Xiaomi Corp

HKEX:1810

Earnings Call Analysis

Xiaomi's Q2 2024 Earnings: Strong Growth and Strategic Advancements

In Q2 2024, Xiaomi's revenue surged 32% year-on-year, reaching RMB 88.9 billion. The company reported a gross profit margin of 20.7% and an adjusted net profit of RMB 6.2 billion, up 20%. Xiaomi's smartphone business maintained a strong pace, with a 27% increase in revenue and a 28% rise in global shipments. The new Xiaomi SU7 EV saw over 27,000 deliveries, contributing to RMB 6.2 billion in sales and a 15.4% gross profit margin. Xiaomi revised its annual delivery target to over 120,000 vehicles, reflecting robust demand and operational efficiency .

Strong Revenue Growth

In the second quarter of 2024, Xiaomi experienced a revenue surge, reaching RMB 88.9 billion, marking a 32% increase year-on-year. The company's core business, including smartphones and AIoT (Artificial Intelligence of Things), was a major contributor, with revenue climbing to RMB 82.5 billion, up 23% year-on-year. This growth represents a historic high for the company and reflects the robust demand for Xiaomi's products across different segments【4:1†source】【4:3†source】.

Impressive Performance in Smart EV Segment

Xiaomi's Smart EV segment showcased significant progress and profitability. The company reported revenue of RMB 6.4 billion from this segment, with a gross profit margin of 15.4%. Xiaomi delivered over 27,000 units of its first vehicle, the Xiaomi SU7, with an average selling price (ASP) of RMB 229,000. The company expects to exceed its full-year delivery target of 120,000 units, demonstrating strong market acceptance and operational capabilities in this new venture【4:0†source】【4:5†source】.

Enhanced Financial Health

Xiaomi's financial health remains robust, with an adjusted net profit of RMB 6.2 billion, up 20% year-on-year. The company's cash reserves also grew significantly, reaching RMB 141 billion, up 24.5% year-on-year. This financial stability is further reinforced by Xiaomi's share buyback plan, aiming to repurchase up to CNY 10 billion worth of shares【4:1†source】【4:7†source】.

International Market Expansion

Xiaomi continues to strengthen its presence in international markets. Overseas revenue accounted for 42.8% of the total, while the company maintained its position within the top 3 global smartphone manufacturers, with a 14.6% market share. Additionally, Xiaomi's innovative business models and strong operational capabilities have allowed it to navigate global market uncertainties effectively【4:2†source】【4:5†source】.

Continued Investment in R&D

Xiaomi has significantly ramped up its investment in research and development (R&D), with expenses reaching RMB 5.5 billion in Q2 2024, a 20.7% increase year-on-year. This focus on R&D underscores the company's commitment to innovation and its strategic goals of enhancing operational efficiencies and exploring new business opportunities【4:1†source】【4:0†source】.

Smartphone and IoT Business

Xiaomi's smartphone division continues to perform well, maintaining a gross profit margin of 12.1% despite increasing component costs. The company's IoT segment also showed impressive growth, achieving record revenue of RMB 26.8 billion, up 20.3% year-on-year. This growth is supported by strong performance in wearables and large home appliances, indicating Xiaomi's ability to leverage its brand and expand its product ecosystem【4:3†source】【4:8†source】.

Commitment to ESG Principles

Xiaomi remains committed to Environmental, Social, and Governance (ESG) principles. The company has received multiple recognitions for its efforts, including inclusion in the Fortune Global 500 list for six consecutive years and being awarded the best ESG award by an internationally acclaimed finance magazine. Xiaomi strives to promote low-carbon development, incorporating eco-friendly materials and PV power generation in its manufacturing processes【4:7†source】【4:6†source】.

Future Outlook and Challenges

Despite the positive performance, Xiaomi acknowledges the challenges posed by market competition and component cost increases. The company remains focused on executing its strategic goals, scaling its new retail model globally, and continuing to innovate across its product lines. Xiaomi is optimistic about its future, driven by its comprehensive ecosystem strategy combining human, car, and home elements【4:16†source】【4:12†source】.

Earnings Call Transcript 2024-Q2

[Operator]

Good evening. Welcome to Xiaomi Group's 2024 Interim Results Announcement Investors' Meeting and online webcast. So this event will be recorded. If you have objections to that, you can hang up now. [Operator Instructions] Now may I invite the IR Team Head, Anita Chan, from Xiaomi to conduct this conference call.

[Anita Chan, executive]

Good evening. Welcome to Xiaomi Group's 2024 Interim Results Announcement Investors conference call and also online webcast. Before we begin, I would like to remind you that this meeting may include forward-looking statements, and there will be impact because of risk and unforeseeable factors so that some results may not be realized. In relation to market condition and also channels outside the Xiaomi Group, there are financial indicators that are not according to IFRS standards. So they should not be regarded as hard financial indicators.

