to rebound in the future.

Q: Many competitors are entering lower-tier cities. What is your view on this, and what is the impact on the industry? Xiaomi has performed well here; besides technological upgrades, what other ideas do you have?

A: Smart driving is crucial for us, so we are investing heavily, with updates every month. Competitors entering lower-tier markets is a good thing, as it can promote smart driving and benefit the public. We hope Xiaomi's smart driving products will shine in the future, and we look forward to it.

Q: The central air conditioning business is different from the old channel business aimed at customers. Xiaomi's products have strong market penetration. What are the plans for the 2B business development?

A: Currently, the 2B business and the central air conditioning market are large enough. Xiaomi brings high-quality products and transparent services, changing the chaos in the industry. Experience shows that Xiaomi's involvement in various fields often achieves growth through product and model innovation, and the central air conditioning business has enormous potential, with broad growth space in the future

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