Shulou(Shulou.com)11/24 Report--

According to the news on the morning of March 25, Xiaomi has released its results for the fourth quarter and full year of 2022. According to the financial report, the company's total revenue in the fourth quarter reached 66 billion yuan, down 22.8% from the same period in 2021, while the adjusted net profit was 1.5 billion yuan, down 67.3% from the same period in 2021. It includes 1.2 billion yuan for innovative business such as intelligent electric vehicles.

For the whole of 2022, the total revenue of Xiaomi Group was 280 billion yuan, down 14.7% from the same period last year, while the adjusted net profit was 8.5 billion yuan, down 61.4% from the same period last year.

After the release of the results, Lu Weibing, partner of Xiaomi Group, President and President of the International Business Department, Lin Shiwei, Vice President and Chairman of CFO and Sky Star Division, and other senior executives attended the subsequent earnings call to interpret the main points of the results and answered questions from several analysts.

The following is the transcript of the question and answer session of the analyst in this conference call:

Morgan Stanley analyst Andy Meng: my question is still about the mobile phone business. We have seen a lot of new product launches by our competitors in the domestic market recently, including some flagship phones. will this put pressure on Xiaomi's domestic mobile phone sales and profit margins? In particular, Mr. Lu and Mr. Lin have just mentioned that Xiaomi's strategy this year is to attach equal importance to scale and profit. This is my first question. The second question, we investors for the overseas market mobile phone situation, whether it is sales or inventory, our visibility is relatively low. Could you ask the management to share with us the latest demand and inventory situation in the market?

Lu Weibing: the first question is about the new products in the recent competition. In fact, everyone can see that the brand is relatively stable at present, and the product layout and even the release time of each brand are also relatively stable. I think this is a very normal phenomenon after the industrial shock. There are indeed a lot of new product releases in March, and there may be some pressure in the short term. But throughout the year, I don't think it will have much impact no matter what month the product is released. Judging from our recent performance and the sales volume of the Xiaomi 13 series, I think the capital impact is small.

The second question is about overseas markets. In terms of overseas markets, in fact, from the perspective of GfK's "SO" (competitive advantage and opportunity) in the past two months, I think the market is not too optimistic, and we still tend to think that it will take some time for the market to recover. From this point of view, I think the demand has not been opened. However, as far as Xiaomi is concerned, I think our inventory has been greatly improved. Just now, Mr. Lin also introduced some detailed data in his briefing, mainly last year when we stepped up our efforts to clear the inventory. At present, our entire inventory is still in a very controllable state, which I personally think is benign.

Lin Shiwei: from the perspective of overall inventory, our inventory has dropped to 50.4 billion in the fourth quarter. Of this, 17.1 billion are raw material inventories, down 15 per cent from almost 20 billion at the beginning of the year. Our costs reached 28.7 billion in the fourth quarter, down from our peak of more than 30 billion in the middle of the year. Under the leadership of General Manager Lu, Xiaomi's global inventory has improved somewhat. Of course, we continue to clear inventory, including the first quarter we are still in the state of inventory clearance. As you can see, Xiaomi's problem inventory is actually not much, most of which can be solved. So looking forward to this year, we hope that inventories can decline further.

Credit Suisse analyst Kyna Wong: I have two questions. First of all, the company's strategy this year is twin engines, double attention, focus on reducing costs and efficiency. May I ask the management how to optimize the plan from a cost point of view? After all, this year we also see a lot of upstream supply chain, parts and other aspects of price pressure, or their prices will fall by a large margin. I would like to ask the management which part of the device or chip has a larger decline? Where are the opportunities more? Is it a lens part? Or the original memory? Or SoC system-on-chip?

In addition, in terms of SoC chips, we see that Arm (SoftBank's chip design provider) may adjust their charging methods. If the charging method is changed, will it affect your Xiaomi's cost reduction and efficiency? Because on the one hand, the company has to control costs, on the other hand, product prices may have to be adjusted, or product structure needs to be adjusted, and so on. I know that Xiaomi attaches great importance to the high-end product strategy this year, so what kind of improvement or change is expected in the ASP (average selling price) of products on this side of Xiaomi's mobile phone business this year?