We have Mr. Lu Weibing from Xiaomi Group Vice President; and CFO, Mr. Alain Lam. So at the beginning, Mr. Lu will go through our company's results and also business operations, and then there will be an overview of our financial performance in the half year period followed by Q&A. Now I will pass the floor to Mr. Lu.

[Weibing Lu, executive]

Good evening, everyone. I am Lu Weibing. Thank you very much for joining our 2024 Q2 results announcement call. For this quarter's events comparing with the past, I think it is very different. First of all, this is the first time that we disclosed performance related to our EV business. And this is also the first vehicle-related performance results release after the launch of our man times car times home whole ecosystem strategy.

Now you have asked a lot of questions about cost increase for our components, our gross profit margin and operating conditions of our mobile phone business. Because of your concern, I would like to share with you on 3 parts. First, I will share with you the results for Q2 of 2024 and our business highlights. Secondly, we will focus on vehicle-related business topics. And #3, recently, you have frequently asked questions about our mobile phone and IoT business. We'll talk about that.

In Q2 this year, in terms of the external environment, competition was fierce and there's intensifying supply chain cost pressure. With this backdrop, our business line performed steadily in accordance with our budgeted pace. Our group total revenue was CNY 88.9 billion, a year-on-year increase of 32%. This is a historical high level, of which core business revenue of mobile phones AIoT was CNY 82.5 billion, up 23% year-on-year. Our gross profit margin was 20.7%, continuing to maintain a healthy level of above 20%.

Our adjusted net profit reached CNY 6.2 billion, up 20% year-on-year. Losses from innovative businesses such as Smart EV decreased on a quarter-on-quarter basis, net loss was CNY 1.8 billion. After restatement core business profit was CNY 7.9 billion. Core business profit margin was 8.9%.

Now I will focus on our vehicle business. On 28th March, after the release of Xiaomi EV, our SU7 production capacity improvement and delivery acceleration are progressing smoothly. In the past few months, we kept on expanding our capacity and accelerated delivery. In Q2, after launch of SU7 our delivery was more than 27,000 units. In July and also in the 3-month period, retail sales exceeded 13,000 units. Renting for us in the retail sales list of CNY 200,000 pure electric sedans, completing our promise to users. The launch right after announcement delivery right after launch volume growth after delivery. So we revised our delivery targets. So the full year delivery target of 100,000 vehicles in November can be completed ahead of schedule and full year delivery target will exceed 120,000 vehicles.

Our vehicle sales and service network is also constantly improving. We currently have more than 100 sales stores, and we plan to open 220 retail stores by the end of this year, covering 59 cities across the country. In Q2, our innovative business, such as Smart EV generated revenue of CNY 6.4 billion, gross profit margin, 15.4%. Net loss narrowed to CNY 1.8 billion, fully demonstrating our EV product competitiveness, cost control capabilities and strong delivery capabilities. So this allows us to continue to invest intensively in the future. We have confidence in that. So this is our vehicle performance in the first quarter.

In terms of new order -- locking in new order delivery and also gross profit margin enhancement, we are still very confident. The success of Xiaomi EV once again proves the power and multi-category applicability of our model and methodology. And we believe that Xiaomi SU7 being the first vehicle, success is not a coincidence. Today, I cannot disclose to you our future new vehicle products. But for future new vehicle products, we are full of confidence.

Now let me talk about smartphone-related business. In Q2, you can see that this time for a few consecutive quarters we are within top 3, and we have narrowed the gap from the second player and the gap between us and the fourth place is widening. Global market share increased by 1.8 percentage points to 14.6%. In Latin America, for the first time we ran second. In Southeast Asia we came back to the second place. In Middle East, we are in the firm second position.

In China, our market share was up by 0.8 percentage points. In 58 countries and regions, our smartphone shipment was within top 3, in 70 countries and regions, we are in top 5. The continued increase in mobile phone share has also driven number of global MAU to a new high. In June 2024, MAU number of smartphone users worldwide reached 676 million, a net increase of 69.8 million year-on-year.

Number of MAU from users in China was 164 million, a net increase of 15.1 million year-on-year, bringing strong impetus to the growth of our Internet business. You are especially concerned about gross profit margin of our mobile phone. Although cost of core components continues to rise, the gross profit margin of our smartphone has reached 12.1%, which fully demonstrates that we have strong cost control capability and stable operating capabilities.

