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Investing.com -- S&P Global Ratings has upgraded Xiaomi (OTC:XIACF) Corp.’s rating from ’BBB-’ to ’BBB’ on April 1, 2025, citing strong performance in the consumer electronics segment and promising initial results in the electric vehicle (EV) sector. The rating agency expects this momentum to continue into 2025.
Xiaomi’s consumer electronics division performed well in 2024, with increased volume and average selling prices. The company’s first venture into the EV market also started positively, increasing the likelihood of Xiaomi successfully executing its EV plans over the coming years.
The upgrade by S&P Global Ratings also reflects the stable outlook for Xiaomi, with expectations that the company will strengthen its market position and increase earnings from its traditional businesses over the next two years. The agency anticipates healthy EBITDA growth, supported by a reduction in losses at the EV segment, and expects Xiaomi to maintain a significant net cash position and a strong financial buffer.
The strong performance of Xiaomi’s consumer electronics business, along with the successful execution of its EV plan, forms the basis of the upgrade. The company’s traditional businesses, including its smartphone, internet of things (IoT), and internet services segments, are expected to maintain strong momentum into 2025-2026.
S&P believes the attractive pricing of Xiaomi’s hardware products, an improved product mix, and increased brand recognition will allow the company to gain additional market share for smartphones and IoT, both domestically and internationally. The agency projects Xiaomi’s total EBITDA from these segments at Chinese renminbi (RMB) 37 billion-RMB40 billion annually during 2025 and 2026, up from the previous estimate of RMB35 billion-RMB38 billion.
The success of Xiaomi’s first EV launch, in the agency’s opinion, suggests that the company has effectively translated its understanding of consumer preferences from consumer electronics to a different product category. However, for a sustainable EV business, Xiaomi will need to launch several more vehicles to achieve critical mass in this sector. The company’s strong consumer electronics business, cash flow, and EBITDA should be sufficient to support and grow this, assuming there is no significant underperformance on the company’s new model launches.
Xiaomi will continue to solidify its position as the third-largest global smartphone manufacturer. The company is expanding its presence in several emerging markets, where demand remains high for affordable 5G smartphones. In its most competitive market, China, Xiaomi is aiming to sell more midrange and premium smartphones by enhancing its offline distribution channels.
Over the near term, S&P expects Xiaomi to benefit from the Chinese government’s stimulus policy on consumer electronics, as most of Xiaomi’s smartphones are covered by the policy. Increased sales of more premium models domestically will allow Xiaomi to achieve higher average selling prices for hardware and acquire more high-value users for internet monetization. This, along with increased shipment volumes globally, should help attract more advertising budget from advertisers. The internet services segment is expected to generate single-digit growth in cash flow over the next two years.
Xiaomi’s EV business plans have exceeded S&P’s expectations. Despite being on the market for a year, pre-orders for the company’s first EV, SU7, have been strong. The introduction of an upgraded version, named SU7 Ultra, has further increased consumer interest in the model.
Based on Xiaomi’s order backlog and new production coming online in the middle of this year, vehicle deliveries could reach 300,000 or slightly more during 2025. These early results and good execution support the view that the second vehicle launch and future production ramp-up would be carried out relatively well.
However, S&P does not suggest that Xiaomi’s EV business will become profitable or contribute notable cash flow in the near future. The business is still in its early stages, with significant investment needs. The company is likely to invest the profit from its vehicle sales into research and development (R&D), preparations for its future product lineup, co-R&D with suppliers, and to further enhance the electronic architecture of its EV models.
S&P forecasts the EBITDA loss for Xiaomi’s EV division will narrow in 2025 and 2026, from an estimated RMB6 billion in 2024. The EV business will require higher capital expenditure (capex) this year to expand production capacity. Hence, S&P projects Xiaomi’s total free operating cash flow will narrow to RMB20 billion-RMB24 billion in 2025, down from over RMB30 billion in 2024.
A recent share placement demonstrates Xiaomi’s cautious financial policy. The equity placement raised RMB38 billion, which S&P estimates is sufficient to cover Xiaomi’s spending on its EV business for at least the next two years. This is in addition to RMB94 billion net cash currently on the company’s balance sheet and an expected RMB20 billion-RMB24 billion in free operating cash flow.
Since Xiaomi’s IPO in 2018, the company has maintained a net cash position, and it is expected to continue operating in this manner, despite the sizable cash burn associated with its EV business.
The stable outlook is based on the assumption that Xiaomi will continue to gain traction with its EV business, with good consumer reception, the rollout of a new model, and additional production capacity, while simultaneously reducing losses in the business. At the same time, Xiaomi is expected to expand its smartphone businesses, particularly internationally, and maintain its 13%-15% global market share.
Stability and growth in the smartphone business will remain very important as the EV business strives to achieve critical mass over the next several years. The downside risk is mainly predicated on the ramp-up of Xiaomi’s EV business. Ratings could be lowered if the company’s EV models experience a significant deterioration in competitiveness, leading to expanding EBITDA losses and declining operating cash flow.
The ratings could also be lowered if there is a significant decline in the company’s net cash balance, reducing its ability to withstand cyclicality in the smartphone industry and any uncertainty with its nascent EV business.
The rating could be raised if Xiaomi’s EV business reaches critical mass, whereby it becomes self-sustaining. This would likely require several more vehicle models and significantly higher sales volumes. Alternatively, the rating could be raised if the company further strengthens its position in the core consumer electronics business and expands its internet service monetization, while maintaining a net cash position.
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