Lu Weibing: indeed, one of our very important strategies is to reduce costs and increase efficiency. At present, I think the whole market is still in a state of oversupply, so in several important devices, such as SoC, memory, screen, camera, lens, etc., we still see a downward trend in cost. At present, as the relationship between supply and demand has not changed, we have not seen a rebound in costs. Therefore, I think Xiaomi still has great potential in reducing costs. At the same time, we have also strengthened our internal management. Xiaomi has developed very fast in the past 13 years, and we still have a lot of management dividends to tap. I believe that if we do these two aspects together, Xiaomi should still have great potential to be tapped.

As for the Arm charge you mentioned, because I haven't seen any specific report yet, I can only give a relatively general answer here. As far as I understand it, any charge to the final landing may take a very long period, and this cycle may even be in "years". So I think at least in the short term, [changes in Arm charges] should not have an impact on our costs; as for the long term, because this is a particularly complex issue, it is difficult to sum up in one sentence.

As for ASP, Xiaomi's ASP is expected to rise further this year, mainly because Xiaomi is promoting high-end technology, both in China and overseas. Therefore, I still have confidence in the rise of ASP.

Lin Shiwei: you can see from our data that Xiaomi's ASP for the whole year has actually reached an all-time high. Just now, Mr. Lu also said that the proportion of Xiaomi's high-end line will be further increased in the future. In addition, our recent overseas release of Xiaomi 13 Pro performance is also higher than expected. So on the whole, Xiaomi's new high-end mobile phone (very welcome), especially our cooperation with Leica in Europe, I think it has also attracted a lot of new users. We also hope to release more competitive high-end mobile phones in overseas markets in the future, which will also bring room for improvement to Xiaomi's overall ASP.

Credit Suisse analyst Kyna Wong: my second question is about Xiaomi's Internet business in 2023. After a period of time we may see the recovery of the Internet industry, platforms, manufacturers are also vigorously promoting sales. For Xiaomi, does the management see that companies, companies or brands and manufacturers are willing to put more advertisements on Xiaomi's platform? In addition, Xiaomi's game business has been improving for six consecutive quarters, will we continue to look forward to better growth in this area this year? After all, the Internet business has relatively great support for the company's overall gross profit, so I would like to consult the relevant views of the management.

Lin Shiwei: looking back at 2022, I think the market is still relatively difficult, but you can also see that Xiaomi's Internet business is relatively sound, and even for the first time we have found that Xiaomi has a certain increment overseas, and Xiaomi users continue to improve. Some people in the investment community have said that the life cycle income of high-end mobile phones is higher than that of low-end mobile phones. Therefore, with the increasing proportion of Xiaomi's high-end mobile phones, it is still helpful to our Internet business.

As for how to look at the market. Recently, we have also seen the announcement of some of Xiaomi's customers at the end of the year. They may still be in the stage of reducing costs and increasing efficiency, but I also see that they think the situation will be relatively optimistic in the second half of the year. So if the market is good, then it will certainly help the revenue of our Internet business. But in the short term, I think they will still be in a period of reducing costs and increasing efficiency. I hope there will be some growth in the future.

Games. In fact, we also see that the market is improving, both licensing and version numbers have signs of opening up, which is good news for us.

Finally, I would like to emphasize that in fact, the number of Internet users has been increasing, with more than 500 million users worldwide and about 140 million domestic users. If we can manage these stock users well, these will become opportunities for Xiaomi in the Internet business in the future.

Timothy Zhou, an analyst at Goldman Sachs: I have two questions for management. First of all, I remember that at the last performance meeting, management shared the outlook for mobile phone sales in China in 2023. With the opening of the epidemic in China, does the management now have any updated prospects for the sales of China's mobile phone market in 2023? The second question is about the gross profit margin of mobile phones. What level does management now think mobile phone gross profit margin can reach in 2023? If it is subdivided, it comes from high-end, the decline of upstream costs, the reduction of supply and even the contribution of exchange rate, etc., can management share with us what contribution these factors have to the increase of gross profit margin?

