Since the March 2021 sector rotation from growth to value, many of the technology equities have sold off heavily - Xiaomi being one of them. I believe Xiaomi is a good pick to have in your portfolio for the following reasons:
Fundamentally
1) An Entrenched Product Ecosystem to Secure Market Share
Xiaomi has built up its brand by acquiring users with affordable and high quality smartphones. Since then, it has expanded the variety of its consumer electronics products to include power banks, earphones and even IoT products such as sensors, smart speakers, and robots. This helps to create a strong network effect and enhances user stickiness, driving up switching costs. As users of the brand continue to experience merits of owning multiple connected device on one integrated platform, they will be more willing to purchase Xiaomi’s products over its competitors.
2) Untapped Monetization Opportunity in Internet Services
Xiaomi is the only company other than Apple (AAPL) to have both hardware and Internet services in the business model. Many internet services and software companies have tried venturing at hardware devices but none have been able to scale significantly. Additionally, Xiaomi’s large hardware user base enables the internet business to have a low customer acquisition cost. We believe that as we enter an age of increased technological innovation and digitization, Xiaomi’s Internet Services segment will grow at a faster rate than its Smartphone Segment.
3) Capitalization on Huawei’s Decline due to US Sanctions
Xiaomi is reaping gains from the overseas market as a result of the harsh US sanction on Huawei Technologies Co. The tightening sactions has resulted in Huawei only owning a limited stockpile of smartphone components, and consequently Xiaomi has stepped up to fill the gap in the online segment, seizing the market share from its rival. Analysts have suggested that Xiaomi is “set to benefit the most from Huawei’s fall globally, with their sales projected to increase by around 30% in 2021” (Deng & Borak, 2021). Indeed, Xiaomi saw sales in Europe grow 90% last year, a strong indication of their future potential growth.
Based on a blended DCF using the perpetuity growth method and an EV/EBITDA exit multiple of 11.9, I derived a target price of $23.55 - $34.02. This is approximately a 1:4.2 risk to reward ratio at current levels.
Technically
Firstly, ever since the huge sell off at (1), we see a quick bounce back to the $27.15 level (which represents huge resistance as it has been tested twice). Selling pressure has significantly reduced as you can see in (2) and (3) - The downsides have decreased which indicate sellers running out of steam and the buyers are taking over. We also see a change in structure with higher lows in recent price action. This has created a triangle wedge which I love to see because it usually results in a breakout. Lastly, the price today on the daily closed with a bullish pin bar with decreasing volume - A good sign.
While all of this points toward share price appreciation in the short-term, we need to be aware of where the HSI is trending as well. A rising tide lifts all boats after all. So far, the HSI is trading below the 50 day moving average, therefore share prices could potentially be rather muted until we see a break above those levels.
A breakout above the $27.15 level will signal confirmation of the uptrend. I have already taken a position at $25 and will be planning to hold this till the end of the year as part of my portfolio.
Please make your own investment decisions, this is by no means financial advice!
Fundamentally
1) An Entrenched Product Ecosystem to Secure Market Share
Xiaomi has built up its brand by acquiring users with affordable and high quality smartphones. Since then, it has expanded the variety of its consumer electronics products to include power banks, earphones and even IoT products such as sensors, smart speakers, and robots. This helps to create a strong network effect and enhances user stickiness, driving up switching costs. As users of the brand continue to experience merits of owning multiple connected device on one integrated platform, they will be more willing to purchase Xiaomi’s products over its competitors.
2) Untapped Monetization Opportunity in Internet Services
Xiaomi is the only company other than Apple (AAPL) to have both hardware and Internet services in the business model. Many internet services and software companies have tried venturing at hardware devices but none have been able to scale significantly. Additionally, Xiaomi’s large hardware user base enables the internet business to have a low customer acquisition cost. We believe that as we enter an age of increased technological innovation and digitization, Xiaomi’s Internet Services segment will grow at a faster rate than its Smartphone Segment.
3) Capitalization on Huawei’s Decline due to US Sanctions
Xiaomi is reaping gains from the overseas market as a result of the harsh US sanction on Huawei Technologies Co. The tightening sactions has resulted in Huawei only owning a limited stockpile of smartphone components, and consequently Xiaomi has stepped up to fill the gap in the online segment, seizing the market share from its rival. Analysts have suggested that Xiaomi is “set to benefit the most from Huawei’s fall globally, with their sales projected to increase by around 30% in 2021” (Deng & Borak, 2021). Indeed, Xiaomi saw sales in Europe grow 90% last year, a strong indication of their future potential growth.
Based on a blended DCF using the perpetuity growth method and an EV/EBITDA exit multiple of 11.9, I derived a target price of $23.55 - $34.02. This is approximately a 1:4.2 risk to reward ratio at current levels.
Technically
Firstly, ever since the huge sell off at (1), we see a quick bounce back to the $27.15 level (which represents huge resistance as it has been tested twice). Selling pressure has significantly reduced as you can see in (2) and (3) - The downsides have decreased which indicate sellers running out of steam and the buyers are taking over. We also see a change in structure with higher lows in recent price action. This has created a triangle wedge which I love to see because it usually results in a breakout. Lastly, the price today on the daily closed with a bullish pin bar with decreasing volume - A good sign.
While all of this points toward share price appreciation in the short-term, we need to be aware of where the HSI is trending as well. A rising tide lifts all boats after all. So far, the HSI is trading below the 50 day moving average, therefore share prices could potentially be rather muted until we see a break above those levels.
A breakout above the $27.15 level will signal confirmation of the uptrend. I have already taken a position at $25 and will be planning to hold this till the end of the year as part of my portfolio.
Please make your own investment decisions, this is by no means financial advice!
Comment:
Hang Seng Index (HSI) testing the 50 day moving average, Xiaomi (SEHK1810) has also broken out of the triangle wedge to the upside. Watch for the test at the $27.15 level.
Comment:
Xiaomi closed at $27.20 HKD, Lets hope it can break out to the upside on Monday!
Comment:
Xiaomi blew out earnings yesterday, this company will definitely pay off huge if you hold long!