Xiaomi mobile phone global scale increased, and we have got economies of scale. In terms of premiumization, we continue to work hard in the high-end market. And in Q2, the main high-end price range in China was CNY 3,000 to CNY 6,000 in each segment, our market share increased year-on-year. In July, we released the new generation of Xiaomi MIX Fold 4 which achieved lighter and thinner experience based on full flagship performance. And there is also our first small, affordable Xiaomi MIX Flip which takes into account fashion, technology and achieved flagship performance.

At the end of June, the number of stores in China exceeded 12,000 at the same time our offline mobile phone market share was 10.4%. Quarter-on-quarter increase was 1.4 percentage points. IoT business. In Q2 IoT revenue was CNY 26.8 billion, achieving record growth of over 20% year-on-year for 2 consecutive quarters. Overall speaking, in the past few years, IoT business, is important when we dig deep into various segments or categories.

And the building of such capability has proven our operating results. In past few years in terms of air conditioner, we have mastered core technology. At the same time, we focus on our technology. So we are the only full chain manufacturer. And in terms of service installation and investment, we attach importance, and we focus on integration. And then we improved the industrial capabilities of our air conditioner and achieved full stack self research and mastery of key technologies. We adhere to technological aesthetics and smart home appliance, make traditional home appliance intelligent. We continue to increase investment in service installation and complete industry's first integration of disassembly, delivery and installation. So this is just one example. We are making more breakthrough in other categories. In the future, our products will benefit from mobile phone and EV brand effect.

At the same time, we will leverage on our efficient channel capabilities of new retail to achieve greater success. And this will also help our new business development. Besides with localization capabilities in international business, more IoT categories will be exported overseas, which will help Mi Home further expand overseas and lay a solid foundation for our future EV overseas expansion.

In conclusion, although there are still huge challenges in the macro and industry environment in 2024, market competition will intensify and there are also cost increase in a lot of components. You can see that our 3 growth curves have been fully deployed. So personal devices centering on mobile phone tablets and wearables, that's the first growth curve. And then large appliances like air conditioner, refrigerator and washing machine, that's the second curve.

And then mobile equipment like vehicles, that's the third growth curve. And we have formed a cross-category complementarity and synergy in the global market and we can withstand external uncertainties such as category industry cycle difference and global market development cycle and also external uncertainty. This is a competitive advantage that other peers do not have.

Our strategy of full ecosystem for human times car times home, this is unique in the global business practice. And this business closed loop has just begun. Our future development will see unlimited possibility and imagination. The above is my presentation today. I will now pass the floor to our CFO, Alain.

[Alain Lam, executive]

Thank you, Mr. Lu. Good evening. As Mr. Lu just shared with you, with our clear strategic layout of our group, in Q2 2024, our revenue growth was very, very strong. Profits continued to rise. Our outstanding financial performance reflects our long-term development path. In Q2 2024, our total revenue was RMB 88.9 billion, up 32% year-on-year with a stable launch and development of our EV business.

In this quarter, China revenue accounts for 57.2% of the total. Overseas revenue share was 42.8%. In this quarter, our consolidated gross profit margin was 20.7%, showing a stable performance. Starting this quarter in order to improve our public disclosure and also to better disclose our strategy of human times car times home ecosystem and to enhance transparency of our financial disclosure, starting this quarter, we will divide our disclosure to 2 segments. First, mobile phone times, AIoT; second segment, smart EV and related new businesses. For mobile phone times AIoT segment, it includes our smartphone business, our IoT business and Internet and other related businesses.

And then for our smart EV and other innovative businesses segment, it includes our EV, Smart EV and other related businesses. Now let's take into -- let's take a closer look of each segment. First, mobile phone times AIoT. In this quarter, revenue was RMB 82.5 billion, up 22.5% year-on-year. Gross profit margin 21.1%, up 0.1 percentage point year-on-year. Of which regarding smartphones, in this quarter, revenue was RMB 46.5 billion, accounting for 52.3% of total revenue, up 27.1% year-on-year.

In this quarter, our global smartphone shipment was 42.2 million units, up 28.1% year-on-year. According to Catalyst data, for 16 consecutive quarters, in terms of global smartphone shipments, we are within top 3 globally. Our market share in this quarter was 14.6%. In this quarter, you can see here that we are within top 5 globally among mobile phone manufacturers. We have the fastest shipment growth. In Q2 2024, smartphone gross margin was 12.1% this is mainly because of competition reasons and also price increase of core components.

Regarding AIoT, in this quarter, you can see that our revenue and our profits have performed very well. our IoT revenue had achieved historical high level, reaching RMB 26.8 billion, up 20.3% year-on-year. Overall speaking, IoT gross profit margin was 19.7%, up 2.2 percentage points. This is mainly from wearables and large home appliance increase in gross profit margin.

