Xiaomi (1810 HK, $28.56, HK$738bn) EV recovery could ease smartphone pressure

Xiaomi reported a weaker-than-expected 1Q26 revenue of RMB99.1bn (-11% YoY/-15% QoQ). Despite group GPM showing resilience at 22% and beating expectations, net profit plummeted to RMB4.7bn (-57% YoY/-28% QoQ), missing consensus of RMB5.4bn, as consumer electronics cyclicality continued to weigh on performance as well as the temporary production halt of EVs.

1). Smartphone: Shifting to premium products to fight persistent pressure. Segment revenue stood at RMB44.3bn (-13% YoY/0% QoQ) below market consensus of RMB44.5bn, accounting for 45% of total revenue. Shipments dropped to 37.7mn units (-19% YoY/ -10% QoQ), driven by a 35% plunge in China, where Xiaomi's market share dropped to 12.6% amid intensified competition from Apple (which recorded a shipment growth of 30% YoY in China). Overseas market shares also slipped to 11.3% with shipments down 12% YoY (compared to a 6% global market contraction). Nevertheless, ASP rose to a record high of RMB1,310 as the company prioritized memory allocation for premium models, lifting its market shares in China of the “above RMB3k” segment to 23.5%. Segment GPM improved 1.8ppt QoQ to 10.1% (beating market expectations), while segment's gross profit contribution rose 6ppt QoQ to 21%.  It is expected that the company will focus on selling more high-end models for better margins.

2). IoT & lifestyle products: Overseas surge mitigates domestic weakness. Segment revenue came in at RMB24.7bn (-24% YoY, 0% QoQ) and the revenue share rose 4ppts QoQ to 25%. The decline mainly stemmed from a high base effect from last year's government subsidies in China, but partially offset by overseas channel expansion, where revenue grew at a double-digit YoY to a record high and accounted for 40% of total IoT revenue. Segment GPM reached 25%, with the segment's gross profit contribution rising QoQ to 28%.

3). Resilient internet services: Segment revenue stood at RMB9.5bn (+4% YoY/ -4% QoQ), accounting for 10% of total revenue. Growth was driven by a 7% YoY increase in advertising revenue to RMB7.1bn, though the pace moderated due to lower smartphone shipments weighing on APP pre-installation income. Value-added services (including game distribution, e-commerce and finance) were flat YoY at RMB2.4bn. Global MIUI MAUs rose 4% YoY to 746mn but declined 1% QoQ. with domestic MAU at a record 196mn and overseas MAU at 550mn (-1% QoQ). ARPU was flat YoY at RMB12.6. Segment GPM edged down slightly to 76.1%, yet its gross profit contribution rose 2ppts QoQ to 33% as the lower total revenue base lifted its relative share.

4). Smart EV and AI/new initiatives: Profit contribution shrink: Segment revenue came in at RMB37.2bn (+7% YoY/ -47% QoQ), with its revenue share falling to 20% from 32% in 4Q25. EV sales stood at 81k units (+6% YoY/ -44% QoQ), primarily due to a two-month halt in production of the older SU7 model. ASP edged down to RMB235k (-1% YoY/ -6% QoQ), pressured by a higher mix of lower-priced models and purchase tax subsidies. Segment GPM fell both YoY and QoQ to 20.1%, with its gross profit contribution dropping to 18%. Consequently, the segment swung to a RMB3.1bn operating loss from a RMB1bn profit in 4Q25.

Profitability Remains Under Pressure: Total GPM stood at a resilient 22%, yet the OPEX ratio edged up to 19% on rising R&D for AI and EV. Core operating profit declined further to RMB3bn (-70% YoY/ -11% QoQ), with core OPM falling to 3%, while net profit margin slipped to 4.8%, dragging net profit to RMB4.7bn.

Business outlook: Mgt maintains its view of an extended memory price hike cycle, with 3Q contract prices still rising. To offset cost pressure, the company will lift ASP via premiumization and new models.  It is expected that near-term price hikes are mainly for maintaining margins, however, a short-term decline in shipment is inevitable, largely due to higher product prices.

Beyond pricing levers, IoT serves as a key structural offset to memory cost pressure on smartphones. Overseas markets, where penetration remains low, offer about twice the addressable market of China. Despite a seasonally soft 1Q26, overseas IoT performed well, highlighting the long-term growth runway.

After a two-month halt of SU7 production, deliveries rebounded sharply in April, with the new SU7 exceeding 30k units monthly. A larger model is scheduled to arrive in 2H. Mgt is confident in the 550k unit annual target. It is also planning to open overseas stores in 2H27, focusing on premium products and developed markets. Scale effects and supply chain savings will offset component inflation to keep EV GPM stable.

For AI, the company's LLM ranks among top global models, with AI expanding to phones and IoT. Token pay-in rate > 30% and overseas tokens accounting for over 50%. Pro and Max versions contribute most of the revenue. However, token plan remains in early data collection and iteration, not yet on a commercial scale.

Our views: 1Q results aligned with our view on consumer electronics cyclicality. Smartphone business remains under pressure, reflecting ongoing sector headwinds. Rising memory costs are expected to put further pressure on near-term shipments. However, the company is shifting its product mix toward premium products.

On IoT, a positive note is that overseas revenue is surpassing 40% of total IoT revenue with double-digit growth. This structural shift should help offset fading domestic subsidies and ease memory cost pressure on smartphones.

The EV segment was the largest drag on profitability in this quarter, primarily due to the company’s voluntary two-month production halt to ramp up the facilities for new model, resulting in a RMB3.1bn operating loss. However, we believe the new SU7 will be able to meet the annual 550k units’ target.  It is estimated that the breakeven point on a quarterly shipment basis is about 110k units.

In the near term, smartphone headwinds will likely hinder margin recovery.  However, easing memory prices could be a positive catalyst to the segment.  Furthermore, Xiaomi will continue to invest in AI investment and integration across hardware (smartphones, IoT, EVs) could bring demand for product upgrades. The counter is trading at 20.5x FY26E P/E. (Research Department)