Lu Weibing: the data we are seeing now is like this: China's mobile phone market fell by about 4% in January and February together compared with the same period last year. So far in March, the market is likely to be basically the same as before. From a comprehensive point of view in the first quarter, there may still be a slight decline in the same period last year, about 2-3 points. From this point of view, we still think that the consumer market has not fully recovered. As for whether the recovery will happen in the second half of this year, we hope so. These are my views on the overall market.

Indeed, we believe that Xiaomi's gross profit margin will increase and grow this year, but it is difficult for us to share with you in great detail the contribution of various factors, such as the contribution of high-end, or the increase of cost reduction, and so on. However, we believe that these factors will have a comprehensive effect.

Lin Shiwei: if we only look at the gross profit margin of mobile phones, we fell to about 9% for the whole of last year, which is higher than the five-year average (about 8.6%). But 2021 was a very high year, and there was a market supply problem in that year, and I won't go into details here. If you look at Xiaomi's mobile phone gross margin, the impact of the appreciation of the US dollar on our gross profit margin last year is about 1-2 percentage points. I didn't show the actual data, but at about 1-2 points, the price drop in inventory probably affected about one point. If you restore it from this point of view, in fact (Xiaomi's mobile phone gross profit margin) may already be more than 10%, and we do not count the recent expected impact. If the exchange rate is relatively stable, or taking into account the profit margin and the impact of the exchange rate on us last year, and if the market is relatively stable, from this point of view, our mobile phone gross profit margin may actually be more than 10%.

CICC analyst Hanjing Wen: first of all, I see Xiaomi annual report also mentioned that the growth in January and February this year is very fast, would like to ask the management of Xiaomi online stores this year what do you think? For example, the plan to open a store, the improvement of GMV (total merchandise trading volume) and the combination of high-end mobile phone strategy and so on. On the second question, I would also like to ask the management about car building, which we are more concerned about. At the Xiaomi Investor Day at the beginning of the year, Mr. Lei (Lei Jun) also shared with you the progress of Xiaomi's car building. With the passage of time, people pay more and more attention to it. I would like to ask Mr. Lu and Mr. Lin, what can I share about Xiaomi's automobile business management office?

Lu Weibing: I actually shared it on the last investment day. We called it "rapid store expansion" in 2021, we focused on improving store efficiency in 2022, and this year we are doing store integration. Therefore, we will regard store integration as a particularly important task, especially we will gradually increase the expansion of strategic partner stores, let it play a more professional and professional store management, and improve its economies of scale. This is a very important point in our strategy this year.

In addition, we will continue to improve the store efficiency that Xiaomi did in 2022. The store efficiency measures we carried out in 2022 are still very effective, but I think it is far from finished. I believe it will continue to work in 2023. In addition, another point is that we need to increase the infrastructure of non-mobile phone products. As we all can see, Xiaomi's growth in large household appliances was very rapid last year, especially in products such as empty ice washing. I think there is still a lot of room for it. But if you go to Xiaomi House, you will find that there may be only a sample of a refrigerator or a washing machine in each Mi store. If it is added to two or three, in fact, the space is very large. To sum up, I think we still have a lot of room for improvement in non-mobile phones and in Xiaomi's home.

Of course, I believe that with the progress of high-end millet, high-end will bring two aspects (positive impact): the first aspect is that high-end will bring very good courage, only high-end explosive products can lead people to the store; the second aspect is that it (high-end) will greatly increase the GMV of stores and improve profits. I believe that after all the measures are implemented, Xiaomi House will take it to a new level in 2023.

With regard to the Xiaomi car you mentioned, it can be said that we are in full compliance with the schedule set before. According to General Lei, this is called "exceeding expectations", it can be said that we are actually better than the original schedule in a lot of time. Judging from the current situation, I think we are still building cars smoothly according to the schedule.

