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Xue Yunkui, a professor at Cheung Kong Graduate School of Business: Xiaomi’s pricing is still overestimated

via:CnBeta     time:2018/7/22 11:31:40     readed:164

Who is Xiaomi?

Why is this question important? Because China's capital market has always been a market that attaches great importance to concepts and themes, different concepts often mean different valuation levels. For example, if Xiaomi is an Internet company, then its reference should beTencentThe Internet company represented by holdings has a price-to-earnings ratio between 40 and 60 times, or even higher.

In 2017, Tencent Holdings reported a net profit after tax of 71.5 billion, while the current market value is 2.67 billion, and its static P/E ratio is 50 times. In the first quarter of 2018, the net profit was 23.2 billion. According to the total profit of the past four quarters, it was 80.3 billion, and its dynamic P/E ratio was less than 50 times. Google’s net profit after tax for 2017 is $12.6 billion, and its current market capitalization is $820 billion, so its price-to-earnings ratio is more than 60 times.

If you are based on the hardware company valuation, for example, the price-leading Gree and the United States as an example. Gree's net profit after tax in 2017 was 22.5 billion. The current total market capitalization is 276 billion, and the price-earnings ratio is only 10 times. Midea Group's 2017 annual net profit after tax is 18.6 billion, and its current market value is 321.3 billion, which is also a price-earnings ratio of more than ten times.

According to the high-tech company, the high-tech company represented by Apple, the net profit after tax in 2017 is 48.3 billion US dollars, the current market value is 937 billion US dollars, the same is 20 times the price-earnings ratio.

After reading these companies, you may understand: Why did Lei Jun always emphasize that Xiaomi is an Internet company. Because as an Internet company, its valuation level is significantly higher than the other two types of conceptual companies. As the founder of the company, it is natural to expect a higher valuation of the listing, in return for investors who have been supporting the development of millet for many years. Of course, as a potential investor in the company, it is natural to expect the current share price to be lower in order to seek suitable buying opportunities. Therefore, their respective positions are different, and the understanding of the company's valuation will naturally vary widely.

Is Xiaomi an internet company?

According to Xiaomi Group's 2017 annual financial report, its total sales revenue was 141.625 billion, of which: smartphone revenue was 80.564 billion, accounting for 70% of total sales revenue; Internet service revenue was 9.896 billion, accounting for 9% of total sales revenue; IoT and consumer goods 23.448 billion, accounting for 20% of total sales, and other products accounted for 1%. Therefore, Xiaomi is not an Internet company, it can only be defined as a "smartphone-based company that also runs IoT and consumer goods and related Internet services." Of course, if you think of the mobile phone as the terminal of the Internet, then it seems that Xiaomi is an Internet company and it is impeccable.

Is Xiaomi a high-tech company?

High-tech companies often have high gross margins due to the differences in their products. Therefore, it is clear that the Xiaomi Group can see the sales of gross profit margins at a glance. Xiaomi Group's sales revenue in 2017 was 146.625 billion, the cost of sales was 99.471 billion, the gross profit was 15.154 billion, and the gross profit margin was 13.22%, slightly higher than the previous year's level of 10.59%, which was a significant increase from 4.04% in 2015. . This is a very low level of gross profit margin relative to high-tech companies.

Perhaps, Xiaomi Group will never be a high-tech company in the financial report, because the company's board of directors has promised in the annual report: "From 2018 onwards, the comprehensive net of Xiaomi's overall hardware business (including smart phones, IoT and consumer products) The interest rate will not exceed 5%. If there is any excess, Xiaomi will give back to the user." Although the net interest rate is not the gross profit margin, the "thickness of the price" determines its low gross profit margin.

The gross profit margin of sales is a voluntary agreement between the product provider and the consumer through the market, which reflects the degree to which the company's products are recognized by consumers in the market. In theory, if the product provider and the consumer are not coerced or controlled, then the price agreed by both parties should be fair, and the gross profit margin of sales naturally becomes an objective indicator of the degree of differentiation of the company's products.

What about the gross profit margin of normal high-tech companies? Taking Apple as an example, the gross profit margin for sales in 2017 was 38.47%. In the past 10 years, its gross sales margin was close to 40%. One of the important reasons for the decline in the gross profit margin of Apple's sales in the last two or three years is the weakening of its product differentiation.

Let's sayMicrosoftThe gross profit margin of sales 10 years ago (2008) was as high as 80.8%, while the gross profit margin of sales in 2017 has dropped to 61.9%, indicating that its technological leadership has dropped significantly compared to 10 years ago.

