Xiaomi’s Q1 Net Profit Beats Expectations; Smartphone Gross Margin Strong; Neutral Rating Maintained

Overview

This report is UBS’s earnings review of Xiaomi Group’s first quarter of fiscal year 2026. Results show Xiaomi’s Q1 revenue of RMB 99.1 billion and non-IFRS net profit of RMB 6.1 billion both exceeded UBS and market consensus expectations. Key highlights include a significant improvement in smartphone gross margin and strong overseas performance—particularly in overseas IoT and internet services revenue. However, the smart electric vehicle business turned into an operating loss due to rising raw material costs, tax subsidy impacts, and increased operating expenses. Given slowing growth in core businesses (smartphones, IoT, internet) and revised profitability outlook for EVs, UBS lowered its earnings forecasts and target P/E multiples for the next two years, adjusting the target price slightly downward from HK$36.00 to HK$34.50 and maintaining a Neutral rating.

Core views

The smartphone business exhibited a 'volume-down, price-up' trend, with significantly enhanced profitability. Q1 smartphone shipments totaled 33.8 million units, down 19% year-on-year, but average selling price (ASP) rose 8.2% year-on-year to RMB 1,310—the highest on record. This was primarily driven by higher proportions of premium models overseas and constrained low-end model shipments. Although memory costs continued rising, ASP gains and product premiumization partially offset cost pressures, lifting smartphone gross margin by 1.8 percentage points sequentially to 10.1%, well above market expectations. The IoT and lifestyle products business saw revenue decline 23.7% year-on-year to RMB 24.7 billion, impacted by the tapering of China’s ‘trade-in’ subsidies. However, overseas performance was strong, with revenue growing in double digits; overseas now accounts for 40% of total IoT revenue. Gross margin remained flat at 25.2%, up 5.1 percentage points sequentially, mainly supported by product portfolio diversification and the company’s strategy prioritizing margins over market share. Revenue from smart electric vehicles and other innovative businesses amounted to RMB 19.9 billion, with deliveries of 81,000 units. Gross margin declined 2.6 percentage points sequentially to 20.1%, due to the discontinuation of the first-generation SU7 series, changes in delivery mix (higher proportion of lower-ASP models), and rising raw material costs. Operating expenses surged 48% year-on-year to RMB 7.1 billion, causing the segment—profitable for two consecutive quarters—to post an operating loss of RMB 3.1 billion this quarter. Management expects gross margin to improve sequentially as tax subsidy effects fade and new models (e.g., YU7 Standard/GT) ramp up deliveries. Internet services revenue rose 4.3% year-on-year to RMB 9.5 billion, driven mainly by advertising revenue growth. Global monthly active users (MAU) and average revenue per user (ARPU) increased 3.8% and 0.5% year-on-year, respectively. In AI, Xiao Ai Tongxue V2.5 model utilization and paid subscription rate exceeded 30%, generating initial token purchase revenue. On valuation and outlook, UBS lowered its 2026/2027 adjusted EPS forecasts by 25%/28%, primarily reflecting downward revisions to core business revenue, EV delivery volume and operating profit forecasts, and higher operating expense ratios. Given slowing profit growth in smartphones, IoT, and internet services, UBS reduced the target P/E multiple for core businesses from 19.2x to 14.8x; however, considering high growth potential from overseas EV expansion and new models, it raised the EV business’s P/S multiple from 1.2x to 1.5x. Based on sum-of-the-parts (SOTP) valuation, the target price is set at HK$34.50.

Analysis framework

UBS employs a Sum-of-the-Parts (SOTP) valuation approach for Xiaomi—a common method for analyzing diversified technology conglomerates. This approach separately values distinct business segments (e.g., mature hardware/IoT vs. high-growth EV) using appropriate metrics before aggregating them into a consolidated valuation. Specific logic is as follows: 1. Core business (smartphones + IoT + internet): Valued using P/E multiples. UBS adjusted the target P/E based on sector cyclical conditions and company-specific growth rates, reflecting downward re-rating of mature hardware businesses. 2. Smart electric vehicle business: Valued using P/S multiples. As this business remains in the investment phase and is unprofitable, P/S better captures its market expansion potential. UBS raised the P/S multiple to reflect stronger overseas expansion expectations and new-model competitiveness. 3. Strategic investments: Valued separately at fair value. Additionally, the report applies volume-price mix analysis to decompose smartphone gross margin drivers—distinguishing the impact of ASP, product mix optimization, and rising raw material costs—to assess profitability quality more precisely.

