On August 17, the US Department of Commerce announced further restrictions on the latter and its non-US affiliates on the entity list to items produced domestically and abroad from US technology and software.
“In our view, this latest development prevents Huawei from relying on third-party chip designers for its handsets, and could significantly curtail Huawei smartphone production internationally,” says the team in a report dated August 19.
Following the restrictions, the team believes it opens the door for Chinese original equipment manufacturers (OEMs) like Xiaomi to gain market share.
“[We] believe there is reasonable precedence for this. In our view, Xiaomi has been a notable beneficiary of Huawei’s loss of access to Google Mobile Services last year. Looking at Europe, Xiaomi saw its smartphone shipment market share rising from 6% in 1Q19 to 17% in 2Q20, while Huawei’s share dropped from 26% to 15% in that same time frame, according to data from Strategy Analytics,” it says.
“Thus, this gives us optimism that Xiaomi will be able to likewise increase share in China, as it currently only commands 9.3% of smartphone shipments in China in 2Q20, vs. 40.2% by Huawei,” it adds.
The latest restrictions against Huawei is also important to Xiaomi as China is its most profitable smartphone market due to opportunities for internet service monetization.
According to the China Academy of Information and Communication Technology (CAICT), 5G in China is on the rise, reaching 65.4% of total smartphones in July, 2.2 percentage points above the 63.2% registered in June.
“We expect Xiaomi to be able to enjoy meaningful share increase from 2021 onwards, after Huawei depletes its strategic inventory,” says the team.
“We continue to believe that higher 5G smartphone penetration should be positive for average selling prices (ASPs), and Xiaomi’s recent launch of its premium M10 at RMB 5,299 ($1,048.11) seems to suggest just that.”
On August 14, the Hang Seng Indexes Company says Xiaomi will be joining both the HSI and HSCEI indices from September 7 onwards.
“This development, together with what we believe to be Xiaomi’s scarcity value in exposure to increasing share in the Chinese smartphone market, results in us increasing our target P/E multiple from 21x to 26x (higher end of Xiaomi’s historical trading spectrum),” adds the team.
As at 4.27pm, shares in Xiaomi Corp were trading 2 HK cents lower, or 0.11% down, at HK$18.16 on the HKEX.
