Xiaomi's foray into the electric vehicle (EV) market has propelled the company to what Morgan Stanley calls its "best-ever" quarterly report, with revenue reaching an all-time high in its second-quarter results. Ahead of Xiaomi's Q3 earnings report next Monday, the investment bank has reaffirmed its optimistic stance on the company, urging investors not to "exit too soon."
Morgan Stanley predicts Xiaomi will continue to show "optimistic" results for Q3, and has raised its price target for the company from HK$26 to HK$35 per share. At Friday's closing price, this implies a potential 25% upside. The anticipated release of Xiaomi's upcoming SUV models is expected to serve as a major catalyst for the stock.
On the financial front, Morgan Stanley expects Xiaomi's earnings per share (EPS) to reach HK$0.88 in 2024, with further increases to HK$0.98 and HK$1.09 in the following two years.
Any Pullback Is a Buying Opportunity, Says Morgan Stanley
In its latest report, Morgan Stanley maintained its "overweight" rating for Xiaomi, stating that any market pullback should be seen as a buying opportunity for long-term investors. The firm highlighted Xiaomi's continued strong performance in the electric vehicle sector, noting that its EV shipments surpassed 20,000 units in October, a key milestone in the company's production capacity.
Additionally, the company is seeing strong demand for its SU7 model, with order backlogs exceeding expectations. The wait time for deliveries has stretched beyond 20 weeks, signaling that sales momentum will likely remain robust. Xiaomi is also expanding its distribution and service network, while constructing its second EV manufacturing plant, which will help boost revenue growth and economies of scale.
Morgan Stanley also pointed out that while the newly launched SU7 Ultra is not expected to be a major sales driver, it has significantly enhanced the brand's image. Despite its high price tag of 814,900 RMB, the model has generated strong consumer interest, with over 3,680 units pre-ordered within just 10 minutes of opening.
Taking these factors into account, Morgan Stanley raised its annual sales forecast for Xiaomi's electric vehicles, adjusting the expected range from 230,000-250,000 units to 260,000-400,000 units. The firm also maintained its gross margin forecast for the business, expecting the total gross profit for the EV division to increase from RMB 34.9 billion in 2024 to RMB 39.3 billion by 2026.
By the time Xiaomi launches its second electric SUV, Morgan Stanley expects the company's market share in the EV sector to rise to 2.6% in 2025 and 3.4% in 2026.
On the smartphone front, Morgan Stanley believes that despite an increase in pricing for Xiaomi's latest models, sales momentum remains strong. Through supply chain checks, the firm has found that orders for models like the Xiaomi 15 continue to rise. The bank expects that the higher average selling prices (ASPs) will help offset component cost increases, positively affecting Xiaomi's profitability over the next 6-12 months. If component costs decrease in 2025, gross margins could surprise on the upside.
In the AIoT (Artificial Intelligence of Things) business, Xiaomi's second-quarter performance was particularly impressive, with strong growth in the shipments of tablets, air conditioners, refrigerators, and washing machines. The company's AIoT gross margins have increased from 13-15% to 19-20% in recent quarters, according to Morgan Stanley's report.
The firm expects that as Xiaomi's product mix improves and cost synergies continue to develop, AIoT gross margins will likely see further growth.
