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Nikkei Markets

Xiaomi pins hopes on 5G for smartphone demand revival

Company plans to keep spending on R&D amid trade spat, roll out new IoT products

Xiaomi said its worldwide sales of smartphones grew marginally to 32.1 million in the second quarter from 32 million a year ago.   © Reuters

HONG KONG (Nikkei Markets) -- Chinese handset maker Xiaomi on Tuesday signaled it's focused on steady operations and stable growth while it waits on the commercial rollout of next-generation cellular technology to spur sagging demand for smartphones in the mainland.

The Beijing-based company is betting that commercialization of 5G technology could lead to a replacement cycle for smartphones and boost demand in world's largest market for the devices. The company, which has already launched its first 5G handset in Europe, said it is well prepared for the occasion and will launch another 5G handset for the Chinese market in the second half of this year.

"We are at the eve of explosive growth that will be brought by 5G and we are now in the period of a series of brand adjustments," Chief Financial Officer Chew Shou Zi told reporters in a conference call after the company reported second-quarter results. "We have been focusing on a steady operations strategy."

China had in June given the go-ahead for the deployment of commercial 5G services in the country, months ahead of expectations. The networks are expected to bring internet speeds up to 100 times faster than those on 4G generation networks.

Worldwide shipments of smartphones shrank 2.3% in the second quarter as consumers continued to wait for phones suited to next-generation cellular networks, while shipments in China fell 6%, according to data from International Data Corp.

Sales of smartphones in China have been under pressure as a slowing economy and saturation in the penetration of 4G networks prolonged replacement cycles for new phones in the country.

Xiaomi said its worldwide sales of smartphones grew marginally to 32.1 million in the second quarter from 32 million a year ago.

The company has been facing stiff competition in the handsets market from Huawei, the Chinese telecommunications-equipment maker that has been embroiled in the ongoing Sino-American trade war.

Earlier on Tuesday, Xiaomi reported an 87% slump in second-quarter profit due to a one-off gain in the year-ago period on fair value changes of some of its convertible preferred shares.

Net profit for the quarter ended in June fell to 1.95 billion yuan ($276.6 million) from 14.65 billion yuan a year ago, although its gross profit margin improved by 1.5 points from a year ago to 14%, aided by a 15% increase in revenue to 51.95 billion yuan.

Revenue from the smartphone business grew 5% to 32 billion yuan. Sales of smartphones accounted for 62% of Xiaomi's revenue, while internet-of-things devices brought in 29% and internet services made up 8.8%.

Xiaomi clocked a 4.9% increase in the average selling prices as it sold more expensive models. Average selling prices in China grew more than 13%, while in international markets, they rose 6.7%.

Chew said that the company was "aware" of trade spats among major global economies, but will continue to invest in research-and-development to roll out "killer" IoT products.

Xiaomi's smartphone shipments in China fell 19% in the second quarter, according to IDC. It held a 12% share of the market and ranked fourth, behind Huawei, Vivo and Oppo, the data showed. Xiaomi didn't share its sales for China in its statement.

The company's fortunes have been tied to the strong performance of its products in markets such as India, where it ranks first in phone handsets. Xiaomi has also been expanding steadily in markets in Europe, where it made a splash with launches last year. International sales were nearly 42% of Xiaomi's overall revenue.

Revenue at its internet business grew 16% during the quarter. Xiaomi has been relying on its smartphone sales to drive growth in this business as customers for its phones use apps and other services, contributing new revenue streams including advertising and payments services.

Xiaomi is also looking at a foray in banking. Insight Fintech, its joint venture with financial services company AMTD, received a virtual banking license from the Hong Kong Monetary Authority in May. The venture, along with others, was expected to launch services within nine months, the HKMA said at the time.

Xiaomi shares, which listed in Hong Kong last year, rose 3.2% to HK$9.43 on Tuesday, while the city's benchmark Hang Seng Index slipped 0.2% to 26,231.54. At its current price, Xiaomi's shares have lost more than 44% of its value from its IPO price of HK$17 each.

-- Benny Kung & Dhanya Ann Thoppil

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