In the turbulent year of 2023 in the smartphone market, &#34;African King&#34; TRANSSION (688036.SH) emerged as the strongest dark horse in the industry.
On February 22, TRANSSION disclosed its 2023 performance report, revealing that it achieved annual revenue of 62.392 billion yuan, a year-on-year increase of 33.9%; and a net profit of 5.503 billion yuan, a year-on-year increase of 121.55%. Both revenue and net profit reached historic highs.
In a smartphone market facing a downturn in 2023, with global smartphone shipments hitting a record low in a decade, dropping by 3.2% to 1.17 billion units year-on-year, TRANSSION seemed like an &#34;anomaly&#34;. Since breaking into the global top 5 in shipments in the second quarter of last year, it surpassed OPPO in the fourth quarter to rank fourth.
Among the top 5 brands in shipments in 2023, TRANSSION and Apple were the only two brands experiencing growth, with year-on-year increases of 30.8% and 3.7% respectively.
TradeWind (ID: TradeWind) learned from sources close to TRANSSION that the inventory clearance of TRANSSION has been basically completed, and the growth rate of its smartphones in 2024 is expected to be above 15%.
TRANSSION has long been referred to as the &#34;African King&#34; by the public. According to Chen Haijin, an analyst at Debon Securities, TRANSSION holds a market share of nearly 50% in target countries such as Ethiopia and Nigeria in Africa.
What is rarely mentioned is that TRANSSION is replicating its &#34;African experience&#34; in emerging markets outside Africa, such as Southeast Asia and Latin America.
In the first half of 2023, TRANSSION ranked first in the smartphone market in Pakistan and Bangladesh, and sixth in the Indian market.
As Moore's Law is declared &#34;suspended&#34; and new forms of products such as foldable screens have yet to make a breakthrough, global smartphone manufacturers are finding it increasingly challenging to innovate in the high-end market.
It is foreseeable that more and more brands will see the potential of emerging markets, as giants like Samsung and Xiaomi (1810.HK) shift more attention and budget to emerging &#34;sinking markets&#34;.
For TRANSSION, which focuses on low-end devices and has relatively weaker R&amp;D capabilities, this may be the real test.
<h2>The King of Emerging Markets</h2>
Before the turning point in demand in the smartphone market in the second quarter of 2023, TRANSSION had already emerged from the negative growth quagmire.
In the first three quarters of 2023, TRANSSION achieved revenue of 43.022 billion yuan, a year-on-year increase of 19.40%; and a net profit of 3.884 billion yuan, a year-on-year increase of 72.01%.
During the same period, Xiaomi's revenue fell by 7.44% year-on-year, only returning to growth in the third quarter; while Apple (AAPL.NASDAQ) saw revenue decline for four consecutive fiscal quarters ending on September 30, 2023, setting the longest downward trend since 2001.
The reason for the industry's mixed performance lies in the distinct differences between TRANSSION's home market and other major players.
TRANSSION's stronghold is in the less affluent African market, where affordability rather than brand name appeals more to consumers. According to World Bank statistics, the per capita GDP in sub-Saharan Africa was around $1,487 in 2020, roughly equivalent to China's level in 2004.
In 2007, TRANSSION's founder, Zhu Zhaojiang, noticed the incompatibility and high charges among local African operators, leading to the introduction of dual-SIM standby and even &#34;four-SIM standby&#34; feature phones, which opened up the African market for TRANSSION.
Subsequently, with larger battery capacities, &#34;beauty mode&#34; camera functions, and higher cost performance, TRANSSION's phones solidified their position as the &#34;African King.&#34; By 2022, TRANSSION had been the top-selling brand in the African market for four consecutive years.
Amid global inflation and tightening demand, TRANSSION sells at a lower price than its competitors, naturally leading to a quicker recovery. Across Africa and the Middle East, TRANSSION's prices are about half the average selling price of all brands.
The success of the low-price strategy is directly reflected in TRANSSION's performance.
Compared to three years ago, TRANSSION's revenue has nearly doubled, with a compound annual growth rate of 18.19% from 2020 to 2023.
It is evident that more than just the African market supports TRANSSION's steadily rising performance, as it replicates its African market experience in more emerging markets.
During investor communications, TRANSSION's management has stated that in the third quarter of 2023, over 70% of TRANSSION's smartphone revenue came from markets outside Africa.