And then in terms of categories, we have a few core IoT categories. They maintained strong growth trend. At the same time, they made contribution to our profits. In this quarter, our smart large home appliance business performed well. Our air conditioner shipments exceeded 3.3 million units, up more than 40% year-on-year. Refrigerators shipments was up 25% year-on-year. Washing machine shipments was up more than 30% year-on-year.

And then about our tablets, Well, there was high growth. In this quarter, we are within top 5 globally. In China, we are within top 3. Global shipments was doubled year-on-year for wearables.

In this quarter, our earphone in China was #1 in shipments, our wearable, wristband equipment was within top 3 globally. Now about Internet service, our user scale continues to expand. In June 2024, our number of global MAUs reached record high level reaching 676 million, up 11.5% year-on-year. In Mainland China, number of MAUs reached 164 million, up 10.1% year-on-year. In this quarter, our Internet service revenue was RMB 80.3 billion, reaching a historical high level, up 11% year-on-year.

Advertising business continued to drive business growth for our Internet business. In this quarter, advertising revenue was RMB 6 billion. At the same time, for Overseas Internet service, revenue this quarter was up almost 33% year-on-year, reaching RMB 2.7 billion. Its share was 32.1% of our Internet service revenue. Now let me talk about our smart EV and other new business segments. In Q2 of 2024, revenue of this segment was RMB 6.4 billion, of which smart EV sales revenue was RMB 6.2 billion. Other related revenue was RMB 200 million.

In this quarter, altogether, we have delivered 27,307 units of Xiaomi SU7. ASP was RMB 229,000. Now in the quarter of our complete delivery of the first Xiaomi vehicle, we achieved positive gross profit margin and gross profit margin reached 15.4%. This is a strong gross profit margin because of a few reasons. First, higher-than-expected delivery volume support from the supply chain and also our peripheral supply chain or ecosystem product contribution.

In the future, we will continue to expand our smart EV and other innovative business development. We will give full play to our own operation strength to showcase our sustainable long-term profitability trend for new businesses. While revenue grew, we continued to enhance our control of costs and expenses. Last year, our core was to lower cost.

In 2024, our theme is to improve efficiencies. In Q2 2024, our overall operating expenses was RMB 12.6 billion. After deducting RMB 2.9 billion of investment into new businesses, our core business operating expenses amounted to RMB 9.6 billion. Expense ratio was 11.7%. On a year-on-year and quarter-on-quarter basis, the decline was more than 1 percentage point. At the same time, we continued to increase R&D investment. In this quarter, our R&D expenses amounted to RMB 5.5 billion, up 20.7% year-on-year.

Then for net profit. In Q2 2024, our group's adjusted net profit was RMB 6.2 billion, up 20.1% year-on-year. Our core business -- our core profit was RMB 7.9 billion, up 20.6% year-on-year. In the first half, our core business profit had exceeded RMB 16.7 billion. In this quarter, our Smart EV and other new businesses, the adjusted net loss was RMB 1.8 billion. Thanks to the higher-than-expected EV gross profit margin.

For cash resources, as of 30th of June 2024, our cash reserve was RMB 141 billion, up 24.5% year-on-year. At the same time, we -- since this year till 19th of July, our share buyback totaled almost HKD 3.7 billion. We plan that in the open market to buy back shares in accordance with our share buyback plan approved by the Board and the AGM amounting to CNY 10 billion. And for cash flow in this quarter, adjusted operating cash flow was RMB 12.2 billion. Our new business contribution was a positive contribution to cash flow.

Let me talk about ESG. We kept on promoting sustainable economic development for our users, employees, our company and the society at large, we are offering support. This year, once again, we were included in Fortune Global 500 list. For 6 consecutive years, we are within this list. At the same time, for our ESG, we continue to get recognition from international authorities organizations. In July this year, we are successfully included in S&P's sustainability development year book.

And once again, the internationally acclaimed Finance magazine II announced the best ESG award, and this is awarded to us for new business. We strive to promote low carbon development for our vehicle Xiaomi SU7. In terms of production and manufacturing, we use PV power generation and other low-carbon measures. And through proprietary eco-friendly materials and also our technological capability, we are able to lower costs.

In July 2024, in the 2024 automobile industrial chain low carbon action plan development forum organized by China automobile technology, R&D center. Xiaomi SU7 was awarded championship. In relation to 2024, China automobile low-carbon area C grade pure electric sedan category. Thank you very much. The above is my presentation. Now we can start Q&A. Thank you.

[Operator]

[Operator Instructions] First question is from Goldman Sachs, Timothy, please.

[Timothy Zhao, analyst]

Okay. Thank you, management, for giving me this chance. Congratulations on your strong results this quarter. I have 2 questions. First, regarding your EV. This quarter, in the first quarter, there was delivery and the gross profit margin already was 15%. This is a high level. Now can you do an analysis. You have achieved this good gross profit margin. What are the reasons behind?

