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Edited Transcript of HMI.N earnings conference call or presentation 12-Nov-19 12:30pm GMT

Q3 2019 Huami Corp Earnings Call

Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Huami Corp earnings conference call or presentation Tuesday, November 12, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Cui

Huami Corporation - CFO

* Mike Yan Yeung

Huami Corporation - COO

* Wang Huang

Huami Corporation - Founder, Chairman & CEO

* Zhang Grace Yujia

Huami Corporation - Director of IR

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Conference Call Participants

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* Ho Fung Cheung

Crédit Suisse AG, Research Division - Associate

* Jing Sun

China Renaissance Securities (US) Inc., Research Division - Analyst

* Meng Cao

Industrial Securities (HK) Financial Holdings Limited, Research Division - Research Analyst

* Michelle Zhang

China Renaissance Securities (US) Inc., Research Division - HK Analyst

* Robert W. Cowell

86Research Limited - Analyst

* Xudong Chen

China International Capital Corporation Limited, Research Division - Associate

* Yu Jang Lai

Citigroup Inc, Research Division - Director & Analyst

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Presentation

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Operator [1]

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Hello, ladies and gentlemen. Thank you for standing by for Huami Corporation's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded. I will now turn the call over to your host, Ms. Grace Zhang, Director of Investor Relations for the company. Please go ahead, Grace.

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Zhang Grace Yujia, Huami Corporation - Director of IR [2]

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Hello, everyone, and welcome to Huami Corporation's Third Quarter 2019 Earnings Conference Call. The company's financial and operating results were issued in a press release through our newswire services earlier today and are posted online. You can also view the earnings press release and slides to which we will refer on the call by visiting the IR section of the company's website at www.huami.com/investor.

Participating in today's call are Mr. Huang Wang, our Chairman of the Board of Directors and Chief Executive Officer; and Mr. David Cui, our Chief Financial Officer. The company's management will begin with prepared remarks, and the call will conclude with a Q&A session. Mr. Mike Yeung, our Chief Operating Officer, will join us for the Q&A session.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the company's annual report on Form 20-F for the fiscal year ended December 31, 2018, and other filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Please also note that Huami's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Huami's press release contains reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to our CEO, Mr. Huang Wang. Please go ahead.

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Wang Huang, Huami Corporation - Founder, Chairman & CEO [3]

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Hello, everyone. Thank you for joining our earnings conference call today.

In the third quarter, we achieved outstanding top line and bottom line growth driven by persistent development and execution of our strategic initiatives, which focus on product diversification, brand elevation and international expansion. Our third quarter revenue was RMB 1.86 billion, representing a 73.3% year-over-year increase.

Our revenue performance was the result of strong sales from both the Mi Band 4 and now our newly released Amazfit products as both brand categories become increasingly recognized and desired by global customers. In the third quarter, we continue to expand and diversify our Amazfit product line with the goal of targeting new customer segments and offering additional applications of usage.

Following our release of multiple smart wearable products in the second quarter, we recently launched the Amazfit GTS and the Amazfit Stratos 3, the latter of which is an updated model of the professional sports watch product line, targeting sports enthusiasts with comprehensive sports-monitoring functionalities. We also introduced the ultra-modern Amazfit X, a new concept product with a prominent curved touchscreen, shaped like a crescent moon, which is slated for release in 2020.

Turning back to sales. Our international shipments continue to climb as our focus on expanding brand recognition globally continues to bear positive results. In September, we successfully held our first international product launch event at IFA 2019 in Berlin, Germany. We also received numerous global product design awards. In general, we view our overseas marketing campaigns as an essential strategy for our growth and brand promotion. And in light of our success thus far in driving sales, more overseas product launches are being developed and scheduled in the future.

The successful sales achievements in the just past Double Eleven e-commerce festival also demonstrated our strong domestic market strategy and intentions. This year, Amazfit product sales reached last year's Double Eleven whole-day sales level in just 1 hour and Mi Band 4 sales reached 350,000 units in only 10 hours.

In addition, we ranked #1 in sales revenue as well as volume on both JD and Tmall platforms in the smart watch market segment with retail price under RMB 1,000 as we have completed our product portfolio in this market segment. With a fast-growing market as well as our effective strategies lying ahead, we have great confidence in future product sales, both at home and abroad.