These emerging markets share a commonality of large populations with a higher proportion of young people, making them more receptive to new technologies like smartphones. For instance, the under-20 population in Africa accounts for as much as 50%, while in India, Bangladesh, and Pakistan, the over-60 population is lower than the global average.
Therefore, compared to the saturated smartphone markets that rely on periodic upgrade cycles for growth, the penetration logic in emerging markets is still unfolding, with consumers showing a stronger demand for smartphones as mobile infrastructure improves.
According to IDC data, the global smartphone market entered a stock market phase in 2016, with shipments starting to decline.
However, smartphone shipments in emerging markets continue to grow steadily. From 2011 to 2018, the compound annual growth rate of smartphone shipments in emerging markets such as Africa, India, and Bangladesh reached 30.81%, far exceeding the global average of 5.7% during the same period. IDC predicts that by 2022, the share of smartphone shipments in emerging markets will reach 70.38%.
Analyst Ge Xingfu from Guohai Securities believes that TRANSSION has reached a good operating state in new markets. In traditional strong markets like Africa, with the possible end of the Fed's interest rate hike cycle, inflation pressures in most African countries have eased. As consumer purchasing power strengthens, suppressed demand for phone upgrades is expected to be released during the interest rate cut cycle in 2024, driving the recovery of its traditional strong markets.
<h2>How to Deal with Competition</h2>
Although it seems that TRANSSION may have crossed the cyclical turning point ahead of its peers, there are still some immediate and long-term concerns.
The first and foremost issue is how TRANSSION will deal with competition in other markets when the dividend in the African market diminishes.
Currently, TRANSSION owns three phone brands: TECNO, Infinix, and Itel. TECNO and Infinix target mid to high-end consumers, while Itel focuses on cost-effectiveness.
With these three brands, TRANSSION covers almost all consumer groups in terms of pricing, ranging from entry-level phones around 500 yuan to high-end models priced at 8,400 yuan.
In recent years, as the proportion of smartphone sales has rapidly increased, the average selling price (ASP) of TRANSSION phones has also been rising.
In 2019, the ASP of TRANSSION phones was only 172 yuan, increasing to 206 yuan, 234 yuan, and 272 yuan in 2020-2022 respectively. According to Counterpoint data, in the third quarter of 2022, the average prices of TECNO and Infinix products increased by 26% and 28% respectively.
Therefore, as a latecomer, TRANSSION will sooner or later face competition from manufacturers like Xiaomi, Samsung, and OPPO.
For example, in 2022, in the world's second-largest smartphone market, India, Chinese manufacturers engaged in a price war, with Xiaomi's smartphone business gross profit margin dropping to only 9% during that period.
This is reflected in TRANSSION's lower gross profit margin in regions outside Africa, with a difference of 11.38 percentage points compared to Africa in 2022.
During performance discussions, the management of TRANSSION also mentioned that the price war in the Indian market is &#34;quite intense,&#34; and the gross profit margin will decrease due to the impact of competitive products.
TradeWind01 contacted TRANSSION to inquire about their strategies to deal with price wars in markets like India, but the call was not connected.
Compared to traditional phone manufacturers, another advantage of TRANSSION is that it not only sells phones but also operates as a semi-software company.
It has established partnerships with Netease to pre-install apps like Netease Cloud Music, Today's Headlines, and TikTok on TRANSSION phones overseas.
For instance, the music app Boomplay, a collaboration between TRANSSION and Netease, has over 68 million monthly active users, with popularity in some countries surpassing Spotify and Apple Music. Additionally, the short video app Vskit competes head-to-head with TikTok in Africa, and the African version of UC Browser, in collaboration with Tencent, has monthly active users exceeding one hundred million.
This means that TRANSSION's powerful software channel capabilities should not be underestimated.
It is worth mentioning that TRANSSION is also increasing its investment in AI.
In May 2023, TRANSSION's TECNO Camon 20 product has been integrated with ChatGPT for text interaction. In the first half of 2023, TRANSSION's semi-annual report mentioned a total planned investment of nearly 100 million yuan in R&amp;D projects related to AI intelligent algorithms, AIGC image generation, and others.
At a time when leading smartphone manufacturers are rumored to &#34;pause the development of foldable screen products,&#34; perhaps AI technology will help increasingly similar smartphone manufacturers barely differentiate themselves.

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