Just now you said that in second half this year, there is an upward gross profit margin trend. So can you share with us -- in the future, how high will be gross profit margin do you think?

The second question is about new retail. Now in your disclosed new retail off-line development -- it is important to your increase in market share. Can you share with us for mobile phone and IoT in terms of new retail, what is your gameplay? And what will be your plan in the coming years?

Mr. Lu, in the past few months, you visited Southeast Asia and the European market. So my question is regarding your overseas development, what is your plan? And what are your thoughts?

[Alain Lam, executive]

Let me talk about vehicles. Well, 15.4% was our gross margin. It exceeded our expectation. So you asked a question. Why is it that we can deliver this good gross profit margin in just 1 quarter? And would it be the same in the future? Let me elaborate. For our gross profit margin, I think it is quite good. I think there are a few factors behind. First, suppliers. In relation to our future prospects, they are positive. They gave us good support. So this is our first vehicle product. At the beginning, the volume is not that big.

However, for our main working partners, they are very positive about our future vehicle development. So at the very beginning, they already offered to us very good customer positioning. So we got very good commercial terms. This is the first important factor.

Second, Xiaomi has a very good strategy about best-selling items. We want to use 1 vehicle model so that scale can exceed a few models together. For EV, well, we talk about China economy. Well, we have to think of economies of scale. Using many car models, then that can create a scale that is about scale economy. We need to maximize the volume of 1 model. So for Xiaomi SU7, this is 1 sedan model, and it is selling above CNY 200,000. It is the first top seller in the market. So the scale of this product has already achieved economies of scale.

Number three, over the past years in terms of consumer goods and also our industrial cultivation about smartphones, we are using our capabilities in other industries. So at the beginning, we are not a low-level company. We are not a beginner, we can make use of our management capabilities. And at the very beginning, where we have good management capabilities. As a result, we enjoy a lot of bonus from management. So I think that's the reason why our gross profit margin has been quite good. In Q2, our EV business had made a loss of CNY 1.8 billion. This shows that we are still at the start for our vehicle business. That's the first point.

Secondly, our gross profit margin, what would be its future trend. Now let me say for sure that future gross margin will definitely be better than the current level. There are many numbers that I can't disclose, but the trend is good. Why is that so? Let me talk about a few points. First, Q2 delivery. Well, that's because of some locked-in orders in April. There are 27,000 units being delivered. And if you look at the orders, well, we have gathered many orders -- in the future, we need to cancel out a certain amount of equity. If you look at our orders originally, our plan is around 70,000 units.

Now we are at 112,000 -- 120,000 already. So we can definitely complete delivery of such volume. And then with such big volume, our costs will come down. Thirdly, during this period if you look at the supply chain, there are some cost pressure, given these circumstances, our gross profit continues to be more favorable. So this is quite certain. Your second question about New Retail. In the past few years, after building our model, we have been doing 2 things. First, our new retail can it cover all categories? For new retail, can it be a carrier for all our categories? Secondly, can our new retail go from China towards the whole world? This is something we have been thinking of in the past few years.

For our vehicles, all are developed by Xiaomi New Retail. So we have brought the vehicle category into New Retail. After vehicles come into our new retail model, there are a few values created. First, our rent cost as compared to our peers, it is getting more favorable. And then in the smartphone business, our rent cost is still the lowest and we are much lower than other automobile companies, a few times lower.

Secondly, for our vehicles, it needs a large area display -- for display. So we open more and more new stores. In the future, you will see more and more large stores at premier location in shopping malls with the best footfall. With the inclusion of vehicles, we have accelerated expansion of Mi Home. This year, we plan to open 3,000 retail stores. At the end of June, we have increased 2,000 stores already. At the end of the year, we can meet the target. So store opening speed was faster. So for our premium smartphones, this is giving strong support.

In the China market, if we don't build a good brand, we won't be able to sell premium products, this is simple. When users buy premium products, they will go to brand specialized store. So can the company do premiumization. It all depends on the brand effects. It will also support our IoT business. This year, our air conditioners sell well and there is also the CDS delivery and also installation one-stop service and so on. This is the value brought by Xiaomi Mi Homes.

We want to bring this value to overseas as well. This year, I visit overseas markets a lot. So Xiaomi model, is going to get into the overseas market comprehensively. So if you go to shopping malls, you will see many Mi Homes. In Hong Kong, you already see many such outlets. The day before yesterday, I went with Mr. Lei and we took a look at the store in Causeway Bay, which was opened 1 month or so ago. Sales was around CNY 5 million within 1 month. So sales is very good. We have full confidence that our new retail will cover the whole world. So this is also an important carrier of our human times car times home strategy.

