Goldman Sachs Maintains Buy Rating on Xiaomi, Target Price HK$40

Overview

Goldman Sachs released its earnings commentary on Xiaomi Group’s Q1 FY26 results, noting that performance was broadly in line with expectations. Although revenue and net profit declined year-on-year, the smartphone business achieved higher gross margin despite rising memory costs, demonstrating strong operational resilience. The report notes that near-term profitability was dampened by heavy investments in EVs and AI, but new SUV models and AIOS launching in Q3 FY26 are expected to reignite ecosystem growth momentum. Goldman Sachs maintains its Buy rating with a HK$40 target price.

Core views

Smartphone business demonstrates resilience: In Q1 FY26, smartphone average selling price (ASP) rose 11% quarter-on-quarter and 8% year-on-year; gross margin increased by 1.8 percentage points quarter-on-quarter to 10.1%, exceeding Goldman Sachs’ expectation by 50 basis points. Despite upward pressure on memory costs (contract prices surged fivefold in Q2 FY26), Xiaomi effectively balanced volume and profitability through dynamic product portfolio adjustments—including the Red Turbo 5 Max and Xiaomi 17 Max—rather than simply passing on cost increases. AIoT business under short-term pressure, strong overseas performance: Q1 FY26 AIoT revenue declined 24% YoY, primarily due to high base effects in China; however, overseas AIoT revenue accounted for ~40% of total AIoT revenue, driving gross margin above expectations. Goldman Sachs forecasts 2026 AIoT revenue to decline 5% YoY overall—down 18% in China but up 25% overseas—with overseas total addressable market at least twice that of China, offering substantial long-term growth potential. Increased investment in EVs and new businesses; watch for second-half product launches: Q1 FY26 losses from EVs, AI, and other new businesses widened to RMB 3.1 billion, driven mainly by infrastructure investment, token consumption, and AIOS development. Goldman Sachs expects adjusted net profit in Q2 FY26 to reach RMB 540 million—the lowest point for FY26. Management maintains its full-year EV delivery target of 550,000 units and expects to launch two EREV SUVs (5- and 6-seat variants) in H2 FY26, contributing over 100,000 units and supporting gradual recovery of EV gross margin from Q1 FY26’s low point to an estimated full-year level of 21.3%. Aggressive AI pricing strategy to secure global leadership: Xiaomi announced permanent reductions of up to 99% in MiMo-V2.5 series API prices—comparable to DeepSeek V4-Pro’s post-price-cut levels—and increased token usage quotas by 5–8x. This is enabled by architectural efficiency gains (KV cache data transmission reduced to ~1/7), aiming to expand MiMo inference token usage and reinforce its leadership position among global large language models.

Analysis framework

Goldman Sachs employs a Sum-of-the-Parts (SOTP) valuation approach for Xiaomi, separately valuing core businesses (smartphones + AIoT + internet services) and the EV business. For core businesses, it applies a 16x FY27 expected EV/NOPAT multiple; for the EV business, it uses a DCF model (WACC 12%, terminal growth rate 3%), yielding a USD 42 billion valuation, then applies a 10% conglomerate discount. This methodology better reflects the distinct growth potentials and risk profiles of different business segments—particularly isolating the high-growth, high-loss EV business to avoid distortion inherent in traditional P/E valuation during transition periods.

Methodology notes

• Valuation MethodSOTP Valuation

  Sum-of-the-Parts Valuation

  Valuing distinct business segments (e.g., mature core hardware vs. high-growth EV business) using appropriate methodologies (e.g., multiples or DCF), then aggregating results—yielding a more accurate assessment of intrinsic value for diversified enterprises.

• Valuation MethodDCF Valuation

  Discounted Cash Flow

  Estimating present value by forecasting future free cash flows of the EV business and discounting them at the weighted average cost of capital (WACC); suitable for evaluating emerging, unprofitable but high-potential businesses.

• Industry/Thematic Analytical FrameworkVolume-price decomposition

  Volume-Price Split Analysis

  Decomposing revenue growth into volume (unit sales) and price (average selling price) components to distinguish whether growth stems from market share expansion or product premiumization/pricing power—in this case used to assess ASP-driven contribution to smartphone gross margin.

Asset mapping & comparison

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

• Xiaomi Group (1810.HK)

  A primary beneficiary—as the world’s third-largest smartphone brand and a leading AIoT/new energy vehicle platform, currently in the early stage of ecosystem expansion.

  Strengths

  Strong balance sheet, robust ecosystem integration capability, economies of scale, and cost advantages derived from deep involvement in the EV supply chain.

  Weaknesses

  Margin pressure on smartphone and EV businesses; short-term profit volatility due to new business investments.

  Comparison

  Compared to pure-play EV makers, benefits from mature smartphone and AIoT cash flow support; compared to pure-play smartphone vendors, possesses a second growth engine.

  Risks

  Intensifying global smartphone competition, EV execution shortfall, geopolitical risks.

Key data

• Q1 FY26 Revenue Change YoY-11%Largely in line with Goldman Sachs and consensus expectations
• Q1 FY26 Adjusted Net Profit Change YoY-43%12% above Goldman Sachs’ expectation, driven primarily by elevated non-operating income
• Q1 FY26 Smartphone Gross Margin10.1%Up 1.8 percentage points QoQ, 50 bps above expectation
• Q1 FY26 Smartphone ASP Change YoY+8%Up 11% QoQ, reflecting successful premiumization
• Q1 FY26 EV/AI and Other New Business LossesRMB 3.1 billionLosses widened, primarily due to increased infrastructure and AI investments
• 2026E EV Delivery Target550,000 unitsManagement maintains target; expects two EREV SUVs to launch in H2 FY26
• MiMo-V2.5 API Price ReductionUp to 99%Permanent reduction aimed at expanding token usage

Impact & implications

Goldman Sachs believes that while Q2 FY26 results may remain relatively weak and weigh on the stock, Q3 FY26 will represent a critical inflection point. The launch of new EREV SUVs, normalization of AIoT revenue base, and potential AIOS rollout could rekindle investor confidence in Xiaomi’s ‘people-car-home’ full-ecosystem strategy. Xiaomi’s aggressive LLM pricing strategy highlights its efficiency advantages in AI infrastructure, helping to build durable competitive moats over time. Investors should monitor improvements in EV gross margin (excluding one-time subsidies) and progress in expanding overseas AIoT markets.

Risks

• Intensifying global smartphone industry competition and sluggish market share growth
• Greater margin pressure on smartphone and EV businesses
• Shortfall in Xiaomi’s brand premiumization and EV execution
• Escalating geopolitical risks and regulatory uncertainty
• Weak macro environment dampening smartphone/IoT demand
• Foreign exchange volatility risk

What to watch

• Launch and sales performance of new EREV SUV models in Q3 FY26
• Progress on AIOS operating system launch and ecosystem integration
• Revenue growth and channel expansion in overseas AIoT markets
• Improvement trend in EV gross margin, excluding one-time subsidies
• Growth in MiMo LLM token usage and commercialization progress