Xiaomi Has Succeeded And Benefited From Anti-Globalization (OTCMKTS:XIACF)

Company profile

Xiaomi Corporation (OTCPK:XIACY) is a Chinese multinational electronics company founded in 2010 by Lei Jun. The company primarily produces smartphones, laptops, home appliances, and wearable technology. Headquartered in Beijing, Xiaomi has a global presence with operations in several countries including India, Indonesia, and Russia. Over the years, Xiaomi has rapidly expanded its product portfolio and has become one of the leading smartphone manufacturers in the world.

Xiaomi’s business model is based on offering high-quality products at affordable prices, making technology accessible to a wider audience. The company’s revenue primarily comes from the sale of smartphones and smart home devices. In addition, Xiaomi generates revenue through Internet services such as online advertising and mobile apps.

Through macro uncertainty, Xiaomi shines and prevails

Xiaomi has been making waves in the high-end market in China. The company’s strategy has been gradually paying off, and with the recent sanctions placed on Huawei by the U.S., Xiaomi has been able to further secure its market share and is now ranked 3 in global smartphone market share.

Solid international footprint to lower geopolitical risk

Xiaomi has been ahead of the game in terms of international market expansion, allowing it to weather the economic downturn in China better than its competitors. Its early establishment in international markets has put it in a position of relative stability compared to its competitors.

The proportion of Xiaomi’s overseas revenue has increased from 44% in 2019 to 50.5% in Q3 2022. The company’s Internet value-added services have also seen growth, with revenue for Q1 2022, Q2 2022, and Q3 2022 being up 72%, 52%, and 17%, respectively.

Likely a beneficiary of the anti-globalization

In the context of anti-globalization, Xiaomi is expected to have a competitive advantage in terms of cost compared to other international operations companies. Non-Chinese companies are beginning to shift their supply chains to Vietnam and India. Given the extra costs involved in shifting the entire supply chain outside of China, local Chinese manufacturing companies are poised to benefit. Additionally, China’s sluggish economy, with a relatively low 2% inflation compared to the 6% inflation in the U.S. and over 9% inflation in Europe, allows for more stable control over labor salary costs. In terms of raw material costs, China’s purchase of a large amount of oil from Russia also gives an advantage to Chinese manufacturing companies.

Steady customer base to produce service earnings

Xiaomi has seen consistent growth in its number of Chinese users, reaching 141 million monthly active users in Q3 2022. With a stable user base of 563 million monthly active users globally, the brand should not be impacted by the uncertain downside risk facing the global economy in 2023. In terms of stock price, the relative timing of the cycle suggests that Xiaomi is at a relatively suitable point for purchase.

Xiaomi’s profits from Internet value-added services have already accounted for 42% of the company’s total gross profit in the first nine months of 2022, which gives the company more pricing power in its hardware development strategy, providing a buffer against the global decline in the smartphone market.

A bottom-up company strategy that prioritizes customers helps Xiaomi create a moat

Xiaomi’s approach is centered around the opinions of its online forum users. The company takes user feedback into account and continually optimizes its software, releasing weekly updates to its MIUI operating system. In terms of hardware, Xiaomi releases multiple models concurrently, targeting different customer segments and maximizing exposure and marketing efforts.

We believe Xiaomi, known for its often criticized “assembler” title, is actually seen as an advantage from a different perspective. By outsourcing its manufacturing, Xiaomi saves some of its budget on technological research and development and focuses instead on the design and consumer experience.

Unlike traditional manufacturers who play a leading role in product design and research and development, Xiaomi’s Internet-based model leverages its online community to gather feedback on its products and MIUI. This allows the company to pinpoint consumer pain points and drive product innovation based on consumer feedback, making its products more attuned to consumer needs.

Take Xiaomi’s decision to produce televisions in a variety of sizes and models as an example. The aim is to test different consumer reactions to different functions and sizes. Xiaomi gathers first-hand data through online sales data and feedback from the MIUI community, allowing it to release updated products faster than traditional manufacturers.

Therefore, even if traditional manufacturers join the smart TV market later, Xiaomi always leads the way with its continuous innovation and popularity, compensating for its technological shortcomings with innovative consumer experiences.

An example of how the company quickly addressed a product issue is as follows: when compared to other manufacturers’ TVs, Xiaomi’s TV starts up slowly due to a technological disadvantage. So the business made the hasty decision to create a standby mode with a screen off capability that allows it to start in a matter of seconds. As a result, despite Xiaomi’s technological shortcomings, it still provides the best user experience.

Another example, consider how Xiaomi created a new market segment in the established smartphone market by developing the quick wireless charging. To successfully enter a new client industry, it built a 50w wireless charger and a 120 wire charger in addition to the customary customer focus on camera and size.

In our opinion, Xiaomi’s approach is similar to the fast fashion model of Zara, effectively creating viral products online and improving customer experience.

In the emerging AI era, rich consumer data and surveys may be advantageous

The volume of data could have an impact on how the AI model is trained. Xiaomi, being one of the largest smartphone manufacturers in the world, has access to a large amount of consumer data which can be used to drive its business forward. The company can leverage this data to develop AI tools to gain a competitive advantage in the market. Xiaomi can use AI algorithms in area like personalization, customer service, inventory management and product innovation.

Valuation

Xiaomi’s price-to-sales ratio bottomed out at 0.58x on October 22, 2022, and has since recovered to 0.9x; the median and average are currently 1.1x and 1.3x, respectively. It is trading below the median and average range. Given Xiaomi’s evenly distributed domestic and international revenue stream, we believe there is a good probability that the company will expand once more. Thus, we think Xiaomi Corporation stock is relatively cheap at this level.

Risks

Technology sanction

One of the main risks that Xiaomi faces is the potential restriction of its access to chips, which are essential components in its products. The U.S. government has been imposing technology-related restrictions on companies like Huawei and other firms with military ties to China, which has raised concerns for Xiaomi’s ability to secure chips in the future.

However, Xiaomi has a long-standing cooperation with TSMC in Taiwan and Qualcomm in the U.S., two of the biggest chip manufacturers in the world, and it shows no signs or history of integrating a political agenda into its business plan. Due to Xiaomi’s impeccable background and excellent relationships with the U.S., there is less chance of sanctions and other limitations being imposed. Furthermore, Xiaomi’s development strategy, which prioritizes consumer needs over high-end technology, also helps to reduce the risk of sanctions.

Strategy to enter EV market

Another area of concern for Xiaomi is the electric vehicle (“EV”) market. Many market observers are worried about the potential impact of Xiaomi’s entry into the EV sector on its core business operations. Currently, the cost of operating the EV business accounts for less than 1.2% of total operating costs, and it remains to be seen whether this will change in the future. However, entering the EV market with a focus on intelligent system could also be a chance for the company, just as many of Xiaomi’s endeavors and success stories have involved entering new product categories (such as air conditioner, refrigerator, scooter, and robot vacuum cleaner).

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.