Furthermore, in the third quarter, we leveraged our expertise in smart wearable hardware and big data analytics to automize algorithms for our cloud-based health care services. At the 2 -- at the 2019 Asia Pacific Heart Rhythm Society, Dr. Erdong Chen from the Peking University First Hospital introduced the hospital's research on the cardio health monitoring by Huami smart wearables. The research indicates that the accuracy of detecting atrial fibrillation through ECG and PPG using smart wearables has reached 94.76% and 93.27%, respectively. This demonstrated that people can manage their cardio health both effectively and remotely through the use of smart wearable devices.

In the meantime, we are continuing to improve our users' experience, especially in the specific health care-related scenarios. We recently launched fall detection in some Amazfit products, which when activated, will automatically alert the user by vibrating and will also send an alert message to the preconfiguration emergency contact.

We also introduced brand-new health care VIP services, which allows users of our smart wearable products to have tools such as ECG reading and analysis, abnormal cardio notification alerts, quarterly health reports and numerous other tools as part of the various premium service packages. We expect services and content to complement our core revenue stream from smart wearable product sales and become an increasingly important component of and contributor to our revenue model and results.

Looking ahead, our plan is to keep investing in and improving our R&D capabilities as well as seeking additional strategic partnerships. In addition, as always, we will continue innovating with our current close partners, Xiaomi and Timex Group. Our long-term plans with Xiaomi and the popular Mi Band product line remain unchanged. We look forward to developing and producing future generations of the Mi Band, including variations targeting different market segments and customer profiles.

In the meantime, we are also collaborating closely with Timex on product development. We plan to launch multiple product lines with Timex in the U.S. in early year 2020. With experts in our self-developed AI chip, Huangshan-1, our smart wearable product and cloud-based services, we strive to provide users a better experience in both sports and health care in order to improve their daily smart lives.

Thank you again for joining today. I will now turn the call over to our CFO, David Cui.

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David Cui, Huami Corporation - CFO [4]

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Thank you, Huang. We are very pleased with our robust financial results in the third quarter. Revenues grew 73.3% year-over-year. And total shipment reached 13.7 million units, up 67.1% from the same period last year. These results were primarily driven by the rising global demand for both Mi Band 4 and our newly launched Amazfit products.

In the meantime, our first 9 months revenue and shipments have already exceeded 2018's whole year performance. Along with revenue expansion, our operating efficiency also improved in the quarter with operating expense as a percentage of revenue at 13.5%, declining 4.3 and 1.4 percentage points, respectively, from the second quarter 2019 and the third quarter last year despite our increase in investment in R&D and brand equity during the quarter. These combined financial and operational improvements, coupled with strong revenue growth, led to bottom line year-over-year growth of 78.7%.

As we further diversify our product lines, strengthen our service offerings, form and solidify strategic alliance and grow our global footprint, we are confident in our ability to continue delivering healthy financial and operating performance going forward.

Mindful of the length of this call, I will highlight the key financial measures for the third quarter 2019 and encourage you to refer to our earnings press release for further details regarding our financial results. Now here are some of the highlights of our strong third quarter. All amounts are expressed in RMB unless otherwise stated.

As previously mentioned, revenues in the third quarter 2019 increased by 73.3% to CNY 1.86 billion from CNY 1.07 billion for the third quarter of 2018. Gross profit increased significantly by 63.8% to CNY 470 million from CNY 287 million in the third quarter 2018. Our gross margin was 25.2% compared with 26.7% a year ago. The decrease was primarily a result of an increasing proportion of Mi Band 4 in our revenue mix driven by its continued sales momentum since its second quarter product launch.

Moving to expenses. Total R&D expenses increased by 56.5% to CNY 251 million from CNY 160 million for the third quarter 2018, reflecting our strategy of investing in R&D, branding and marketing to enhance long-term returns. Research and development expenses increased by 107.7% to CNY 125 million from CNY 60 million for the third quarter last year primarily due to an increase in our personnel-related expenses and a rise in costs associated with the testing of new pipeline products.

