Xiaomi's Sales are Suffering Due to China's Weak Economy

On Wednesday, the Chinese phone giant reported a 10% year-over-year decline in revenue for the quarter ended September. This is roughly in line with analysts’ consensus estimates collected by S&P Global Market Intelligence. However, the company sank into the red for the quarter as it booked losses on investments.

Additionally, gross profit fell by 18%.

China's economy has been sluggish due to strict pandemic restrictions and an imploding housing market, which has squeezed consumers. Smartphone shipments in China fell 12% year over year for the quarter ended September, according to industry tracker IDC.

Xiaomi is the biggest smartphone maker in China, but it is not the local market leader. The new iPhone 14 from Apple is popular in China, and was the only major manufacturer that reported year-over-year shipment growth in China last quarter. Honor, which was spun off from Huawei after the Chinese company was hit by U.S. sanctions, has made a comeback to the top ranks. It was the second top-selling brand in China last quarter, according to IDC, with 18% market share—higher than Xiaomi’s 13%.

India's smartphone market is not looking much better, with shipments dropping 11% last quarter compared to the previous year, according to Counterpoint Research. Chinese companies, including Xiaomi, are also facing increasing regulatory scrutiny from the Indian government.

Xiaomi's internet services business, which accounted for 43% of its gross profit during the quarter, was also hurt by China's economic slowdown and regulatory crackdown on the internet industry. Revenue in the segment last quarter fell 4% from a year earlier, while margins narrowed. The company subsidizes its smartphones to sell customers advertisements, videogames or other services. Gross margins at the segment were 72% versus 9% for smartphones themselves. While Xiaomi makes around half of its revenue outside China, its home market makes up about three-quarters of its sales at the internet services segment. Overseas internet services were a bright spot, at least, with revenue growth of 17% year on year.

Xiaomi's shares have rebounded this month along with other Chinese stocks, on hopes that China will ease both its zero-Covid policies and property crackdown. Xiaomi's shares are down more than 70% from their peak in early 2021, but they still fetch around 30 times prospective earnings, according to FactSet.

Xiaomi's success depends in part on factors outside of management's control, such as China's zero-Covid policy. While Beijing will eventually relax some of its strict pandemic restrictions, the process is likely to take some time. Recent surges in Covid cases have led to lockdowns in many parts of the country.

Investors hoping for a stronger signal from Xiaomi may need to wait a bit longer. The company has been relatively quiet lately, and it may take some time for it to give a clear indication of its future plans.