Xiaomi’s Q1 gross margin for smartphones and AIoT exceeded expectations, offsetting EV losses.

Overview

Morgan Stanley released an research report analyzing Xiaomi Group’s first-quarter 2026 results. Despite a 44% year-over-year decline in adjusted net profit, weighed down by losses in its electric vehicle (EV) business, the company’s smartphone and AIoT segments delivered gross margins that significantly exceeded market expectations, effectively offsetting headwinds from the EV segment. The firm believes that, with the EV business poised for a sequential recovery and rising shipment volumes in the second quarter—coupled with sustained margin expansion in the smartphone segment—the company’s fundamentals are likely to improve. Accordingly, Morgan Stanley maintains an “Overweight” rating and a target price of HK$45.

Core views

Core Financial Performance: Earnings Under Pressure but Structural Improvements In Q1 2026, Xiaomi Group reported an adjusted net profit of RMB 6.072 billion, down 44% year over year and 4% quarter over quarter, broadly in line with market consensus estimates. Total revenue stood at RMB 99.14 billion, a 11% decline from the same period last year. Despite the overall contraction in both revenue and profitability, the profit mix showed encouraging signs: excluding EV‑related expenses, non‑IFRS adjusted net profit reached RMB 9.172 billion, underscoring the continued resilience of the company’s core businesses. Segment Highlights: Smartphone and AIoT Margins Both Beat Expectations The smartphone segment delivered the biggest upside this quarter. Although revenue fell 13% year over year to RMB 44.27 billion, its gross margin surged to 10.1%, significantly exceeding both the prior quarter’s 8.3% and the 6% forecast by analysts. This suggests that the company has made substantial progress in optimizing its product mix and controlling costs. Similarly, the AIoT and lifestyle products segment posted strong results, with gross margin expanding by 5.1 percentage points quarter over quarter to 25.2%, surpassing the expected 21%. Despite a 24% year-over-year decline in revenue to RMB 24.68 billion, the high-margin profile underscores improved earnings quality. Challenges and Outlook: Short-Term Pain in EV Business Amid Anticipated Q2 Recovery Electric vehicle (EV) revenue for Q1 totaled RMB 19.86 billion, up 7% year over year but below the consensus estimate of RMB 22.5 billion. Gross margin came in at 20.1%, in line with expectations, though the segment remained loss‑incurring. The research report attributes the EV business’s losses as the primary drag on overall performance. However, analysts remain optimistic about the coming quarters, forecasting a sequential recovery in EV shipments driven by positive order trends for new models and expanded offline channel deployment. Meanwhile, internet services revenue grew 4% year over year to RMB 9.47 billion, with overseas revenue accounting for 31.4% of the total and advertising revenue rising 7.8%, highlighting the segment’s steady cash‑flow contribution. Valuation and Rating Framework Using a Sum of the Parts (SOTP) valuation approach, the firm assigns Xiaomi an “Overweight” rating. For the mature smartphone, AIoT, and internet segments, a Residual Income Model (RIM) is applied; for the growth‑stage EV business, a probabilistic DCF model—incorporating 30% bullish, 60% base-case, and 10% bearish scenarios—is employed. At the current share price, the forward P/E ratio for 2026 stands at approximately 34.7x. Given the long-term potential of the EV business and the ongoing margin improvement in the core segments, the firm deems the current valuation attractive.

Analysis framework

Institutions employed a standard “segment‑by‑segment breakdown plus marginal‑change analysis” framework to dissect this earnings report. First, through segment analysis, the group’s complex operations were disaggregated into four distinct business units—smartphones, AIoT, internet services, and electric vehicles—allowing for separate assessments of revenue growth and margin trends. This approach enables clear identification of which segments are generating cash (e.g., smartphones and AIoT, with their high gross margins) and which are underperforming (e.g., EVs, which remain loss‑incurring). Second, the focus shifted to the “expectation gap”—the divergence between actual results and consensus estimates. Rather than merely examining year‑over‑year figures, the research highlighted how key metrics, such as smartphone gross margin at 10.1% versus the expected 6%, and AIoT gross margin at 25.2% versus the anticipated 21%, underscored the underlying resilience of the business fundamentals. Finally, a forward‑looking perspective was applied to identify potential inflection points. Regarding the EV segment’s losses, the firm refrained from a simplistic bearish stance, instead leveraging industry‑specific insights—such as the typical ramp‑up cycle for new vehicle launches—and operational indicators like shipment forecasts to project that Q2 would mark the beginning of a recovery, thereby reinforcing a medium‑to‑long‑term bullish outlook.

Methodology notes

• Valuation MethodologySOTP Segment Valuation

  Summing the valuations derived from different valuation models applied to each business segment.

  The research report employs the residual income model (RIM) for mature businesses—mobile, IoT, and internet—and a probability-weighted DCF model for the high-risk, high-growth EV segment, summing the results to derive the target price. This approach is well-suited for valuing diversified conglomerate firms.

• Company Fundamentals and Financial FrameworkProfit Quality Analysis

  Exclude non-recurring or strategic losses to assess core profitability.

  The research report specifically presents “adjusted net profit excluding EV-related expenses” to help investors distinguish between accounting losses attributable to one-off or strategic investments and the company’s underlying profitability in its core business.

Asset mapping & comparison

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

• Xiaomi Group (1810.HK)

  Beneficiary: Core business profit margins exceed expectations, and the EV business is poised for a recovery.

  Strengths

  The gross margins of smartphones and AIoT have significantly exceeded expectations, reflecting robust cost-control and pricing capabilities; meanwhile, the share of overseas revenue in internet services has risen, bolstering ecosystem stickiness.

  Weaknesses

  The EV business remains in the investment phase, leading to a substantial decline in overall net profit; smartphone revenue continued to post a double-digit year-over-year drop.

  Risks

  Intensified competition in the EV market could trigger a price war, further squeezing gross margins; meanwhile, inventory destocking pressures and weak demand for smartphones may weigh on performance in subsequent quarters.

Key data

• Q1 adjusted net profitRMB 6.072 billionDown 44% year on year and 4% month on month, in line with expectations.
• Smartphone gross margin10.1%Far exceeding the expected 6%, with a significant month-on-month increase.
• AIoT gross margin25.2%Up 5.1 percentage points month-over-month, exceeding the expected 21%.
• EV business gross margin20.1%In line with expectations, but still operating at a loss.
• Target PriceHK$45.00There is 51% upside potential from the current share price of HK$29.76.

Impact & implications

The research report argues that Xiaomi’s current share price may be overpricing the short-term losses in its EV business while underestimating the value of the structural improvement in profit margins across its core hardware segments—smartphones and AIoT. If Xiaomi can deliver sequential growth in EV deliveries as expected in Q2, this would validate the cost‑reduction rationale driven by economies of scale, thereby serving as a catalyst for further upside in the stock price. For investors, the focus should shift from mere revenue growth to the ability of each business segment to deliver on its margin targets—particularly whether the gross margin expansion stemming from the premiumization of its smartphone lineup is sustainable.

Risks

• Competition in the electric vehicle market remains intense, potentially leading to price wars and margin pressures.
• Smartphones face macroeconomic risks stemming from inventory destocking and weak demand, which could weigh on gross margins.
• Market concerns about investments in smart electric vehicles may persist, weighing on stock prices.

What to watch

• Q2 electric vehicle shipment data and order feedback for new models.
• The contribution of sales growth attributable to the expansion of China’s offline distribution channels.
• Progress in the expansion of smartphone market share in overseas markets.