Insights

5 Tailwinds Powering Xiaomi’s Surging Stock Price

Here’s why Xiaomi Corp (SEHK: 1810) shares have done so well in 2020 despite the coronavirus outbreak. –

Despite rising tensions between the world’s two most populous countries and Covid-19 continuing, Xiaomi Corp (SEHK: 1810) shares are up 65% year-to-date and the stock is near a 52-week high.

So, what’s powering Xiaomi’s latest surge? Here are five tailwinds that might explain why Xiaomi has outperformed in 2020.

5G

Due to 5G telecom rollouts, many consumers are upgrading to 5G-compatible phones to take advantage of potentially much faster speeds and lower latency.

Xiaomi has anticipated this trend with a portfolio of 5G phones and the company has benefitted financially as a result.

According to the company’s results announcement for the three months ended 31 March 2020, Xiaomi’s average selling price mainly rose due “to the launch of 5G and other premium smartphone models”.

Xiaomi is also likely doing better in 5G than regular phones. In March of 2020, it had a mainland China 5G smartphone market share (by sales volume) of 14.1%.

By contrast, Xiaomi had around 10.7% market share of the mainland China overall smartphone market in the first quarter of 2020 in terms of shipments according to Canalys.

If Xiaomi maintains its market share of 5G in mainland China in the future, its overall market share in the country could grow given increasing 5G penetration.

Apple

Xiaomi’s stock may have also been helped by Apple’s financial success in services.

Xiaomi has always had a goal of making profit in services, and Apple’s financial success over the past few years in selling services has shown investors that it’s not only possible to make money from services, but it’s also really lucrative too.

Although Apple has a much easier time making money from services due to its premium position in the market, its success in making money from non-hardware products gives Xiaomi investors hope for the future.

Also, if Apple is valued higher by the market, other leading phone makers’ valuations are worth more to many investors due to relative valuation.

Share buybacks

According to Technode, Xiaomi’s board approved a potential buyback programme of up to 10% of the total number of shares issued.

If Xiaomi buys back those shares and the share repurchases more than offset the number of new shares the company issues for its employees or other purposes, Xiaomi’s earnings per share (EPS) could rise.

Hang Seng Index inclusion

Due to changes in the Hang Seng Indexes Company’s rules, Xiaomi will be included in the prestigious index from September.

If Xiaomi is added to the Hang Seng index, there could be some buying by institutions who passively invest by following indexes.

Billions of dollars of passive money follow the Hang Seng Index and inclusion could improve sentiment in the near term.

India

India is a key market for Xiaomi. The company has around 30% market share and Xiaomi is in a good position to benefit from India’s secular development if it keeps its leading position.

Due to the recent border clashes between China and India, there has been some uncertainty.

Although Xiaomi’s operations could be affected, Xiaomi is still allowed to do business in India and the management team there is optimistic. Xiaomi India managing director Manu Kumar Jain said:

“Our product team, R&D teams are here in India. As we have mentioned, all (of) our phones, majority of our TVs are made in India, and a large number of components are locally sourced. 

Till now, we are not seeing any major impact on our business, with respect to sales or demand”.

If relations between China and India improve, the market could value Xiaomi’s business there higher.

Foolish conclusion

Despite the coronavirus outbreak, Xiaomi has a number of tailwinds such as 5G adoption and future Hang Seng inclusion powering the stock higher.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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