Of course, Xiaomi’s business model is to subvert the gross profit margin of the product’s sales. It requires both product technology and technology, and it also gives consumers a kind price. Although this business model can please customers, but I do not know how to please employees and shareholders? If the creativity of employees is not motivated, how can the company maintain its leading position in product technology? If you can't earn enough returns, why can you satisfy the appetite of the capitalist who never satisfied? Perhaps this is also the core value of Xiaomi: With the help of the Internet platform, customers are allowed to participate in creation and innovation, and to establish a new balance of benefits between customers, employees and shareholders. It seems that this is likely to be a very sophisticated business idea.

Xiaomi is just a low-cost company

In addition to the board's price commitments, Xiaomi's R&D investment and marketing investment also expresses that it is a company that is well-known in marketing rather than R&D. It is a company that is cost-effective rather than high-profile.

In the past three years, Xiaomi Group has invested a total of 6.767 billion yuan in research and development, which is 1.512 billion, 2.104 billion and 3.151 billion. Although this level of input is not as good as Gree and the United States, it is basically in the same position as they. Gree invested 4.625 billion in research and development in 2016, and invested 5.767 billion in 2017, an increase of 24.69%. In the past three years, Midea invested 17.208 billion in research and development. The three-year investment was 5.263 billion, 6.046 billion and 8.5 billion.

Compared with R&D investment, Xiaomi Group's marketing expenses in the past three years were 1.913 billion, 3.022 billion and 5.232 billion, far exceeding the level of R&D investment. This expresses its emphasis on marketing at the data level.

The true technology-leading giant has basically maintained its R&D investment level at around RMB 100 billion. For example, Apple’s investment in research and development in 2017 was US$11.58 billion.HuaweiControlled investment in R&D in 2017 was 89.7 billion yuan. Compared with them, Xiaomi obviously has a big gap and is not in the same grade.

Is Xiaomi worth investing?

Whether a company has an investment value depends on how much it can bring to investors. The return on investment of listed companies has two dimensions: the rise in stock prices and the company's earnings.

In fact, these two dimensions are fundamentally a dimension. Because the rise in the company's stock price is theoretically driven by the company's profitability. In other words, companies that are not profitable or whose earnings are not growing are unlikely to maintain a long-term upward trend in their stock prices. Therefore, the key to analyzing whether Xiaomi has investment value is to analyze the future profitability of Xiaomi.

According to Xiaomi Group's 2017 annual financial report, its net loss after tax was 43.889 billion yuan, a considerable drop from the previous year's profit of 492 million. This has caused a huge problem in assessing the investment value of Xiaomi. It is obviously impossible for a company with huge losses to have investment value. The reason why Xiaomi is also popular in the capital market under the premise of huge losses is naturally that investors are betting on the future profit of Xiaomi. So, how to analyze the future profitability of Xiaomi?

To analyze the future profitability, we must first analyze the current truth and loss of Xiaomi. According to the 2017 annual financial report, the reason for the huge loss of Xiaomi is that the fair value change of convertible redeemable preference shares was 54.072 billion. Since this factor has nothing to do with the company's normal operations, the impact of this factor can be deducted when analyzing the company's profitability. After deducting the company's 2017 annual net profit after tax was 10.183 billion.

So, does 10.183 billion represent the true profitability of Xiaomi? This requires a further distinction between the specific source composition of 10.183 billion. Since the net profit of 10.183 billion yuan after tax includes 2.06 billion yuan in income tax, the profit before tax reduction was 12.243 billion. Among them, the fair value change income of equity investment was 6.371 billion, accounting for 52.03% of the total profit before tax. If the impact of this factor is removed, its total operating profit before tax is 5.872 billion, deducting 2.06 billion yuan in income tax, and the net profit after tax of the company's normal product operation is 3.812 billion.

As an investor in Xiaomi, will it be satisfied with the above business performance? Of course, the factor that expresses the company's performance is not just profitability. The growth of the company's business, especially the future growth, is the key to truly testing value investment. For example, the reason why Tencent has a higher valuation is not only because of its Internet characteristics or high-tech concept, but because of its 50% compound annual growth since its listing. Similarly, the high valuation that underpins Apple is also the average compound growth rate of its past 10 years, reaching 24.25%. The reason why Gree and Midi's P/E ratios are relatively low is also due to their relatively low compound growth rate. For example, Gree's compound growth rate in the past 10 years was 15.13%, while Midea Group was 15.86%.