Methodology notes

• Valuation MethodSOTP Valuation

  Sum-of-the-Parts (SOTP) Valuation

  A valuation methodology that separately values different business segments (e.g., mature core hardware vs. high-growth EV) using appropriate metrics (e.g., P/E and P/S), then sums them to derive the company’s overall value. This approach more accurately reflects the intrinsic value of each segment in diversified enterprises, avoiding distortions inherent in single-metric valuations.

• Industry / Sector Analysis FrameworkVolume-Price Mix Analysis

  Volume-Price Mix Analysis

  A technique that decomposes changes in revenue or profit into contributions from volume (sales quantity), price (average selling price), and mix (product or geographic composition). In this report, UBS used this framework to reveal how Xiaomi’s premiumization strategy offset declining smartphone volumes and lifted gross margin despite falling unit shipments.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Xiaomi Group-W (1810.HK)

  Directly Covered Entity

  Strengths

  Industry-leading smartphone gross margin; strong overseas IoT and internet services growth; early monetization success in AI ecosystem; large-scale share repurchase supporting share price.

  Weaknesses

  Slowing revenue growth in core businesses; smart EV business turned to operating loss; rising operating expense ratio; persistent cost pressure from memory and other raw materials.

  Comparison

  Compared with pure-play EV makers, Xiaomi benefits from stable cash flow from core businesses; compared with traditional handset vendors, Xiaomi holds first-mover advantages and synergies across AIoT ecosystems and EV development.

  Risks

  Continued rise in raw material prices; intensifying competition in premium segments; slower-than-expected EV production ramp-up; obstacles to overseas expansion.

Key data

• Q1 FY26 RevenueRMB 99.1 billionDown 10.9% year-on-year and 15.2% quarter-on-quarter; 3.3% above UBS estimate
• Q1 FY26 Non-IFRS Net ProfitRMB 6.1 billion11.7% above UBS estimate; 7.5% above Visible Alpha consensus
• Smartphone Gross Margin10.1%Up 1.8 percentage points sequentially and year-on-year; 160 bps above UBS estimate
• Smartphone Shipments33.8 million unitsDown 19% year-on-year; down 10% quarter-on-quarter
• Smartphone ASPRMB 1,310Up 8.2% year-on-year; all-time high
• Smart EV Deliveries81,000 unitsUp 7% year-on-year; down 44% quarter-on-quarter
• Smart EV Operating LossRMB 3.1 billionTurned from profit in prior two quarters to loss this quarter due to higher expenses
• New Share Repurchase ProgramUp to HK$20 billion12-month program; ~HK$8.4 billion repurchased year-to-date

Impact & implications

UBS believes Xiaomi has demonstrated strong resilience in its core hardware businesses, successfully countering weak domestic demand and rising costs through premiumization and overseas expansion. Its industry-leading smartphone gross margin underscores improved product capability and brand premium power. Robust overseas growth—especially in IoT and internet services—provides a new growth engine and lays the foundation for EV internationalization. However, widening EV losses and slowing core business growth remain key concerns. UBS’s valuation multiple reduction reflects cautious views on the overall growth ceiling for the hardware sector. That said, Xiaomi’s AI ecosystem integration (e.g., rising Xiao Ai Tongxue monetization) and upcoming EV platform launches (e.g., large plug-in hybrid SUV expected in H2 FY26) remain compelling catalysts. The share repurchase program also signals management’s commitment to shareholder returns.

Risks

• Smartphones: Sustained increase in raw material prices; intensifying competition in premium segments.
• IoT: Faster-than-expected tapering of domestic 'trade-in' subsidies leading to sharp demand contraction.
• Electric Vehicles: Insufficient production ramp-up resulting in order backlog and potential market share erosion; unsuccessful launch of new models.
• Valuation: Downward revision of valuation multiples due to suboptimal capital allocation efficiency.

What to watch

• Adoption pace of edge-AI smartphones in China and globally.
• Whether IoT product monetization accelerates beyond expectations.
• Contribution of accelerated overseas expansion to internet services revenue and overall gross margin.
• Whether smart EV delivery volumes and market share exceed expectations.
• Launch and market reception of new platform (large plug-in hybrid SUV) in H2 FY26.