Xiaomi "Becomes a God Overnight": Where Does the Trillion Come From and Where Does It Go?

Cars are here! IoT and smartphones have also opened up sales channels thanks to subsidies! With eight to nine hundred million active devices in hand, the dawn of edge AI is also faintly visible... In this "turnaround" drama, no one plays it better than Lei Jun. It can be said that since its listing in 2018, Xiaomi has never been as glorious as it is now!

The question is, how did the "loser’s artifact" Xiaomi overnight transform itself into the "light of national trends"? From being disliked by thousands to being adored by millions, how did Xiaomi achieve this? Is the trillion-dollar Xiaomi really worth it? Where will future investment opportunities arise?

This article by Dolphin Research focuses on discussing the current risks and values of Xiaomi, a typical representative of "turnaround" in the covered ticket pool.

1. Has the "soul-less" Xiaomi become "illuminated"?

Since its listing in mid-2018, $XIAOMI-W(01810.HK) has painted a story for the capital market that Dolphin Research can hardly count:

First, at the peak of the IPO internet boom, Xiaomi claimed to be an "internet" company, using hardware to gain traffic; then, as Huawei swept the domestic market, Xiaomi, which was "born with both Zhuge Liang and Zhuge Jin," played three strategic cards: IoT Reconstructing Xiaomi, International Reconstructing Xiaomi, and High-end Reshaping Xiaomi.

However, regardless of which card was played, it was basically held high for a moment of glory, only to seemingly sink into the sea. This has led to its valuation being typically in the range of 10-20XPE, driven by product cycles, except for the water buffalo in 2020-2021 and last year's automotive breakout, since its listing nearly seven years ago.

Before Xiaomi's brand upgrade (with Xiaomi and Redmi walking on two legs), Xiaomi phones were the go-to for homebodies and the "loser’s artifact"; IoT products, which were not self-produced or self-researched but merely branded IoT, were superficial and lacked soul, to some extent merely an extension of smartphone traffic monetization.

In overseas markets, whether due to path dependence or fierce competition abroad, Xiaomi's entire operation still follows a strategy of quickly capturing markets with low-priced devices.

However, similar to the domestic market, after users in overseas markets have been educated on the benefits of smartphones, when they are ready to upgrade, they also make the same choice as in the domestic market, opting for better brands, higher quality, and higher prices, which in turn benefits Apple's market share in emerging markets So whether it's recreating Xiaomi overseas or recreating Xiaomi through IoT, Xiaomi's progress has not been ideal.

Why does Xiaomi, which lacks soul, suddenly have "light"? Simply put, in 2024 and 2025, it's time for Xiaomi's "happy trio":

① Automotive: Xiaomi has told a whole story about IoT and overseas recreation, but the ultimate success in recreation is the Xiaomi automotive business, which was initiated in 2021 and will be sold in 2024.

② National subsidies: From home appliances to smartphones. Successfully selling cars is a point of pride for Xiaomi, but at the same time, Xiaomi's smartphone and IoT businesses are also resonating: in the context of weak domestic demand, Xiaomi, which has been crawling in darkness for three to four years, has welcomed a windfall—"national subsidies," which are almost tailor-made for Xiaomi.

Xiaomi's focus on intelligence, green technology, essential needs, and cost-effectiveness perfectly aligns with the standards of national subsidies, which were originally aimed mainly at home appliances and consumer electronics other than smartphones.

However, starting from January 2025, national subsidies will also extend to Xiaomi smartphones, which account for nearly half of Xiaomi's revenue and 30% of its gross profit. Moreover, all of Xiaomi's product lines have now fallen under national subsidies or products encouraged by policies. Sales have exploded.

③ Edge AI? The emergence of Deep Seek has further accelerated the story of hardware upgrades brought by AI. For a long time, smartphones have been characterized by excess hardware configuration, encouraging app developers to make their apps infinitely large.

However, with the advent of ChatGPT, the hardware capabilities of devices like smartphones have suddenly become insufficient, whether in terms of computing power or storage. Moreover, to meet the hardware configuration requirements that ChatGPT can use, the current prices of AI smartphones and computers are too unaffordable.

But with the appearance of Deep Seek, it seems that hardware upgrades have become easier to achieve, as DS has hardware requirements that are not so high as to make AI smartphones/computers prohibitively expensive.

As a result, the simultaneous resonance of these three favorable narratives has propelled Xiaomi's stock price directly into the stratosphere.

From an event-driven perspective: in the second half of the year, there are ① in automotive, possibly the SUV YU7 in June; ② in smartphones, the launch of the new Xiaomi 16 model in the second half of the year.

