Xiaomi's Baa2 ratings affirmed by Moody's, outlook upgraded to positive

Investing.com -- Moody's Ratings has confirmed Xiaomi (OTC:XIACF) Corporation's Baa2 issuer rating and senior unsecured rating on the bonds issued by Xiaomi Best Time International Limited and guaranteed by Xiaomi, revising the outlook from stable to positive on April 11, 2025.

The change in outlook is a reflection of Xiaomi's strengthened business profile, as seen in its new smart electric vehicle (EV) business and its consistent leadership in the smartphone market. Gerwin Ho, a Moody's Ratings Vice President and Senior Credit Officer, stated that Xiaomi's strong consumer electronics brand, solid execution ability, and strong net cash position provide a credit buffer against greater business and economic uncertainty.

Ho also anticipates that Xiaomi will continue to maintain its strong balance sheet and excellent liquidity while expanding its smart EV business through prudent financial management. This strategy is expected to further strengthen Xiaomi's business profile over the medium term.

The Baa2 issuer rating takes into account Xiaomi's growing consumer brand, globally competitive scale, recurring revenue from internet services, strong capital structure, and strong net cash position. These factors provide a buffer against fluctuations in product demand and business expansion. The rating also reflects Xiaomi's growing smart EV business and strong market position in smartphones.

Despite these strengths, the rating is limited by the company's moderate profitability, fluctuating demand for its key smartphone product, and execution risks associated with its growing smart EV business.

As per International Data Corporation, Xiaomi was the third-largest smartphone provider globally in terms of unit shipments in 2024, a market position it has maintained since 2021. Xiaomi also held a leading market position for Internet of Things (IoT) smart hardware products, with about 905 million connected devices as of December 31, 2024, up from 434 million at the end of 2021.

Moody's expects Xiaomi's revenue to grow by about 19% over the next 12-18 months to reach about RMB436 billion. This growth is anticipated to be driven by growing smartphone demand, market share gain, continued expansion in its IoT smart hardware and lifestyle products, internet services businesses, and increased contribution from the sales of smart EVs.

In March last year, Xiaomi launched its first smart EV, the SU7 sedan, and began deliveries in the second quarter of the same year. Despite the positive market reception, Xiaomi's adjusted EBITDA margin is expected to contract to about 7.8% over the next 12-18 months from about 9.2% in 2024. This contraction is expected to be driven by lower gross margin due to competition and higher operating expenses as the company invests in research and development and product development across its business lines.

However, as the smart EV sales volume grows, this segment's profitability is expected to be sustained due to greater economies of scale. Xiaomi's substantial operating cash flow from its smartphone, IoT smart hardware and lifestyle product, and internet services businesses, excellent liquidity, and strong net cash position are expected to buffer the investment needs and expenses associated with the growing smart EV business.

Xiaomi's operating cash flow averaged RMB25 billion over the past three years, comfortably covering its reported capital expenditure that averaged RMB7.5 billion during the same period. Xiaomi's leverage is forecast to remain low and stable at around 1.1x over the next 12-18 months, reflecting stable EBITDA and a steady level of debt supported by the company's strong net cash and free cash flow.

As of December 31, 2024, Xiaomi's net cash position was RMB39 billion. The company's cash and short-term bank deposits of RMB70 billion at the end of 2024, coupled with projected operating cash flow over the next 12 months, are expected to cover its short-term debt of RMB13 billion and investments over the same period.

The company's strong market position in smartphones and large operating scale provide good access to capital markets, further supporting Xiaomi's liquidity. In March 2025, the company raised about RMB40 billion of equity capital, which is expected to further strengthen its liquidity and capital structure and improve its financial flexibility.

Moody's notes that Xiaomi's senior unsecured rating is not affected by subordination to claims at the operating company level due to the company's highly diversified business profile.

Xiaomi's exposure to environmental and social risks reflects the nature of its business, which is predominately driven by technology hardware. In terms of governance risk, the company's conservative financial strategy and strong management track record counterbalance its high controlling shareholder ownership of voting shares and the majority of its board members being non-independent.

The ratings could be upgraded if Xiaomi maintains its smartphone market position, continues to grow its revenue scale while sustaining its profitability, maintains its excellent liquidity and generates steady operating cash flow, upholds its strong credit profile with its adjusted debt/EBITDA around 1.5x, and continues to grow its smart EV business' revenue scale while sustaining the segment's profitability.

However, the outlook could be revised back to stable if Xiaomi's position in the smartphone market weakens, it experiences volatility in its operations or adopts an aggressive debt-funded investment strategy that erodes its balance sheet strength, its excellent liquidity buffer weakens, or its smart EV business fails to grow its revenue scale or sustain its profitability, all on a sustained basis.

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