Xiaomi's second-quarter performance was mixed, smartphone gross margin was better than feared, and EV momentum is expected to improve in the fourth quarter

Overview

The report reviews Xiaomi's second-quarter 2026 results and separately assesses earnings trends in its smartphone, IoT, and EV businesses. Second-quarter adjusted earnings exceeded BofA's forecast, and smartphone gross margin was also better than the market had feared, but overall gross margin and profitability in the IoT and EV businesses remained under pressure. BofA therefore lowered its medium-term earnings forecasts and target price while maintaining its Buy rating, primarily based on Xiaomi's ecosystem spanning smartphones, IoT, Internet services, and electric vehicles, as well as its long-term synergy potential.

Core views

Xiaomi's second-quarter 2026 results presented a combination of "slightly better earnings and pressured gross margin." Adjusted earnings were CNY6.2 billion, up 2% QoQ and down 43% YoY, 8% above BofA's forecast and broadly in line with market consensus; revenue was CNY109 billion, up 10% QoQ and down 6% YoY. Overall gross margin was 19.8%, 0.8 percentage points below BofA's forecast and 0.6 percentage points below consensus. The report therefore concludes that the earnings result did not deviate significantly from market expectations, but the divergence in operating momentum and margins among the different businesses remains key to subsequent forecasts. The smartphone business recorded a second-quarter gross margin of 8.5%, better than the market's prior expectation of approximately 8%, making it a relatively positive signal for the quarter. The report expects smartphone profitability to become relatively easier to manage in the second half of 2026 as the pace of memory price increases moderates, while new product launches in the fourth quarter may also improve momentum. Meanwhile, shipments remained weak: second-quarter global smartphone shipments were 31.2 million units, down 8% QoQ and 26% YoY; China shipments were 8.3 million units, down 3% QoQ and 19% YoY; India shipments were 4.2 million units, up 14% QoQ and down 16% YoY; Asia Pacific shipments were 17.1 million units, down 5% QoQ and 19% YoY; Europe shipments were 5.7 million units, down 11% QoQ and 27% YoY; Latin America shipments were 4.1 million units, down 9% QoQ and 36% YoY; and Middle East and Africa shipments were 4.3 million units, down 12% QoQ and 39% YoY. BofA forecasts Xiaomi's smartphone shipments at 121 million and 125 million units in 2026 and 2027, respectively, and believes the company's scale and execution should enable it to outperform smartphone peers amid rising memory prices. The IoT business's second-quarter gross margin was weighed down by mid-year promotions and the peak air-conditioner sales season, while weak domestic demand may continue to exert pressure in the near term. Management is confident that rapid overseas business growth will continue through 2027, particularly in home appliances. The report expects IoT revenue to resume growth in 2027–2028 and believes the more favorable margin structure in overseas markets could become a driver of long-term IoT profitability while creating synergies with the smartphone and EV businesses. Gross margin for electric vehicles and other new businesses edged down from 20.1% in the first quarter to 19.2% in the second quarter, mainly due to the higher bill-of-materials cost of the updated SU7 and the large language model business remaining in an early, low-margin stage. The report expects SkyNomad to drive business momentum from the fourth quarter, with deliveries beginning in September 2026. However, EV shipments in January–July 2026 totaled only approximately 215,000 units, equivalent to 39% of the full-year guidance of 550,000 units. BofA therefore lowered its 2026 EV shipment forecast to 450,000 units, which is still above the 411,000 units recorded in 2025. The valuation model assumes shipments of 560,000 units and an average selling price of CNY233,442 from the second half of 2026 through the first half of 2027, implying EV sales of approximately CNY130.727 billion during the period. Over the longer term, the report believes overseas EV expansion beginning in the second half of 2027 should enhance business resilience. Based on the second-quarter results and pressure in the IoT and EV businesses, BofA lowered its 2026–2028 adjusted earnings forecasts by 18%–28%, with the revised forecasts 11%–22% below market consensus. The 2026 EPS forecast was lowered from CNY0.94 to CNY0.90, the 2027 forecast from CNY1.35 to CNY0.99, and the 2028 forecast from CNY1.77 to CNY1.24. BofA now forecasts adjusted net profit of CNY24.104 billion, CNY30.463 billion, and CNY37.133 billion for 2026–2028, respectively; adjusted EPS is forecast to decline 42.5% YoY in 2026, grow 10.0% in 2027, and grow 25.3% in 2028. The report also forecasts a 55% CAGR in actual operating profit from 2026 to 2028, reflecting a profit recovery trajectory from a low base. BofA lowered its sum-of-the-parts-based target price from HK$40 to HK$37 and rolled the valuation period for the core business forward from 2026 to the second half of 2026 through the first half of 2027, while leaving other valuation assumptions unchanged. The HK$37 target price comprises HK$23 per share for the core business and HK$14 per share for the EV business. The core business is valued at 16x P/E based on EPS of CNY1.26 for the period; 16x is approximately 0.5 standard deviations below Xiaomi's historical average valuation, with the discount reflecting continued risk from rising memory prices. The EV business is valued at 2.5x P/S, above the 1.5x assigned to peers by BofA's auto team, based on Xiaomi's broader business expansion potential and resilient demand. Although both the earnings forecasts and target price were lowered, BofA maintained its Buy rating, believing that the integrated ecosystem comprising smartphones, IoT, Internet services, and electric vehicles can support long-term upside.

Analysis framework

The report first compares second-quarter revenue, adjusted earnings, and gross margin with BofA's forecasts and market consensus, and then breaks down margins, shipment volumes, and operating momentum across the smartphone, IoT, and EV businesses. It subsequently adjusts its 2026–2028 earnings and shipment forecasts based on memory prices, new product launches, overseas expansion, and the pace of EV deliveries. Finally, it separately values the core business and EV business using a sum-of-the-parts valuation and presents the upside and downside risks to the target price.