Regarding national subsidies, based on the two new national bond quotas released today, unless the domestic demand situation further deteriorates, it may be quite difficult to expand further. The key remaining question is how much national subsidies can boost the gross profit margin of Xiaomi's electronic products.

Clearly, these events are actually foreseeable and predictable. At this point, the most critical question is, as Xiaomi approaches a market capitalization of HKD 1.5 trillion, what prospects are currently priced into its market value? If one were to invest now, how many opportunities would still be available, and what is the cost-effectiveness of these opportunities?

II. Automotive: Is it about to become the main star?

Before Xiaomi's automotive business takes off, the company's stock price has struggled to break through the HKD 30 barrier. The brief breakthrough at the beginning of 2021 was mainly influenced by the overall market driven by post-pandemic policy support, economic recovery expectations, and market sentiment The recent breakthrough of 30 Hong Kong dollars is mainly driven by the automotive business.

Regarding Xiaomi's current market value reaching one trillion, Dolphin Research believes that the core logic of the market's expectations for Xiaomi's automotive business has changed: the market's valuation of Xiaomi's automotive business has shifted from a short-term perspective to a medium- to long-term perspective.

① The more cars sold, the more orders received

When the SU 7 was just launched, the market's valuation of Xiaomi's automotive business was still based on the expected sales for that year, referencing the valuation system of its peers in the new energy vehicle sector.

However, as Xiaomi's automotive production ramps up and deliveries increase, the backlog of orders has also grown. On the Xiaomi Automotive APP, the delivery wait time for the SU 7 has increased from 28-30 weeks at the beginning of the year to now 30-37 weeks.

In terms of months, if users place an order immediately, the wait time for vehicle delivery is at least 5 months or more. Based on the company's current monthly delivery volume of 25,000 units, the current orders for the Xiaomi SU 7 amount to approximately 150,000 to 180,000 units.

This demonstrates the principle that the more deliveries made, the more orders received.

In this context, the analysis of Xiaomi's automotive business has been infinitely linearly extrapolated: having cars to sell means more sales, and despite the fierce market competition, the more sold, the more orders received.

Among the various automotive brands in China, with Huawei not personally entering the car manufacturing arena, only Xiaomi has demonstrated the brand appeal of an outsider—Tesla. In the automotive business, Xiaomi seems to have become a mirror image of Tesla: selling cars with strong brand appeal, without the need for advertising, a single launch event can make it a well-known name across the internet.

② Intelligence: Rapidly entering the state

Moreover, in addition to its sincere hardware configuration, Xiaomi's speed in entering the state of automotive intelligence and its competitive capabilities are also impressive.

In terms of progress: Xiaomi has moved quickly from acquiring a small team for smart driving research to pushing products compared to first-tier players:

High-speed NOA will be launched in April 2024, city NOA will be rolled out in ten cities in June, and city map-less NOA will be fully pushed in October; by February this year, it has already achieved full-scene intelligent driving from door to door.

In terms of progress, it has basically caught up with the first-tier players in intelligent driving such as Huawei, Li Auto, and XPeng.

③ Strong Execution Capability

Xiaomi's first-phase factory is designed with a production capacity of 150,000 vehicles. Starting from zero in the first quarter of 2024, it reached the maximum capacity of 28,000 by early 2025 in less than a year.

Some may think that the domestic automotive industry chain is complete, with everything available, and that all components can simply be assembled on the production line and labeled. However, there is a counterexample — Baidu's automotive project, which was initiated almost simultaneously in the same industry chain environment, turned into a farce over three years, while Xiaomi Automotive delivered impressive results. Execution and implementation capabilities are equally important.

With the support of points (①——③), the expectations for Xiaomi Automotive have begun to unfold linearly: rather than looking at Xiaomi's current production capacity, it is based on the ultimate market expectations.

According to the current visible production capacity planning, under the condition that cars can be sold:

a. Xiaomi Automotive's first-phase factory has a planned capacity of 150,000, which can be pushed to nearly 300,000 annual production, mainly producing the Xiaomi SU7. Whether it's the standard version, Pro, Max, or Ultra version, all come from this production line.

b. Second phase: also with a planned capacity of 150,000, it is scheduled to peak in mid-2025 and start production in July. It is estimated to reach a maximum capacity of 300,000, producing the SUV — YU7, which is expected to be released in June and start deliveries in July.

The market, following the logic that production drives sales, has already given the SU7 a sales outlook of 300,000, while the YU7 is estimated at 50,000 to 100,000, corresponding to Xiaomi's sales target of 350,000 to 400,000 in 2025, while Xiaomi's publicly announced target for 2025 is only 300,000 vehicles.

