Is there a misunderstanding in the market? Morgan Stanley: In previous memory price increase cycles, Xiaomi's profit margin "actually improved"

As the market worries that rising memory prices will put pressure on the gross margins of smartphones, Morgan Stanley's latest research report overturns this common perception.

According to the Wind Trading Desk, Morgan Stanley pointed out in its latest research report that the surge in upstream storage chip costs, through specific pass-through mechanisms, may actually become an opportunity for terminal manufacturers to improve their profit margins.

Morgan Stanley found through a correlation analysis of historical data that during the three price increase cycles of 2016-17, 2019-21, and 2022-23, Xiaomi's smartphone gross margins actually improved.

This counterintuitive finding suggests that the market may underestimate the cost pass-through ability of smartphone manufacturers and Xiaomi's profit resilience. Morgan Stanley maintained its "overweight" rating on Xiaomi Corporation and a target price of HKD 62, which has a 50% upside potential from last Friday's closing price of HKD 41.

Counterintuitive Historical Correlation

Currently, there is a prevalent linear concern logic in the market: as memory costs rise, smartphone manufacturers' gross margins are bound to face downward pressure. This seemingly reasonable inference dominates the current "consensus expectation." However, after a deep analysis of the historical correlation between Xiaomi's smartphone gross margins and DRAM price fluctuations, Morgan Stanley reached a completely opposite conclusion.

The report pointed out that by reviewing the cycles of "2016-17, 2019-21, and 2022-23," the data clearly shows a non-consensus finding: "When DRAM prices show an upward curve, Xiaomi's smartphone gross margins actually improve." This indicates that historical experience does not support the simple formula of "cost increase = profit decrease."

Cost Pass-Through, Time Lag Dividend, and High-End Moat

Why does this divergence occur? Morgan Stanley believes the core lies in the effectiveness of the cost transmission mechanism and Xiaomi's own product structure optimization. There are three key logics behind this phenomenon:

First, the cost pass-through mechanism is effective. Research shows that smartphone manufacturers can restore gross margin levels during cycles. When prices of key components like memory rise significantly, it drives the entire industry to implement substantial product price increases, thereby passing the cost pressure onto end consumers.

Second, there is a "time lag dividend." When cost inflation drives prices up, once the inflation trend reverses, manufacturers will face a favorable situation of "high prices, low costs," triggering a rebound in gross margins.

Third, the long-term drive of product structure upgrades. Xiaomi's ongoing high-end strategy is a long-term positive driver for gross margin improvement. By improving its product mix, Xiaomi is gradually moving away from a model that solely relies on low-end models for volume, thereby enhancing its defensive capability during such cost fluctuation cycles.

Super Cycle or Short Cycle Will Determine Different Outcomes

Despite historical data favoring the bulls, Morgan Stanley has not overlooked the risks. Morgan Stanley differentiated future scenarios in its report:

If memory costs rise following a supercycle pattern, meaning the price increase lasts for a longer duration, smartphone gross margins are expected to face sustained downward pressure. In this case, cost pass-through may lag, and manufacturers will endure margin compression for an extended period.

However, if the cycle reverses quickly, smartphone gross margins may also enjoy a rapid recovery. Based on historical experience, once DRAM prices peak and decline, the improvement in gross margins for manufacturers like Xiaomi may exceed market expectations