Xiaomi Group: Maintain Overweight, Target Price of HK$45

Overview

Morgan Stanley released an updated risk-reward analysis for Xiaomi Group (1810.HK), adjusting financial models based on the company's first-quarter 2026 results. Despite AIoT underperformance, stronger-than-expected smartphone revenue and margin improvements led to modest earnings forecast上调s. The firm maintains its 'Overweight' rating and HK$45 target price, citing Xiaomi's diversified revenue structure (approximately 60% from non-smartphone businesses) providing resilience against smartphone industry headwinds, with current valuations fully reflecting downside risks, offering favorable risk-reward over the next 12-18 months.

Core views

The report notes that Xiaomi's 1Q26 smartphone revenue exceeded expectations by 9%, leading to a 4% upward revision in full-year phone revenue forecasts; however, AIoT revenue fell short by 8%, resulting in a 2% downward adjustment for this segment. Overall, driven by improved gross margins (full-year GPM assumption increased by 0.4 percentage points), 2026 earnings forecasts were revised up by 1.4%, with 1.8% and 1.0% increases expected for 2027-2028 respectively. Despite these revisions, the limited magnitude of adjustments left the HK$45 target price unchanged. The firm emphasizes that Xiaomi's approximately 60% non-smartphone revenue exposure is far superior to peers (e.g., Transsion at only 10%), offering defensive characteristics during smartphone market downturns. Additionally, the 'People + Car + Home' ecosystem strategy is expected to create long-term growth opportunities in AI home appliance upgrades and the electric vehicle market. Short-term catalysts include: increased market share in premium smartphones driving ASP and internet services ARPU growth, AIoT returning to positive growth in H2 2026, and exceeding expectations in new EV model (SU7) orders and user feedback.

Analysis framework

Morgan Stanley used the Sum-of-the-Parts (SOTP) valuation approach for Xiaomi. The three core businesses—smartphones, IoT, and internet services—were valued using the Residual Income Model (RIM), applying equity cost (CoE) rates of 11%, 11%, and 11.4%, with terminal growth rates set at 3%, 3%, and 6%. The electric vehicle (EV) business was evaluated using a probability-weighted DCF model (30% optimistic, 60% base, 10% pessimistic scenarios), with a WACC of 12.2% and a terminal growth rate of 5%. The final target price was derived by summing the valuations and investment values of each business segment.

Methodology notes

• Valuation MethodSOTP Segment Valuation

  Valuing individual business segments of a diversified company and aggregating them

  Given Xiaomi's operations span hardware, IoT, internet services, and even electric vehicles, a single valuation model cannot accurately capture its value. SOTP selects the most appropriate valuation method (such as RIM or DCF) for each segment and aggregates them to derive an overall target price, allowing for more precise assessment of each segment's contribution to value.

• Valuation MethodRIM Residual Income Model

  An intrinsic valuation model based on accounting income and book value

  The residual income model (RIM) is suitable for mature businesses with stable book values and predictable profitability. It was applied to Xiaomi's smartphone, IoT, and internet service segments by forecasting future residual incomes (net income minus cost of equity) and discounting them to assess the intrinsic value of these core businesses.

• Valuation MethodDCF Discounted Cash Flow

  Absolute valuation based on forecasts of future free cash flows

  For the early-stage, unprofitable EV business, the report uses a DCF model with probability weighting (optimistic/base/pessimistic) to reflect uncertainty regarding future success. This approach incorporates high-risk, high-return emerging businesses into the overall valuation framework.

Key data

• 2026 Smartphone Revenue Forecast Change+4%Due to 9% outperformance in 1Q26 actual revenue
• 2026 AIoT Revenue Forecast Change-2%Due to 8% shortfall in 1Q26 actual revenue
• 2026 Gross Margin (GPM) Assumption+0.4pptBased on stronger margin performance in 1Q26
• 2026 Earnings Forecast (EPS)+1.4%Result after combining revenue and margin adjustments
• Non-Smartphone Revenue Percentage~60%Significantly higher than peer Transsion at 10%

Impact & implications

The report suggests that Xiaomi's diversification strategy is a core competitive advantage, offering a buffer during smartphone market weakness. With the advancement of its premiumization strategy and AIoT market recovery, the company could see a performance inflection point in H2 2026. Meanwhile, while the EV business faces short-term pressures, long-term success would bring significant valuation elasticity. Current prices have largely incorporated negative factors, presenting a good medium-term entry opportunity.

Risks

• Geopolitical tensions disrupting key component supply chains or overseas sales
• Delayed delivery of second EV model or SU7 affecting profitability and valuation
• Margin pressure from inventory destocking and weak demand
• Increased investor concerns about smart EV investments negatively impacting overall valuation

What to watch

• Smartphone margin trends and memory cost changes
• Penetration rate in mid-to-high-end smartphone markets and ASP growth
• Order volume and user satisfaction for new EV models
• Recovery momentum in AIoT business in H2 2026
• ARPU growth for MIUI users