However, based on a unit price of 240,000 to 250,000, Xiaomi Automotive's annual revenue would not exceed 100 billion. Without a valuation multiple far exceeding its peers, it is difficult to explain how Xiaomi's valuation increased from HKD 400 billion to HKD 1.4 trillion, and how much of that is attributed to Xiaomi Automotive's valuation.

In the absence of clear potential release, how to understand the valuation of Xiaomi Automotive business? Dolphin Research's approach is to consider the valuation from a long to mid-term perspective, beyond production and short-term sales of 1-2 years, to think about Xiaomi Automotive's position in the future smart automotive landscape.

In other words, once the supply-demand imbalance for Xiaomi Automotive is resolved, what should its steady-state sales and market share look like? For this question, Dolphin Research hypothesizes that, based on the current momentum, its sales scale could reach a level comparable to leading new forces like Li Auto, corresponding to nearly 100,000 monthly sales by 2029, while maintaining the current comprehensive unit price due to brand appeal.

In terms of valuation, referencing the current most significantly valued new force in pure electric vehicles, XPeng, and giving a steady-state 2X PS, with a 10% WACC risk discount, this would correspond to a valuation of slightly over HKD 500 billion by the end of 2025, equivalent to HKD 21 per share, which is more than double the market value of the current champion in the extended range segment — Li Auto, or in other words, during Xiaomi's surge to a valuation of HKD 1.4 trillion, the automotive sector contributed half of the incremental value

III. Mobile Phones and AIOT: Considered as Cash Cows

With the imagination of the second curve fully established, the burden of mobile phones and IoT has significantly lightened. Although the market's valuation of mobile phones and IoT businesses is quite evident, due to cyclical issues and inherent capabilities, Dolphin Research still views them differently.

In the short term, Xiaomi's mobile phones and home appliances are likely to exceed expectations in revenue and gross margin due to subsidies. However, from a long-term perspective, both businesses are in mature markets, and the competitors are quite formidable, so they still need to rely on enhancing their competitive positions.

Therefore, in terms of short-term expectations, based on the one-time dividend brought by national subsidies in 2025, after the base period in 2026, Dolphin Research will still judge based on long-term competitive conditions.

First, the long-term competitive landscape of mobile phones: Xiaomi's global market share has increased, but it is still relatively small. The potential release of the mobile phone business mainly relies on the slow high-end transformation of Xiaomi phones in the domestic market. The following chart shows the gradual increase in the starting price of Xiaomi's flagship digital series models over the past two years.

First, the long-term competitive landscape of IoT: The IoT business essentially monetizes brand traffic, and in single categories, especially in large white goods, there are no significant categories that can clearly capture market share. Therefore, after passing the subsidy base period, it is still expected to grow weakly, with gross margins maintained below 20%.

These two mature businesses, in the long run, still represent a stable business with mid-to-high single-digit growth, with profits mainly achieved through the improvement of gross margins during the high-end transformation of the mobile phone business.

For these mature businesses, due to their stability, Dolphin Research uses DCF for valuation, with a WACC of 10% and a perpetual growth rate of 3%, corresponding to a valuation of over HKD 950 billion, with a single stock price close to HKD 40.

Conclusion: Does Xiaomi Still Have Cost Performance?

If the two businesses are summarized using the SOTP method, the valuation is approximately HKD 1.5 billion, corresponding to a single stock price of HKD 60

If the discount factor remains unchanged, if Dolphin Research values all of its businesses using DCF, the corresponding valuation per share is around HKD 70.

The valuation range derived from these two methods is between HKD 60-70 per share. Currently, from a price perspective, Xiaomi does seem to have some value, but it is somewhat lackluster. To exceed this range, further optimistic scenarios may need to be played out, such as replicating the success of SU 7 after the release of YU 7, with orders completely unscathed and a massive backlog of orders.

Alternatively, in the smartphone sector, with the support of national subsidies and edge-side AI, a significant replacement cycle could be triggered, driving the cash cow—smartphone business—to significantly outperform expectations.

Dolphin Research's historical articles on Xiaomi Group:

Earnings Season

November 18, 2024 Conference Call: “Xiaomi: Targeting 20,000 Xiaomi Stores by 2025 (24Q3 Conference Call)”

November 18, 2024 Earnings Commentary: “Proudly Presenting, 'Super Xiaomi' Arrives”

August 21, 2024 Conference Call: “Xiaomi: Enhancing Automotive Competitiveness, Not Participating in Price Wars (24Q2 Conference Call Minutes)”

August 21, 2024 Earnings Commentary: “Automotive Fuel, Smartphone Warmth, Is Xiaomi Making a Comeback?”