Let me supplement, especially for your first question. You can see that in Q1, we delivered 27,000 units in Q2. And in July, more than 10,000 units. In August, more than 10,000 units, that's our target. So based on our delivery volume, it will increase quarter after quarter. So talking about the sharing of production costs will be in a more advantageous position. That's the first point I would like to add.

My second point is in CNY 6.4 billion new business revenue, around CNY 6.2 billion is revenue for vehicles. CNY 200 million is other related business revenue. So the CNY 200 million includes other peripheral products and our financial services. So we expect that when our product layout is more comprehensive, products will be more diversified. And then as Mr. Lu said at the very beginning, a lot of things were given out for free in terms of accessories and gradually, they would become -- they would be included in our configuration. So that will bring about additional revenue and profit. These are the 3 points I would like to add.

[Operator]

Next question is from Andy of Morgan Stanley.

[Andy Meng, analyst]

Lu and Alain, I have 2 questions. First question is about mobile phone. Xiaomi smartphone in Q2 in various countries and regions, market share has increased significantly. Mr. Lu, can you talk about 2024 comparing with last year in which core competitiveness has that been an enhancement? In second half of the year, in various regions, are you going to see increase in your market share?

My second question is about Xiaomi vehicles. Your first vehicle achieved good success. In Q2, gross profit margin was also outstanding. This year, in EV market, competition in China was very intense. So management, can you share with us your next step, your next competitive strategy? Are you going to get into a price war for the sake of gross profit margin? Or will you attach more importance to improve product quality with new functions, new components and so on?

Are you going to use these to acquire new EV customers? What would be your next step?

[Weibing Lu, executive]

Our smartphones, well, we are talking about a mature existing market. So we do not have any special tactics to do this business. We are just pragmatic. We just execute our formulated strategy. So we have a technology strategy. We want to dig deep into our technology. In smartphone business, we keep on mastering our technology well. So this year, we are doing much R&D into the 2.0 version for us, and this is something we need to keep doing. And we want to improve our supply chain management to face up to market cost increase.

So you asked about impact on our gross profit margin because of such cost increase, we have done much strategic preparation, so I think in terms of cost, we'll be able to do a good job in cost control. In the past few years, we adopted premiumization. So in China, we executed it, and we are successful then we went overseas with this strategy. For overseas, premiumization progress has been very good. Besides, we also conducted service upgrading and service reform.

In terms of service, we are getting better and better. In terms of our product quality improvement, our API, our user operation, we are doing quite a good job. Besides new retail, I think this is a unique, one-of-a-kind competitive strength. In the past few years, we have done a lot. So these are the results. So I think today, we are talking about competition of the total supply chain. We are not only strong in 1 area. We have our own special characteristics. And in the coming few years, we don't think there would be a big change. We will just do our job well.

So we will work hard and we will gradually achieve enhancement. We have confidence. Perhaps in various quarters, there will be volatility. So the launch timetable of main products of different brands will be different. But in the long run, we will follow our own approach. Globally, we have a large long-term goal that won't change. And secondly, for our EV, as you said, well, we have not thought too much right now. We want to focus on delivery. On 28th of March, we launched the vehicle. It has been 4 months after that. Mr. Lei talked about stringent selection by 1 million netizens.

And I think there is also a strong attack on our product as well. That's the first thing. Secondly, we focus on delivery up to now. Our delivery cycle has shortened, but it is still quite long. So we want to enhance production capacity, and we want to improve our delivery. This is the second thing that we're doing. The third thing is we need to focus on scale to improve our cost. At present, we have delivered some good outcome in our first factory. In the future, there is much room for enhancement. In the future, for cost reduction, I think it is foreseeable and then we will develop new car models.

Internally, of course, this project is confidential. I cannot disclose the details. But for new model development, I think the overall competitiveness is quite good. When more and more users are in place, user operation is important. So they may have new demands after using the cars. And gradually, we will offer services based on user operation. So Xiaomi vehicles will become more and more interesting. It is not only mobility too. It will become more fun and interesting. It can meet personal needs. So that's basically it.

[Operator]

Next question is from Citi, [indiscernible].

[Unknown Analyst]

Congratulations on the excellent results. I have 2 questions. First, regarding EV, gross profit margin is very good, outstanding. For the whole year, gross profit margin target, are you going to revise it upwards? Some time ago, you gave a range to investors. Can you not be more specific? Can you give a more specific guidance in the second half? For smartphone business, there are 2 challenges. How are you going to handle them first?

In the second half, Apple will launch some AI cell phone. Comparing with products launched last year, users may want to try the new product. So for Mi 15, what do you forecast? So what will be the impact on you? And secondly, in the second half of the year, for components, price of component, what is the trend? And the price increase range? Will it be different from the original forecast?