Lin Shiwei: boss Lu also said in the previous briefing that after the epidemic, we saw that the GMV of Xiaomi in January and February increased by more than 30% compared with the fourth quarter of last year. This is an improvement in the efficiency of our store. Although this is a bit unfair, it is clear that Xiaomi's GMV in January and February is higher than that in each quarter of last year, which can be said to be an obvious recovery.

In addition, in terms of high-end mobile phones, we also mentioned that Xiaomi 13 series accounts for more than 55% of offline stores. Xiaomi IoT also accounts for a higher and higher proportion of GMV in stores. In addition, the arrival of operators in Xiaomi House, our other service products, and the "trade-in" business are all advancing at the same time, and they are making good progress so far. This is the current situation in the store.

With regard to car construction, President Lu has just made it very clear, and I am not going to repeat it here.

Leping Huang, analyst at Huatai Securities: I have two questions. The first question concerns the AI side. Recently, the market is very concerned about the impact of ChatGPT on the industry. I see that the strategy that Xiaomi has been talking about in the past few years is "Smartphone × AIoT". May I ask the management, what is the specific business and technical reserve of the company in AI at present? How will Xiaomi seize the development opportunities brought by ChatGPT in the future? The second problem is that the international financial markets have been very volatile over the past month or so, including the collapse of Silicon Valley banks. I would like to ask the management, due to Xiaomi's wide global business, there may be a lot of investment business, what is the current situation of these exposures? How will management respond to fluctuations in global financial markets in the future?

Lu Weibing: let me answer ChatGPT's question. ChatGPT is really popular these days, and Xiaomi is also very concerned about it. As we all know, Xiaomi has made a lot of attempts in the AI model, and we have also adopted the strategy of multi-technology parallel. For example, everyone is particularly familiar with Xiao Ai is actually a typical large model landing application scenario. We will face a lot of challenges from the big model to the landing, but the success of ChatGPT gives us confidence, and we have a lot of accumulation in this area. For example, Xiaomi now has an AI team of almost 1200 people. In the medium to long term, Xiao Ai, we have been working for six years, and we have accumulated long-term and reusable experience in terms of user experience. In the future, we will continue to do large model research and introduce more advanced large model capabilities, including exploring multimodal capabilities, intelligent cockpit interaction and so on. This is our medium-and long-term plan.

Next, I would like to talk about Xiao Ai of Xiaomi. It is actually a concrete embodiment of Xiaomi's AI ability. Artificial intelligence has helped Xiao Ai to support the integration of multiple scenes such as mobile phones, speakers and future cars. As of December, Xiao Ai had more than 115 million monthly active users worldwide. The rich landing experience of the big model gives Xiaomi more competitive advantages in the AI era. Therefore, we are very concerned and believe that Xiao Ai's accumulation will play a very good role in the long-term landing of Xiaomi's business in the future.

Lin Shiwei: the second question is about the impact of fluctuations in the international financial market on Xiaomi. One of the simplest responses is: we have no deposits in the recently affected banks. This is also an issue that everyone is more concerned about.

Most of the banks we work with are head banks, and we monitor the market every day to ensure that our money will not be at great risk. This is also the basis for the company to manage funds. We have mentioned on other occasions before that we will try our best to get the money back and give it to the headquarters for unified management. This is the "style" of Xiaomi's money management. In the future, we will continue to monitor the changes in the market, after all, such changes are very big. We will always maintain a sound and advanced business plan and maintain a sound business.

Citigroup analyst Yayuan Huang: I have two follow-up questions. The first problem is that on the Investor Day at the beginning of the year, I heard Mr. Lu share Xiaomi's optimization of offline retail channels in overseas markets. I would like to ask the management what benefits Xiaomi hopes to achieve in building more basic services for overseas localization. Because overseas construction will also bring a relatively large cost input, how will the final benefit and cost management evaluate?

The second problem is that Xiaomi also carried out a certain degree of personnel optimization last year, and there will be a similar situation in the Internet industry. From the point of view of the situation at that time, the related costs may be involved. But from this year's point of view, will Xiaomi have a better decline in the expense rate in various aspects such as sales staff in 2023?