Is the current pricing of Xiaomi overvalued or undervalued?

Understand the operating profit of Xiaomi Group, more or less can understand the possible profitability of Xiaomi in the future. According to Wind data, Xiaomi's current market value is HK$448.8 billion (July 21, 2018), which is converted at the current exchange rate of 1:0.86. The market value of RMB is 386 billion, which exceeds the US (308.5 billion). And the market value of Gree (271.1 billion). Its static P/E ratio is 101 times (excluding equity investment income) and 38 times (including equity investment income). From the perspective of price-earnings ratio, Xiaomi's current pricing is still suspected of being overvalued.

Due to the impact of the aforementioned convertible redeemable preference shares, Xiaomi Group's 2017 financial report shareholders' equity was -172,211 million. Therefore, we cannot calculate the return on equity (ROE) of Xiaomi based on the original balance sheet. However, if the convertible redeemable preference shares treated as debt are adjusted to ordinary shareholders' equity, then the company's book shareholders' equity is 34.2 billion. As a result, the company's return on equity was 29.7%.

Of course, some people say that Xiaomi's valuation can't only look at the profit and shareholder returns, but also need to incorporate the industrial ecosystem that Xiaomi is trying to build into the valuation range. I totally agree with this. However, the industrial ecology of Xiaomi is of value, it is difficult to use public data to evaluate. Through the financial report, we can provide some comparable data as a reference.

According to Xiaomi's 2017 balance sheet, its equity investment balance representing industry ecology is 1.711 billion yuan, and other long-term investments are 18.857 billion yuan, a total of 20.568 billion yuan, accounting for 22.89% of the total assets of 89.87 billion. Apple, which has the same characteristics, has less than $370 billion in total assets in 2017 and more than $200 billion in equity investments. The equity assets of Tencent Holdings' equity investments, held-to-maturity investments, and available-for-sale investments also totaled 164.105 billion, accounting for 39.60% of total assets. It is reasonable to believe that these equity investments of Apple and Tencent are also related to the industrial ecology they create. Their valuation in the valuation system of the capital market may be used for the valuation of Xiaomi.

The future risks of Xiaomi Company

As in the previous analysis, Xiaomi is essentially an Internet-based cost-leading or cost-effective company. It emphasizes the price of the product in the product market, and emphasizes its Internet characteristics or high-tech characteristics in the capital market. The former is for the product to sell better, the latter is for the capital market to give a higher valuation, this two-sided pleasing reality fully demonstrates Xiaomi's outstanding marketing talent. Of course, as to whether or not this contains foam components, investors need to think twice.

As a company that pursues cost-effectiveness and pursues efficiency, Xiaomi's sales revenue in 2017 has grown rapidly, especially in overseas sales, which is as high as 250%. This is a great achievement, and perhaps this is the fundamental reason why Xiaomi is sought after by the market. However, due to the short operating cycle of Xiaomi, whether the future growth can maintain the high speed of the previous year is very uncertain.

At the same time, "friending users and making the coolest company in the hearts of users" not only deeply touched the hearts of consumers, but also deeply touched investors from all walks of life. Before the company opened the door to the capital market, it has successfully raised 1.585 billion US dollars, or about 10 billion yuan. This is also a very remarkable achievement. It can be said with certainty: Xiaomi is indeed an extraordinary company.

Of course, the decisive factor in determining the long-term trend of the company's stock price is not just the concept, but the continuous growth of the company's performance, the simplest is the growth of the company's sales and profits. Without the growth of business and the improvement of performance, any story in the capital market will eventually be shattered, but the higher the climb, the more painful it will be.

Xiaomi “continues to provide the best technology products and services at a high price” emphasizes both the price and the leading edge of technology, which is of course the most ideal business model. But in terms of logic, it is self-contradictory. Traditionally, no one can do the organic integration of the two.

Dell tried to make the computer both right and good, but it ended up being only partial, but it didn't continue to do its best. Because it is both appropriate and good, it is actually the relationship between "water" and "fire". H&M and ZARA combine low prices with fashion, and are a successful example of “water and fire”. But with low prices and technological innovation, I believe that Xiaomi has created a precedent for history. I sincerely hope that Xiaomi can use the promotion of Internet technology to make a positive result on this road and write a new height of human commercial civilization.

Xue Yunkui, a tenured professor of Cheung Kong Graduate School of Business, founding deputy dean of Cheung Kong Graduate School of Business, and deputy dean of the Shanghai National Accounting Institute

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