【1810 Analysis】Xiaomi Falls Over 3%　Smartphone Gross Margin Drops to 8.3%　Capital Expenditure Doubles　He Qicong: Low Gross Margin + Cost Pressures

Xiaomi (01810)
Shares fell more than 3% after earnings. The company’s adjusted net profit for Q4 declined 23.7% year-on-year to 6.34 billion RMB; revenue increased by 7.3%, but the growth slowed, slightly better than market expectations. The gross profit margin of smartphones decreased by 3.7 percentage points year-on-year to 8.3%. Some analysts pointed out that the sharp rise in storage memory and precious metal prices over the past period has eroded Xiaomi’s profits, and capital expenditures have surged, so buying is not recommended.

Independent stock analyst Ho Kai Chung analyzed in our video program “ET Market Opening Live” that since Q4 last year, the chip shortage has caused issues, and at the beginning of this year, the market started to show “sell-off of US dollars” sentiment, which has driven up the prices of precious metals, increasing Xiaomi’s costs. “Both of Xiaomi’s business areas—consumer electronics and automotive chips—will lead to higher costs… Remember, Xiaomi is a value-for-money brand. Selling value-for-money means the company earns less, with a low gross profit margin. When the gross margin is low and costs are under pressure, it’s very difficult to absorb those costs.”

Ho Kai Chung also pointed out that capital expenditure poses a challenge to profit outlook. “In the next five years, capital expenditure will increase to 200 billion RMB, compared to about 10 billion RMB in the previous five years. The company plans to spend about 20 billion RMB annually on R&D, which would generate roughly 40 billion RMB in profit per year. If 20 billion RMB is allocated to R&D and the business currently shows no signs of profit growth, will profits be halved next year?” He summarized, “In this performance report, I don’t see any particularly bright spots.”