General and administrative expenses in the third quarter remained essentially flat at CNY 70 million compared with CNY 68 million for the third quarter 2018. Our selling and marketing expenses increased by 75.1% to CNY 57 million from CNY 32 million for the third quarter last year as we increased advertising and promotional expenses for our new Amazfit products. We also expanded our sales and marketing team to boost our sales efforts globally.

Our income tax -- our income before income tax was CNY 228 million compared with CNY 129 million for the third quarter of 2018. The GAAP and the GAAP net income attributable to the company increased to CNY 203 million compared with CNY 114 million for the third quarter of 2018. Net income attributable to ordinary shareholders of the company also increased to CNY 203 million. Basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was RMB 3.31 and RMB 3.15, respectively. As a reminder, each ADS represents 4 Class A ordinary shares.

Next, for non-GAAP measures, adjusted net income attributable to Huami Corporation increased to CNY 210 million from CNY 134 million for Q3 2018. Finally, adjusted basic and diluted net income per ADS attributable to ordinary shareholders of Huami Corporation was CNY 3.41 and CNY 3.25, respectively. Relating to cash, as of September 30, 2019, the company had cash and cash equivalents of CNY 1.72 billion compared with CNY 1.44 billion at the end of 2018.

And now to our outlook. Looking ahead to the fourth quarter of 2019, the management currently expects net revenues to be between CNY 1.93 billion and CNY 1.95 billion, which would represent an increase of approximately 57.6% to 59.2% from CNY 1.2 billion for the fourth quarter of 2018.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question today comes from Clive Cheung of Crédit Suisse.

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Ho Fung Cheung, Crédit Suisse AG, Research Division - Associate [2]

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My, I think, big question is on the Xiaomi smart watch competition. Previously, we believed that Xiaomi smart watch will be targeted at a different segment compared to our Amazfit products, but the price range seems pretty similar on some of the higher-end ranges for Amazfit products. Could you share some insights on the view on this? And if there is any risk on -- for Amazfit on Xiaomi channels?

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Mike Yan Yeung, Huami Corporation - COO [3]

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Yes. This is Mike, Mike Yeung. And so basically, there are differences in terms of the feature set. The Xiaomi smart watch, for example, they have the calling function...

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Wang Huang, Huami Corporation - Founder, Chairman & CEO [4]

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4G.

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Mike Yan Yeung, Huami Corporation - COO [5]

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4G. And basically, that is more tailored to scenarios where you might not have the phone with you. And currently, that scenario is quite new to many users.

For us, we mostly target the smart watches. We have a lot of sports feature as well as a lot of health care feature and also in terms of fashion, in terms of elegance. Those are the features we focus on, sports feature, health care feature as well as looks and design and fashion. So whereas the -- again, the Xiaomi smart watch is more focused on communication. So basically, it's a slightly different -- it's different featured sets targeting different people and different scenarios. Does that answer your question?

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Ho Fung Cheung, Crédit Suisse AG, Research Division - Associate [6]

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Yes. And also -- so I think Amazfit obviously have products sold through Xiaomi channels. Is there any risk or impact to that?

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David Cui, Huami Corporation - CFO [7]

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To directly answer your question, for Amazfit products, our own brand products, majority of them did not go through Xiaomi's channel. We have successfully built our own channel, and we are still expanding our distribution channel right now.

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Operator [8]

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The next question comes from Arthur Lai of Citi.

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Yu Jang Lai, Citigroup Inc, Research Division - Director & Analyst [9]

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Congrats for the good results for quarter 3. I have 2 questions. So number one is a housekeeping question, number two is a new product question. So I would like to start from the number one. So you mentioned that this quarter, we shipped 13.7 million total products. Can you give us some breakdown of the Xiaomi Band product and also your own brand product? Or the other ODM product as well? And also, can you also comment about the R&D expense? You mentioned that you -- the R&D expense actually increased 107%. This is quite amazing. And can you also elaborate what kinds of product you are working on?

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David Cui, Huami Corporation - CFO [10]

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Okay, Arthur. For the breakdown of our total shipments. As we announced about 20 days ago, in this quarter, we were -- very successfully shipped close to 1 -- about 1 million Amazfit products. And that's the total shipments in only 1 quarter. That's historical. And the rest of the shipments are Xiaomi's products -- Xiaomi's product.

