HSBC Maintains Buy Rating on Xiaomi, Lowers Target Price to HKD 50

Overview

HSBC Qianhai Securities released an earnings commentary on Xiaomi Group (1810.HK), noting that the company delivered resilient 1Q26 results amid a challenging cost environment, with both revenue and profit slightly exceeding expectations. Although the firm has lowered its 2026–2027 earnings forecasts and reduced the target price from HKD 54.00 to HKD 50.00 due to persistent smartphone market weakness and increased R&D spending on AI initiatives, it maintains a 'Buy' rating, citing successful premiumization, an enriched EV product portfolio, and recovering delivery volumes. The current share price implies approximately 68% upside potential.

Core views

Earnings Review: 1Q26 revenue totaled RMB 99.1 billion, with adjusted net profit of RMB 6.1 billion, primarily driven by better-than-expected gross margins in smartphones and IoT. Despite rising memory component costs, Xiaomi stabilized smartphone gross margin at 10.1% by actively managing the mix of mid-to-low-end shipments and pushing premiumization, resulting in an average selling price (ASP) of RMB 1,310—up 8.2% year-over-year and a new record high. IoT gross margin surged 5.1 percentage points quarter-over-quarter to 25.2%, with overseas revenue accounting for nearly 40%, highlighting significant growth potential. EV Business Progress: The EV product lineup has been strengthened with the launch of the YU7 Standard and YU7 GT models, catering to diverse user needs—from daily commuting to performance upgrades. April deliveries rebounded strongly, surpassing 30,000 units. Although reduced government subsidies and raw material cost pressures may weigh on short-term margins, the firm believes the full-year delivery target of 550,000 units remains achievable as new models roll out and the mix of higher-ASP vehicles improves. Earnings Forecast Adjustments: The firm lowered its 2026 and 2027 non-GAAP net profit forecasts by 10% and 3%, respectively, reflecting continued smartphone shipment weakness and elevated expenses from the company’s commitment to invest over RMB 60 billion in AI R&D over the next three years. Conversely, the 2028 earnings forecast was raised by 3% based on a more optimistic outlook for the IoT segment. R&D expense forecast for 2026 was increased by 16%. Valuation Logic: The firm applied a Sum-of-the-Parts (SOTP) approach. The legacy businesses (smartphones, IoT, internet services) are valued at a target P/E of 23x, implying HKD 33.80 per share; the EV business is valued via a DCF model (WACC 7.4%), contributing HKD 16.20 per share. The sum yields a target price of HKD 50.00.

Analysis framework

The firm first deconstructed the volume-price dynamics across business segments in 1Q26 to validate Xiaomi’s ability to sustain gross margins through product mix optimization during a period of rising input costs. It then assessed near-term marginal changes by incorporating historical patterns of promotional seasons (e.g., 618) and the EV launch cadence. On valuation, recognizing the distinct life cycles and valuation logics between traditional consumer electronics and the emerging EV business, the firm abandoned a single consolidated multiple and instead adopted SOTP: using P/E multiples for mature, stable legacy businesses and DCF for the high-growth, not-yet-profitable EV segment to more accurately capture intrinsic value.

Methodology notes

• Valuation MethodSOTP Valuation

  Sum-of-the-Parts (SOTP) Valuation

  When a company operates multiple business segments with significantly different characteristics, growth stages, or risk profiles (e.g., Xiaomi’s legacy hardware vs. emerging EV business), applying a single valuation method can be misleading. SOTP separately values each segment and sums them, offering a more accurate reflection of total intrinsic value.

• Valuation MethodDCF Discounted Cash Flow

  DCF Discounted Cash Flow Model

  For early-stage, capital-intensive businesses with negative or volatile current profits but predictable future cash flows (e.g., Xiaomi EVs), analysts often use DCF models—forecasting future free cash flows and discounting them to present value—to assess long-term worth, rather than relying solely on current earnings.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Volume-Price Decomposition Analysis

  When analyzing revenue and gross profit changes, drivers are broken down into 'volume effects' and 'price/mix effects.' The report notes that Xiaomi offset weak shipment volumes and cost inflation by reducing the share of low-end models and increasing premium mix—a classic application of volume-price decomposition logic.

Asset mapping & comparison

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

• Xiaomi Group-W (1810.HK)

  Directly covered subject of the report

  Strengths

  Successful smartphone premiumization boosts ASP and margins; EV deliveries rebounding quickly with a diversified product matrix; strong IoT overseas growth potential; deep integration of AI into hardware ecosystem.

  Weaknesses

  Persistent smartphone shipment weakness; significant R&D cost increases from AI and EV initiatives pressuring near-term net profit; potential short-term margin pressure from the 618 shopping festival.

  Comparison

  Compared to pure-play smartphone makers, Xiaomi benefits from a second growth curve in EVs; compared to pure EV makers, it has mature cash-generative businesses and ecosystem synergies.

  Risks

  Critical semiconductor shortages; intense competition in IoT and internet services from Huawei, Lenovo, and new internet entrants; FX volatility impacting overseas profits.

Key data

• 1Q26 RevenueRMB 99.1 billionSlightly above expectations
• 1Q26 Adjusted Net ProfitRMB 6.1 billionSlightly above expectations
• Smartphone Gross Margin10.1%Stable despite memory cost pressures
• Smartphone ASPRMB 1,310Up 8.2% YoY, record high
• IoT Gross Margin25.2%Up 5.1 percentage points QoQ
• April EV Deliveries>30,000 unitsRecovery in growth momentum
• 2026E Non-GAAP Net Profit Forecast Adjustment-10%Due to weak smartphone demand and higher AI R&D
• Target PriceHKD 50.00Reduced from HKD 54.00

Impact & implications

The report argues that Xiaomi is successfully executing its premiumization strategy, which not only stabilizes profitability in its core smartphone business but also supports overseas expansion of its IoT segment. While near-term headwinds include promotional season pressures and peak R&D investment, the rapid ramp-up in EV deliveries and an enriched product portfolio bolster confidence in the company’s medium-to-long-term growth trajectory. Its strategy of deeply integrating AI into its hardware ecosystem (smartphones/EVs/IoT)—rather than monetizing AI as a standalone service—helps build a deeper competitive moat.

Risks

• Shortages of key semiconductor components (e.g., SoCs, power management ICs) could cap revenue upside
• Intense competition in IoT and internet services from Huawei, Lenovo, and emerging internet players
• FX volatility from international expansion may impact revenue and profitability

What to watch

• Impact of the 618 shopping festival on smartphone ASP and channel economics
• Launch and market reception of large SUV models in the second half
• Efficiency of AI R&D investment and penetration rate of MiMo models in hardware
• EV segment gross margin performance under raw material cost pressures