Lu Weibing: I would like to share with you about the expansion of overseas markets. I went out with my team for about 20 days after the Spring Festival, and transferred to three regions and six countries. This is also the first time that I have led such a big team out since the epidemic. Indeed, due to the epidemic, there is a lack of communication between our headquarters and the front line, although we will have a lot of videos, but still can not replace face-to-face. After going out this time, I personally still have a very great harvest.

First of all, we saw that last year, it can be said that we encountered a lot of pressure, and every brand encountered a lot of pressure. Some brands have withdrawn from some countries, but Xiaomi still insists on having the most complete infrastructure layout in the world. I think this is a very important foundation for Xiaomi's overseas business to develop rapidly, especially after the market picks up. This is one aspect. In addition, the global market is indeed very large, very diverse, very fragmented, how to choose the focus in such a market? In the past, we would basically consider the size of the market, the consumption power of the market or the structure of the product. As geopolitics has gradually become a particularly important factor in recent years, we will actually add risk to it. Therefore, based on these three dimensions, we choose Xiaomi's strategic market, in other words, the risk is low, the population base of the market is large, and the purchasing power is strong. These three elements combine to form Xiaomi's division of the global strategic market.

Based on this dimension, we have selected about 20 countries around the world as Xiaomi's strategic market. The company will make a heavy investment in these markets. We believe that long-term investment in these markets will yield very good long-term returns. It is very important not only to the company's high-end strategy, but also to the landing of Xiaomi's mobile phone AIoT strategy. Without these inputs, both the high-end strategy and the landing of AIoT will be very difficult.

After many rounds of identification, I think that from the current point of view, the progress of this strategy is very stable and smooth. I firmly believe that with the advance of the strategy, Xiaomi will form a particularly strong, what we internally call a "safe and efficient global financial platform." The construction of this platform will send Xiaomi a steady stream of good products to global consumers quickly and efficiently in the future. This is a very long-term strategy.

As for your question about personnel optimization and the related costs and costs, Lin will always answer this question.

Lin Shiwei: general Lu's reply just now raised a very important point, that is, Xiaomi will operate our business more finely in the future, including Xiaomi's recent establishment of a commission and a manpower committee. these are a very important part of Xiaomi's future cost reduction, efficiency and refinement operation process. So why should we take each country apart? If we want to achieve more refined operations, we will certainly invest in places, regions or countries where the company thinks there is a return, which is also part of the fine operation. This is my supplementary to the answer given by Boss Lu just now.

About reducing costs and increasing efficiency. As you can see from our statement, there is actually some reduction in the number of people in the company. But at the same time, we are also investing in other battlefields that we think will pay off, including cars, some overseas investment in the future, and so on, so in fact, we have both in and out. Personally, I think personnel optimization is only part of it. In fact, there are many different strategies for companies to reduce costs and increase efficiency. According to the principle of fine operation, how to improve the market launch, how to invest and improve the R & D efficiency of the company, how to improve the operation of the company and so on, from this point of view, it is not just the optimization of personnel. On the whole, we look at every important cost very carefully. Of course, people are big heads, but what I want to say is that the company is not only concerned about people, we are also very concerned about business, hoping to improve the efficiency of our business.

Jian Kuai, an analyst at Oriental Securities: my first question may be similar to that just now. We have seen that Xiaomi accounted for 53.4% of Chinese mainland's revenue in the fourth quarter, which is actually the highest proportion of revenue in mainland China in the past three years. This may have something to do with the relatively complex international situation and other factors. Boss Lu also mentioned just now that Xiaomi actually has to make all kinds of efforts overseas to maintain its global advantage. Combining these factors, what does the management think of Xiaomi's revenue share in Chinese mainland and overseas in the future?

My second problem is that we see that the company's large home appliance business has achieved very good results in 2022. Does the management have any experience to share in this area? In addition, how can Xiaomi's successful experience be used for reference to other businesses?