And for your R&D breakdown, what I can point out is the OpEx in total as a percentage of our total revenue actually decreased as compared to the same quarter in 2018. And we were -- very successfully managed our G&A expense and to compensate that, the increase in our R&D investment and also in our channel distribution, channel-building costs. So as a result of this, our net margin, if you look at our net margin year-to-year, it's actually slightly increased.

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Yu Jang Lai, Citigroup Inc, Research Division - Director & Analyst [11]

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Okay. Yes. Actually, don't get us wrong. Actually, we are not trying to beat the company because you're adding R&D. Actually, we are happy to see you invest for the future. I just want to get some color about those product road map because you mentioned actually more forward looking. And if you look at your -- such as U.S. leading brands, they actually invest in a wearable product a lot such as TWS headsets. So I'm also wondering, do you have a plan to expand your product line to all of the smart band and also smart watch?

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David Cui, Huami Corporation - CFO [12]

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I can answer first and then if Huang Wang or Mike Yeung can add on. We do have a pipeline of new products for next year, 2020. And that does include TWS. That's in our radar. But majority of the products are still wearables, and that does include the TWS. Does that answer your question?

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Yu Jang Lai, Citigroup Inc, Research Division - Director & Analyst [13]

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Yes. Yes.

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Operator [14]

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The next question today comes from Meng Cao of Industrial Securities.

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Meng Cao, Industrial Securities (HK) Financial Holdings Limited, Research Division - Research Analyst [15]

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This is Meng Cao from Industrial Securities. So my question is that what's your strategy to promote Huami's Amazfit brand? And could you give us some color on -- necessarily on the marketing expense in 2020?

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David Cui, Huami Corporation - CFO [16]

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Yes. So for our Amazfit brand strategy, we will definitely continue to invest and grow our brand, especially internationally. We are seeing very good adoption of our product right now. And we will do more product launches internationally, as we mentioned earlier in the call. And for example, in upcoming CES in January, we will have our first CES booth presence and promote our products. And IFA last year -- this year was also another example. So we'll continue to do more major international product launches to promote our brand.

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Operator [17]

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The next question comes from Michelle Zhang of China Renaissance.

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Michelle Zhang, China Renaissance Securities (US) Inc., Research Division - HK Analyst [18]

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I would want to know that because our cooperation, the contract with Xiaomi, will end in October next year. So we want to know, like, what is our current relationship with Xiaomi.

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David Cui, Huami Corporation - CFO [19]

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Yes. Yes. So currently right now, again, we are continuing our partnership as before. We are already working on Mi Band 5, and we will -- we expect to renew the -- our partnership agreement with Xiaomi. We don't see -- right now, we don't see any change in that. So -- and again, we expect to renew the agreement sometime early next year.

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Operator [20]

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The next question comes from Xudong Chen of CICC.

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Xudong Chen, China International Capital Corporation Limited, Research Division - Associate [21]

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Congratulation for the robust results. As we all know, application of health care or medical use of smart watch and other wearable devices is very hot recently. My question is will Huami consider to go into those fields? Are there any plans or recent achievement to share with?

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David Cui, Huami Corporation - CFO [22]

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Actually, our mission actually is to explore the opportunities in the health care field. So this is maybe also -- maybe it's also our strength area. So it's worth to mention that it is Huami who actually launched the first ECG commercial wearables even ahead of other -- or famous competitors. So we -- our R&D lab are working on other advanced medical fields such as blood oxygen and blood pressure. And we are working on those and trying to get the technology approved by China FDA and eventually approved by the U.S. FDA. So we should expect future products in those areas.

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Operator [23]

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The next question comes from Robert Cowell of 86Research.

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Robert W. Cowell, 86Research Limited - Analyst [24]

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My question is about our priorities for the use of cash. It seems there's a pretty significant cash balance at this point.

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David Cui, Huami Corporation - CFO [25]

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Yes. Robert, we are accumulating a lot of cash so far, but we are looking at strategic opportunities, investment opportunities, merger-acquisition opportunities globally. And we will use the cash in a good way.

