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Companies

China's Xiaomi targets high-end phone market amid robust sales

Phone-maker sets sight on Western Europe

Xiaomi was able to raise the average retail price of its phones by 25% in China.   © Reuters

HONG KONG -- Chinese budget phone maker Xiaomi is going upscale with the launch of high-end models as it accelerates expansion into Western Europe.

Announcing its earnings for the first time as a public company, Xiaomi on Wednesday posted a net profit of 14.91 billion yuan ($2.18 billion) in the April-June quarter, compared with a loss of 11.34 billion yuan a year earlier. This was largely due to a one-off valuation gain related to its $4.7 billion initial public offering in Hong Kong in July.

Xiaomi's sales rose 43.9% in the quarter to 32 million handsets, breaking through the slowing momentum in the overall global smartphone market. In its biggest market, China, Xiaomi was able to raise the average retail phone prices by 25% to 952.3 yuan, thanks to robust sales of its premium phone model Mi 8, which is priced above 2,000 yuan.

"In China, our strategic focus for 2018 is to strengthen our status in the high-end smartphone market," Chew Shouzi, chief financial officer, told reporters during a conference call on Wednesday.

This move contrasts with Xiaomi's strategy of selling budget smartphones, which enabled it to take China, India and other developing markets by storm in just a few years. As assurance that it would continue to sell value-for-money products, Xiaomi founder Lei Jun put an indefinite cap of 5% on the company's hardware net profit margin ahead of the company's IPO.

Chew said the company is making premium phones to meet changing tastes in China where consumers are now striving for more expensive goods. He said that such a change in consumer trends will lend support to the company's business in the coming year.

Xiaomi is making similar moves overseas. It launched another brand, Poco, in India earlier this month. On Wednesday, Poco unveiled a model exclusive to India, Poco F1, priced between 20,999 rupees ($300) and Rs 28,999. The device features a 6.18-inch high-definition screen, Qualcomm chip Snapdragon 845 SoC and dual cameras backed by artificial intelligence technology.

This model is expected to undercut premium phones made by Samsung Electronics and Huawei Technologies.

Xiaomi and Samsung have been locked in fierce competition in India, the world's second largest smartphone market behind China. Xiaomi overtook Samsung as the country's largest seller of smartphones in March, but the South Korean company regained the crown in the second quarter, thanks to a new range of handsets, according to data from Counterpoint Research.

Besides launching high-end models in developing countries, Xiaomi also plans to prioritize expansion in Western Europe, Chew said.

Its Mi stores -- which resemble Apple Stores -- are already operating in Italy, France and Spain. In the second quarter, smartphone shipments to Western Europe surged 2,700% year-on-year, according to its results report.

"Western Europe is a priority new market... We started from Spain, but now we have expanded to Italy and France, and potentially to more new markets over the course of the next six months," Chew said.

Founded in 2010, Xiaomi is the world's fourth-largest smartphone maker after Apple, Huawei and Samsung in terms of exports in the second quarter of 2018, according to research company IDC. The company also manufactures and sells other smart devices and lifestyle products, from rice cookers and air purifiers to sunglasses and backpacks, on the internet. It also earns revenue from services and advertisements on its mobile and internet platforms.

The company's smaller but faster growing smart TV business also generated strong results, with a 350% rise in sales volume and grabbing the top market share in China. Thanks to increasing advertising, internet services revenue grew 63.6%. Overall company revenue rose 68.3% to 45.24 billion yuan, with 36.3% of that coming from overseas.

Xiaomi's results for the quarter were distorted by its IPO. Due to the offering, the company booked a 22.5 billion yuan valuation gain on its preferred shares, which were all converted into Class B common stock after the offering.

A separate one-time loss of 9.9 billion yuan for share-based compensation costs meant Xiaomi reported an operating loss of 7.59 billion yuan for the quarter, after making a profit at the operating level last quarter.

However, Xiaomi has had a bumpy start on the Hong Kong stock market. Its stock dipped below its offer price on its first trading day, but surged as much as 30% the following week, before erasing almost all its gains by Wednesday closing at $17.68.

Zach Coleman contributed to this story.

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