Lu Weibing: you just mentioned that Chinese mainland's business accounted for 53% in the fourth quarter. I think the proportion adjustment in a short-term quarter may be related to the short-term business strategy adjustment: for example, our Xiaomi 13 series is released about a month earlier, so naturally the proportion of this series in Chinese mainland marketing will increase; or, for example, in overseas markets, we have taken the initiative to reduce inventory and so on. These are all short-term strategic adjustments.

In the long run, we still think that there is a lot of room for the overseas market, because the overall development of the overseas market is later than that of the Chinese market. Xiaomi only started working in overseas markets in 2014. I think there are still a lot of difficulties in the company's management of overseas markets in the past three years. Therefore, on the whole, we think that at present the company still has a lot of space and potential to tap in the management of overseas markets. After all, the volume of the market is there, it is far larger than Chinese mainland. Xiaomi's share of overseas AIoT is much lower than that of the Chinese market. So I think there should still be a lot of room for overseas markets in the future.

At present, I am also president of Xiaomi International Department, so I have arranged several business trips this year, hoping to visit all the important markets that the world strives for. I am still very confident in overseas markets, because whether it is the progress of high-end technology, the sales of AIoT products, or the refinement of management, there is actually a gap between (overseas markets) and the Chinese market. So I also believe that through hard work, we will be able to tap our potential.

The second question is about the business of large household appliances. We can also see that Xiaomi's large household appliances business, especially our "empty ice washing", has achieved very great growth. In my impression, the air conditioner seems to have achieved a 50% growth, and the refrigerator should have a 100% growth. But in fact, as you can see, up to today, Xiaomi is not a major player in the market. In my impression, we should now be ranked fifth or so in the category of "air conditioning", while the category of "refrigerator" may be in the sixth place. There are many more ahead of us. There is still a big gap between us and the first and second place in the industry. It also shows our potential.

Xiaomi's big home appliance business did so well last year thanks to several factors.

First, basically we have been doing these businesses for several years. In our experience, for a new business, Xiaomi may need 3-4 years to complete the learning curve for categories and industries, because after entering any industry, there are always several inflection points that we need to cross, about 3-4 years to master. After crossing the inflection point, we know where to focus. Last year, we benefited from the investment in self-research technology (it should be said that Xiaomi invested heavily in self-research), and we mastered the core technology of this category as well as the commanding heights and control points of key technologies. Taking the air conditioner as an example, we have mastered the self-developed system to explore how to make the air flow more effectively in the air conditioner. The design of this structure is the core technology. We have mastered these technologies. Similarly, we are steadily expanding in refrigerators and washing machines. From this point of view, Xiaomi's self-developed technology is very important.

Second, the excavation of production capacity. It can be said that Xiaomi cooperates with particularly competitive and strong partners in the industry to increase production capacity and manufacturing capacity, while greatly reducing costs and improving quality.

Third, I think Xiaomi House has played a special advantage. If users come to Xiaomi House today, you will find that Xiaomi has at least two air conditioners hanging on the wall and a vertical one underneath. Although Xiaomi's refrigerator and washing machine are still very small, I think it has played a very important role. Especially for the more high-end household appliances, users always have to go to the store to have a look, touch and experience.

All these aspects are the foundation we laid last year. In the next few years, I believe they will still play a huge role, after all, I think from the perspective of market space, Xiaomi's space is still very large. Like my family, I basically replaced all my household appliances with millet. I think this impression is very good.

To sum up, I still have great confidence in Xiaomi's large home appliance business. It not only increases the company's revenue and profits, it also improves Xiaomi's user structure and increases user stickiness. I am very confident in this area.

Lin Shiwei: let me add a few more figures. For the whole year, Xiaomi's revenue last year (2022) was 50.8% in China and 49.2% overseas. In fact, it is about the same as the year before last, but it is still fifty-fifty. However, Mr. Lu also mentioned that the product architecture in different quarters and so on will be affected by the new product release. But on the whole, I think it is still 50-50, and I think this is also a possible trend in the future.

As for IoT, Mr. Lu has made it very clear, so I won't add any more.

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