The mobile phone business was dragged down by rising storage costs, leading to a downward revision of shipment forecasts but an increase in ASP.
UBS lowered its 2027/2028 smartphone shipment forecasts for Xiaomi by 12%/9% to 110.5 million/119.2 million units, respectively. It expects a 10.2% year-on-year decline in 2027, followed by a 7.9% recovery in 2028. This is mainly due to rising storage costs and potentially continued component supply shortages into 2027. However, UBS expects Xiaomi's ASP to increase by 11% in 2027, partially offsetting the shipment decline, with mobile phone revenue still expected to grow by 2%/8.9% in 2027/2028.
Automotive and self-developed chips are long-term bright spots, but upfront investments are suppressing short-term profits. Positive consumer feedback after the launch of Xiaomi's Pengcheng series is expected to accelerate electric vehicle revenue in 2027. Meanwhile, Xiaomi released a new 3nm SoC (Xuanjie O3) and increased investment in MiMo large-scale AI. UBS believes the long-term synergy between chips, AI, and smart devices is promising, but the substantial upfront investment required could drag down near-term profitability.
Earnings forecasts have been lowered, and valuations already reflect short-term pressures.
UBS has lowered its adjusted net profit forecasts for 2027 and 2028 by 4% and 8% respectively, while keeping the 2026 forecast largely unchanged. The target price has been lowered from HK$32.20 to HK$30.40, maintaining a "Neutral" rating. The current share price corresponds to a 2027 P/E ratio of 19x, approximately 0.6 standard deviations below the historical average of 22x. The share price has already fallen 33% this year, and the market has already priced in short-term pressures from rising memory prices and component shortages. UBS believes the current valuation is reasonable, but short-term catalysts are predominantly negative. (UBS Report, September 22)