[Weibing Lu, executive]

Regarding vehicle GP margin. In the first quarter, it's 15.4%. I can only answer you with some trends. In each quarter, now in 2024, in third quarter and fourth quarter, it will rise steadily. I cannot give a concrete number, but the trend is positive. I think you understand what I mean. Then for competition and challenge, well, for iPhone, iPhone 16, in relation to AI, well, we do not quite understand what kind of new launch will they do? And will users be very interested after the launch? Would there be a big change in customer experience? This is still an unknown today. Today, it is difficult for me to answer this question. Will it be easy for us to snatch iPhone users? Or would it be difficult?

However, from my point of view, if we snatch iPhone users, we get more and more of them. I think there will be a change in the situation. This year, we are very confident for our MIX Flip. After it's launched, 42% of the users were -- used to be iPhone users. So after the past few years, our product benchmarking, experience enhancement, up to today, we do not only snatch users from iPhone. We target at all brands. Huawei and also other 5 brands, we will try to snatch users from them.

This year in the China market, there is a net increase of 15 million users. And Xiaomi snatched users from all brands. And you talk about Huawei's delay in product launch. I have no understanding of that. I cannot comment. But given today's environment, I think the overall competitive landscape and trend, I will not see fundamental change. You talked about raw material costs.

Well, you focus on screen -- and for screen cost increase, I think that has come to an end, it will start to come down. I don't think there will be a big change. And then for another component, the point is, well, the -- there will still be a cost increase. So for inner storage cost increase does not have a strong foundation. This year in Q3, comparing with Q3 last year, it has increased 100% already almost. But I think it has already peaked. That's my judgment.

[Operator]

Next question is from Huang Yayuan.

Next question is from CICC, Hanjing.

[Hanjing Wen, analyst]

Mr. Lu and Alain, I have 2 questions. Just now, you said that in Q2, Internet revenue reached record high gross profit margin is outstanding. For Internet business, what is the reason for the increase in GP margin. Looking at Q3, what will be the trend of Internet business? That's my first question.

Second question, I want to ask about your AI capabilities. So my question is Mr. Lu, Alain, from your point of view, how do you see the prospect of AI phone in the future? In the AI product plan, what are your thoughts? For Internet, gross profit margin improved. There are a few factors. First, our scale continues to expand. So actually, for global users, there's an increase by a few 10 million on a year-on-year basis. The reason is simple. For existing users, if there are more and more, then your development in all areas will get stronger.

So this is our value to our gross profit margin. Another factor is our improved product structure. When we have more and more premium models then revenue will become better for Internet revenue. So that's the second reason. Third reason, overseas Internet revenue accounts for more and more share. Overseas GP margin is higher than Chinese market. So these are the reasons behind that improved our Internet business gross profit margin.

Our overall sales volume increase, premiumization accounts for a bigger share overseas business accounts for a bigger share. I don't think these trends will change. That means that our Internet business gross profit margin will gradually continue to go up. It will be sustainable. Now we are at a very high gross profit margin level. If you say that there will be a big upside. It is not realistic. So please don't be too optimistic.

You asked a question about AI phone. I said already that up until today, all so-called AI phones should not be called AI phone. They are only using AI technology to develop some AI features. And then these features are running on phone. So I will say that they are AI-feature phone, not AI phone. If you say AI phone, well, if it is regarded as a new category, then I think it will be realized, but it is not something that we see today with just a few AI features.

AI technology on the operating system should be able to run. So we are going to launch a new product. I think it is going to deliver some brand-new experience to you. So you will see them in the coming months. I would like to add a point for Internet gross margin, it is also because of a higher share of our advertising revenue. Advertising revenue GP margin is high. So you can see that in this quarter, our advertising revenue accounts for a high share. Why is it that advertising revenue can be so high? Just now Mr. Lu explained the major reason. So this is the point that I would like to add.

[Operator]

Next question is from Huatai, Chen Xudong.

[Xudong Chen, analyst]

Congratulations on your excellent results. Two questions. First, IoT in Q2, growth rate is very fast. And gross profit margin was enhanced. For large home appliance shipment also performed well. Pad product growth rate was fast in the future. Do you have some plan about future development? Do you have overseas development plan?

Second question, for smartphones, CNY 3,000 to CNY 6,000 price range, the growth was fast. So are you going to work on CNY 6,000-plus price range? Do you have some successful methods that you can share with us?

