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Xiaomi shares bounced driven by better-than-expected earnings

Chinese smartphone market Xiaomi bounced by more than 8 per cent in Hong Kong while the benchmark Hang Seng Index was falling, boosted by the company’s better-than-expected earnings for the third quarters, which prompted several banks to raise its target prices.

According to Xiaomi’s third quarterly earnings report, its revenue surged by 49.1 per cent year-on-year to 50.8 billion yuan and the adjusted profit increased by 17.3 per cent year-on-year to 2.9 billion yuan.

Strong growth were seen across all business segments, with IoT and consumer products segments growing at the fastest pace.

In addition, Xiaomu announced that it had signed a strategic cooperation agreement with Chinese beauty-selfie App Meitu on November 19, 2018, through which, Meitu’s imaging algorithms and technologies will help Xiaomi provide a better camera experience for smartphone users.

Meanwhile, Meitu’s brand awareness among female users will help Xiaomi to expand and enrich user base, said the company.

After the announcement of the Q3 earnings, Goldman Sachs raised the target price of Xiaomi from HK$23 to HK$24, maintaining its “Buy” rating.

Citibank said in the latest research note that Xiaomi’s adjusted net profit for the third quarter was 2.885 billion yuan, higher than 2.306 billion yuan expected by the bank and also better than 1.996 billion yuan expected by the market. It gives Xiaomi a “Buy” rating with a target price of HK$17, citing faster-than-expected monetisation of internet service business in the overseas market.

Meanwhile, it warned that Xiaomi’s performance in the Double 11 promotion is unsatisfactory and the exchange rate environment is unfavorable to the company, expected to drag down the fourth quarter gross profit margin.

However, the Bank of America Merrill Lynch reiterated in a research note that Xiaomi’s operating profit in the third quarter was 15 per cent lower than that the bank’s expectation, primarily due to a slowdown in revenue growth and the weakening Chinese yuan and Indonesian rupiah.

The bank also said that although Xiaomi’s adjusted net profit came in 34 per cent higher than the bank’s forecast, it was primarily driven by interest income of 100 million yuan and tax incentives of 117 million yuan.

The bank forecasts Xiaomi’s 2018 and 2019 net profit to increase by 4 per cent primarily boosted by its cooperation with Meitu. However, the bank is still worried about the pressure on its gross margin brought by exchange risk in emerging markets, and an overall slowdown in China’s internet market.

The bank expects Xiaomi to underperform in the market rating with a target price of HK$11.

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