May 23, 2024 Conference Call: “Xiaomi: New Retail for Automobiles, Targeting 20,000 Stores in Three Years (24Q1 Conference Call)”

May 23, 2024 Earnings Commentary: “Xiaomi: Smartphones Reviving, Cars Booming, Can They Truly Clear Their Name?”

March 19, 2024 Conference Call: “Xiaomi: Aiming to Become One of the Top Five Automotive Brands Globally (4Q23 Conference Call Minutes)” March 19, 2024 Financial Report Review: “Mediocre” Xiaomi: Can Only Rely on Cars to Tell a New Story

November 20, 2023 Conference Call: Xiaomi Management Discusses Sources of Gross Margin Improvement (3Q23 Conference Call Minutes)

November 20, 2023 Financial Report Review: Xiaomi "Strikes" Back

August 29, 2023 Conference Call: Inventory Depletion Nears Completion, Impairment Reversal Increases Profit (Xiaomi 2Q23 Conference Call)

August 29, 2023 Financial Report Review: With Challenges from India and Huawei, Can Xiaomi Rise Again?

May 25, 2023 Conference Call: Investing in Chips is a Long-term Strategy Xiaomi Must Pursue (Xiaomi 23Q1 Conference Call Minutes)

May 24, 2023 Financial Report Review: Reduced Inventory, Lost Market Share, Where Does Xiaomi Go from Here?

March 25, 2023 Conference Call: Inventory Depletion Effective, Demand Recovery Still Not Here (Xiaomi 22Q4 Conference Call)

March 24, 2023 Financial Report Review: Xiaomi: Fallen to the Bottom, When Can It Stand Up Again

November 23, 2022 Conference Call: Inventory Begins to Digest, Supply and Demand Move Towards Balance (Xiaomi 22Q3 Conference Call)

November 23, 2022 Financial Report Review: Xiaomi Has Lain Down for Too Long, Finally Approaching “Light”

August 19, 2022 Conference Call: How Management Explains After a Comprehensive Decline in Financial Reports (Xiaomi 22Q2 Conference Call) August 19, 2022 Financial Report Review: Layoffs can't save Xiaomi from its deep troubles

May 19, 2022 Conference Call: Xiaomi in trouble both internally and externally, what does the management say? (Xiaomi 22Q1 Conference Call)

May 19, 2022 Financial Report Review: Internal troubles and external challenges, Xiaomi is not the optimal choice

March 22, 2022 Conference Call: Xiaomi Group: After a mediocre financial report, what does the management say? (Conference Call Minutes)

March 22, 2022 Financial Report Review: Ordinary Xiaomi: Tasteless to eat, regrettable to discard

November 30, 2021 Conference Call: With Xiaomi releasing pure electric models one after another, how does Li Auto compete? (Meeting Minutes)

November 23, 2021 Conference Call: Is the decline in mobile phones caused by shortages? Let's hear what Xiaomi's management has to say (Xiaomi Conference Call)

November 23, 2021 Financial Report Review: Big ups and downs, where is Xiaomi heading?

August 26, 2021 Conference Call: Xiaomi Group: After a brilliant report card, what did the management discuss?

August 25, 2021 Financial Report Review: No more doubts, Xiaomi ascends to the "altar" again

May 26, 2021 Financial Report Review: Remarkable achievements, is Xiaomi coming for a double hit in Davis?

March 25, 2021 Conference Call: [Chip shortages, slow Internet/IoT, car manufacturing? This is how Xiaomi responded!](https://longbridgeapp.com/topics/719211? invite-code=032064)》

March 24, 2021 Financial Report Review: The expectation gap is so large that it makes one question life, what is going on with Xiaomi?

In-depth

December 7, 2023: Consumer Electronics "Climbing Out of the Pit": Xiaomi Recovers, Apple Holds Firm

December 1, 2022: Xiaomi: The "Three Arrows" of Reversal in Adversity

June 17, 2022: Consumer Electronics "Ripe": Apple Stands Strong, Xiaomi Struggles

December 1, 2021: Honor's Siege, Xiaomi Faces Another "Life and Death Challenge"

November 24, 2021: Behind Xiaomi's Sharp Decline, What Went Wrong?

June 11, 2021: 2021, Xiaomi's "Transformation" | Dolphin Research

March 16, 2021: Dolphin Research | A Turn of Events, Is Xiaomi Finally Going to Shake Off Its Misfortune?

This article's risk disclosure and statement: Dolphin Research Disclaimer and General Disclosure