Methodology notes

• Valuation methodologySOTP valuation

  Sum-of-the-parts valuation of the core business and EV business

  The report separately estimates the per-share values of the core business and EV business, then adds HK$23 and HK$14 to derive the HK$37 target price, reflecting the different earnings models and valuation bases of the two businesses.

• Valuation methodologyP/E and PEG valuation

  P/E valuation of the core business

  The core business is valued using EPS of CNY1.26 for the second half of 2026 through the first half of 2027 and a 16x P/E multiple; this multiple is approximately 0.5 standard deviations below Xiaomi's historical average, reflecting the risk of rising memory prices.

• Valuation methodologyPS valuation

  P/S valuation of the EV business

  The EV business's sales are estimated based on shipment volume and average selling price, after which a 2.5x P/S multiple is applied; this is above the 1.5x multiple for automotive peers, supported in the report by Xiaomi's broader business expansion potential and resilient demand.

• Industry analysis frameworkVolume-price decomposition

  Decomposition of business performance by shipment volume, average selling price, and gross margin

  The report assesses revenue momentum and profitability pressure using smartphone and EV shipment volumes, regional changes, average selling prices, and segment gross margins, and adjusts its forecasts accordingly.

Asset mapping & comparison

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

• Xiaomi Corporation（1810.HK）

  The core company covered by the report, whose earnings forecasts and segment valuation are jointly determined by its smartphone, IoT, Internet services, and EV businesses.

  Strengths

  Smartphone gross margin was better than the market had previously expected; strong business scale and execution; a more favorable margin structure for overseas IoT; and an integrated ecosystem capable of creating cross-business synergies.

  Weaknesses

  Overall gross margin was below expectations, smartphone shipments declined YoY in most regions, domestic IoT demand was weak, and gross margin for electric vehicles and other new businesses declined QoQ.

  Comparison

  The report believes Xiaomi can outperform smartphone peers amid rising memory prices due to its scale and execution; the EV business is valued at 2.5x P/S, above the 1.5x multiple for automotive peers.

  Risks

  Slower-than-expected growth or monetization in the hardware and Internet businesses, weakening hardware gross margin, slower EV deliveries and higher expenses, and worsening China–US tensions.

Key data

• Second-quarter 2026 adjusted earningsCNY6.2bnUp 2% QoQ and down 43% YoY, 8% above BofA's forecast and broadly in line with consensus.
• Second-quarter 2026 revenueCNY109bnUp 10% QoQ and down 6% YoY.
• Second-quarter 2026 overall gross margin19.8%0.8 percentage points below BofA's forecast and 0.6 percentage points below consensus.
• Second-quarter 2026 smartphone gross margin8.5%Better than the market's prior expectation of approximately 8%.
• Second-quarter 2026 global smartphone shipments31.2 million unitsDown 8% QoQ and 26% YoY.
• 2026 and 2027 smartphone shipment forecasts121/125 million unitsCorresponding to 2026 and 2027, respectively.
• Gross margin for electric vehicles and other new businesses19.2%Below the 20.1% recorded in the first quarter of 2026.
• EV shipments in January–July 2026around 215k unitsEquivalent to 39% of the full-year guidance of 550,000 units.
• 2026 EV shipment forecast450k unitsBelow guidance of 550,000 units but above the 411,000 units recorded in 2025.
• Revisions to 2026–2028 adjusted earnings forecastsLowered by 18%–28%Reflecting the second-quarter results and pressure in the IoT and EV businesses.
• Gap between adjusted earnings forecasts and consensus11%–22% lowerCorresponding to the comparison between BofA's 2026–2028 forecasts and market consensus.
• 2026–2028 adjusted net profit forecastsCNY24,104mn / CNY30,463mn / CNY37,133mnCorresponding to 2026, 2027, and 2028, respectively.
• Target priceHK$37Lowered from HK$40; core business value HK$23 and EV value HK$14.
• Core business valuation16x 2H26-1H27E P/EApproximately 0.5 standard deviations below Xiaomi's historical average valuation.
• EV business valuation2.5x 2H26-1H27E P/SAbove the 1.5x P/S multiple assigned to peers by BofA's auto team.

Impact & implications

The report believes Xiaomi continues to face near-term pressure from its overall gross margin, domestic IoT demand, memory costs, and the pace of EV deliveries, leading to cuts in both its medium-term earnings forecasts and target price. However, better-than-feared smartphone gross margin, momentum from new smartphone and EV models in the fourth quarter, overseas IoT expansion, and overseas EV expansion after the second half of 2027 may collectively support subsequent profit recovery and ecosystem synergies. BofA therefore maintains its Buy rating.

Risks

• Slower-than-expected growth in hardware sales and the Internet business could reduce the operating forecasts underpinning the target price.
• Hardware gross margin could weaken further.
• Monetization of the Internet and ecosystem businesses could progress more slowly than expected.
• EV deliveries could be slower than expected, while related expenses could be higher than expected.
• A further deterioration in China–US tensions could create additional downside risk.

What to watch

• Monitor whether the pace of memory price increases continues to moderate and its impact on smartphone profitability in the second half.
• Monitor whether new smartphone launches in the fourth quarter can improve sales momentum.
• Monitor domestic IoT demand, overseas home-appliance growth, and margin performance in overseas markets.
• Monitor SkyNomad's production ramp after deliveries begin in September 2026 and progress toward the full-year EV forecast of 450,000 units.
• Monitor Xiaomi's progress in advancing overseas EV expansion from the second half of 2027.