[Weibing Lu, executive]

You talked about IoT. In the past few years, we had an important strategy. The 2 strategies are combined into one. The first is an internationalization strategy. And then in the earlier period, our categories are based on production volume. So production company made investment, and we ensured the quality. And through our channels, we made sales later on with this business model. It is difficult for us to strive for premiumization. So for important categories, from the original production chain model, we changed it to the self-operation model, for example, wearables, large home appliance, air conditioning, washing machine, refrigerator, door lock and also routers.

All these are self-developed. And after that, we can make heavy investment into them, and we can master the core technology and supply chain. Today, in terms of sales volume growth, revenue growth, gross profit growth, these are results arising from such strategy. What I want to say to you is we have just started -- this is just our beginning. This year is the first year of delivering such results.

In the coming few years, you'll see that these businesses will improve. And at the same time, we have the same game play for global products. Products will be sold globally. Our scale will improve. And in these few years, we have better overseas layout. So we have very good overseas sales. This year, our overseas growth is very amazing. These 2 together, of course, we have also new retail. So together, our IoT business will develop in a better way. In the future, you will see future growth, ASP growth, revenue growth, profit margin improvement.

These are the overall trends. I have confidence in that for premiumization. So from CNY 3,000 to CNY 6,000 price range. So we are already very strong in lower price range, but for CNY 6,000 to CNY 10,000 or CNY 10,000 plus, we experience pressure. Today, we have 3 product models at low end. So Xiaomi series and also large foldable series. After a few generation today, word of mouth is getting better and better. Every year, the model launch is definitely the best one in the market.

Every year, sales volume grew. I have not much worry about it. So for the small foldable model, it is very successful. So my preliminary projection is for CNY 6,000 to CNY 8,000 price range, we have found the methods. For the CNY 10,000 price range, we need to work harder. Our product is selling okay, but then at this price range, there is still a gap that we need to cross or we need to fill. And at high price range, if you ask me this question, I am so worried, but this year, I am confident in the price range, CNY 6,000 to CNY 8,000. So I will focus more to work hard on CNY 10,000 price range.

And with our EV, I think it will support our smartphone business as well. This efficiency and effectiveness has just started.

[Operator]

Next question is from of Huang Yayuan of Citic.

[Yayuan Huang, analyst]

Mr. Lu, Alain, looking at your financial statements, you have 3 curves which showed strong performance. Congratulations to your excellent results. I have 2 questions. First, about vehicles. Mr. Lu just emphasized that in the second half of the year, you have the Smart EV strategy and delivery is important. Apart from your vehicle product line ramping up, what are some of the factors that can lead to increase in delivery? And would that be a further increase in demand for after sales service? How are you going to face up to that?

And then for smart production, you said that you will build a smart factory for smartphone. And this also covers vehicle manufacturing. Under your assessment, in relation to smart manufacturing and smart factory. What will be the impact according to your assessment? IoT business, and also your top sellers in IoT, they have achieved explosive growth. Scale is rising. For these big categories and products, are you going to go for a smart production of these products?

[Weibing Lu, executive]

Sometime ago, basically, we focused on our production line for our EV plant. First, we plan to produce 70,000 to 80,000 units. And then now we need to have 2 ships. We have to increase manpower and enhance our production capacity. So that is what we need to do for after sales. Right now, it's still okay. We saw the challenge. In each delivery period, we have to consider after sales service. And then in terms of selling network and also places with weak coverage, we have a third-party arrangement and licensing.

Then basically, we're able to ensure customer experience realization. So so far, in terms of after sales service, we don't see any major dissatisfaction of our customers and users. And then in relation to Smart Factory, for a certain category, do we need a smart factory? It all depends on weather. There is the right environment. If there is, then we can do it.

Otherwise, for some categories, if the focus is on assembly or if there are difficulties -- if it is only assembly, then there isn't much added value. So it is not worthwhile for us to do it. So it depends on a particular category. So for smartphones, in the past, we adopted EMS model. In the future, why do we want the ET arrangement? That's because we are moving towards premium, premiumization, third-party manufacturing and also the cooperation or interaction with quality. That's the reason why we need our Smart Factory. Then we can empower our working partners. Our future assessment is for refrigerators, air conditioners and washing machines, the value added is going to be very high. For other categories, value add may not be too high, then we won't do it. for EMS, what is the relationship with it.

Our target is around 20% production capacity that will be built by ourselves. 80% plus capacity will be handed over to our working partners. However, for our working partners' future production, while there must be complete interface with our own information platform, there should be end-to-end management and control to ensure product delivery and also material precision. Xiaomi has to master our core production capabilities and our management and control. We only work on 10% to 15%. The rest will be handed over to our working partner. I don't know whether I have made my point clearly.

[Alain Lam, executive]

Because of time, we will conclude our call here. Thank you for your participation. I hope you will continue to support Xiaomi Group. Thank you. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]