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Operator [26]

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The next question comes from [Edward Chen] of [Hitomi International].

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Unidentified Analyst, [27]

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Congrats for the good results. I just want to follow up on the health care services that we're focusing on. So I wonder if management could give us a bit more color on sort of what will the business model look like in terms of the services that we'll launch related to health care.

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David Cui, Huami Corporation - CFO [28]

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Yes. For health care services, actually, there are quite different -- several different kind of revenue streams, potential revenue streams. One is, as we mentioned before, working with insurance companies and either do a licensing of our algorithm or -- and data sharing with the users' approval, and on our leads generation. Savings, we can potentially get a share of the savings in claim costs. So those are various ways that we could work with insurance companies to monetize off of the -- our health care features and data.

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Operator [29]

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The next question comes from Jason Sun of China Renaissance.

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Jing Sun, China Renaissance Securities (US) Inc., Research Division - Analyst [30]

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I have one question. Actually, the market is speculating that Xiaomi will actually launch several -- a bunch of products in December, including the bands, very low-end bands and some high-end and middle-tier watches. So how do you think this will impact the relationship or your product shipment in the first half of next year?

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David Cui, Huami Corporation - CFO [31]

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Well, thank you, Jason. So as Mr. Wang mentioned in his earlier speech that our long-term plans with Xiaomi and the popular Mi Band product line, this will remain unchanged. So we are looking forward to developing and producing future generations of the Mi Band for Xiaomi. So to be specific that we will launch Mi Band 5 in next year for Xiaomi. This is a strong indicator that we will continue to work with Xiaomi and continue the strong relationship with Xiaomi.

In terms of what you mentioned, that Xiaomi may launch multiple future products, so we would consider that it's just one more player on the market. And as of this moment, that our total shipments still remains the top 5 or 6 globally. And we -- our products are unique in terms of features, in terms of the designs. So we are confident that we can develop our business independently and develop our technology and the products associated with the technology for the global consumers.

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Mike Yan Yeung, Huami Corporation - COO [32]

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And Jason, just to add more color is that, for example, in this just past Singles Day, our -- we're still totaling out the -- our sales figures. But basically, we have seen a very strong Singles Day sale for our Amazfit brand products even though the Xiaomi smart watch was also for sale. So we've seen again very strong sales for this past Double Eleven, probably -- as a matter of fact, strongest ever for our company, for our brand. So basically right now, again, we don't really see that much impact with Xiaomi smart watch.

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Wang Huang, Huami Corporation - Founder, Chairman & CEO [33]

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Yes. Actually, we compare this without Xiaomi. We -- in a single day (sic) [Singles Day], we're now the #1 in the under the 100 -- RMB 1,000 price segment. We beat Huawei. And yes, I think in the future, we will be better in -- above the RMB 1,000 price range.

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Jing Sun, China Renaissance Securities (US) Inc., Research Division - Analyst [34]

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Okay. So how do you think -- do you think the low-priced band might maybe -- priced at CNY 69 will cannibalize some of the user base from the, like, over RMB 100 segmentation?

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David Cui, Huami Corporation - CFO [35]

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Well, the strongest growth in future based on independent market research is coming from the smart watches. So that's focus -- our future focus area with advanced health care features. And in terms of the band, that will be the existing market. So far, you can see our performance, product performance. You can see the last 2 generations, Mi Band 3 and Mi Band 4, and how we grew that. So we are confident that Mi Band 5 will be another success. And we believe that the lower-priced RMB 69 price band will be no comparison with our band products.

As a matter of fact, the band sounds cheap, but it does involve a lot of technology, involves a lot of integration of our R&D, integration of our production and supply chain management. And it requires expertise. So we are confident that the band shipments in future generations will not that much impact.

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Operator [36]

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As there are no further questions, now I'd like to turn the call back over to the company for any closing remarks.

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Zhang Grace Yujia, Huami Corporation - Director of IR [37]

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Thank you, once again, for joining us today. If you have further questions, please feel free to contact Huami's Investor Relations department through the contact information provided on our website or the Pearson group, the company's Investor Relations consultant. This concludes this conference call. You may now disconnect your lines. Thank you.