Smartphone Gross Margin Beats Expectations; EV Profitability Ramp Slows, but Multiple New Product Catalysts Are Approaching

Overview

Xiaomi's 2Q26 results were broadly in line with expectations, but business performance diverged significantly. Smartphones demonstrated strong execution through a balance among shipments, average selling prices, and gross margin; smart EVs, AI, and other new businesses were weighed down by industry conditions, lower ASPs, and AI investment. Goldman Sachs maintains its Buy rating and lowers the target price from HK$40 to HK$39.

Core views

The key positive was smartphone gross margin of 8.5%, above expectations, reflecting pricing and product-mix management capabilities amid rising bill-of-materials costs. The key negative was slower-than-expected improvement in EV profitability, resulting in cuts to revenue and profit forecasts. Analysts believe that the SkyNomad launch and order confirmation in September-October, together with overseas AIoT expansion, chip and operating system updates, flagship smartphone launches, and AI model releases, could restart valuation catalysts.

Analysis framework

The report combines segment operating data, shipments, ASPs, gross margins, market shares, internet user metrics, and monetization indicators to revise 2026-2028 revenue, profit, and segment earnings forecasts, and derives its 12-month target price using sum-of-the-parts valuation.

Methodology notes

• Valuation methodsSum-of-the-parts valuation

  SOTP

  Applies 12-month forward EV/NOPAT multiples to Xiaomi's core businesses, uses DCF valuation for its smart EV business, and applies a holding-company discount.

• Valuation methodsDiscounted cash flow

  DCF

  The report assigns Xiaomi's EV business a valuation of US$35bn, using a 12% weighted average cost of capital and a 3% terminal growth rate.

• Operating AnalysisSegment forecast revisions

  Linkage of revenue, shipments, average selling prices, and gross margins

  Adjusts 2026-2028 forecasts based on changes in smartphone shipments, ASPs, bill-of-materials costs, and EV deliveries and margins.

Asset mapping & comparison

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

• 1810.HK

  Direct coverage target

  Strengths

  Improving smartphone gross margins, ecosystem integration capabilities, scale-driven cost advantages, a strong balance sheet, and long-term expansion potential in smart EVs and AIoT.

  Weaknesses

  Pressure on smartphone shipments and market share, slower-than-expected improvement in EV profitability, and AI investment depressing near-term profit.

  Comparison

  The report notes that Xiaomi's smartphone market share in China, Europe, Latin America, and the Middle East and Africa declined year on year year-to-date, while its share rose in Southeast Asia and India; Apple and Huawei maintained market-share gains over the same period.

  Risks

  Intensifying competition, smartphone and EV gross-margin pressure, weaker-than-expected premiumization and EV execution, geopolitical and regulatory uncertainty, weak macro demand, and foreign-exchange volatility.

Key data

• 2Q26 revenue year-on-year growth-6%Overall broadly in line with expectations.
• 2Q26 adjusted net profitRMB6.2 billionDown 43% year on year; 4% above Goldman Sachs' forecast and 2% below market consensus.
• 2Q26 smartphone gross margin8.5%The report views this as the largest positive surprise.
• Smartphone shipment year-on-year change-26%ASPs rose 26% year on year during the same period.
• 2026-2028 smartphone gross margin forecasts8.9% / 8.9% / 9.5%Previous forecasts were 8.1% / 8.5% / 9.3%.
• 2026-2028 EV delivery forecasts450,000 / 740,000 / 960,000Lowered based on lower expected shipments.
• 2026 gross margin forecast for EVs, AI, and other new businesses19.4%Cut from the prior forecast and below 20%.
• 2026 revenue forecastRMB433.0 billionDown approximately 5.3% year on year.
• 2026 adjusted net profit forecastRMB24.0 billionLowered due to a slower EV profitability ramp and continued AI investment.

Impact & implications

The report's view is that Xiaomi's near-term earnings will remain under pressure from EV expansion and AI investment, with 2026 total revenue and adjusted net profit forecasts cut by approximately 3% and 5% on average. However, improved smartphone gross margins, AIoT recovery from a lower base, and a concentrated pipeline of new product and technology launches are expected to improve market expectations for growth and valuation. The limited target-price reduction indicates that analysts still value the long-term expansion thesis of Xiaomi's integrated human-vehicle-home ecosystem.

Risks

• Intensifying competition in the global smartphone industry, with market-share improvement falling short of expectations.
• Higher gross-margin pressure in smartphone and EV businesses.
• Xiaomi's brand premiumization and EV business execution progress falling short of expectations.
• Rising geopolitical risks and regulatory uncertainty.
• A weakening macro environment and soft demand for smartphones and IoT products.
• Foreign-exchange fluctuations affecting operating performance and valuation.
• Negative beta in the EV industry, declining ASPs, or lower-than-expected deliveries could further weigh on revenue and profitability.

What to watch

• SkyNomad's official market launch in early September and confirmation of order volumes around the end of the National Day Golden Week.
• Whether smartphone gross margin bottoms in 3Q as expected, and whether higher ASPs can offset rising bill-of-materials costs and shipment pressure.
• Sales and pricing performance following the late-September launch of the Xiaomi 18 flagship phone.
• The scaled rollout of the Mijia brand and overseas AIoT growth during IFA 2026 in Europe.
• Market feedback on the next-generation XRING chips, HyperOS, MiMo-V3, and other AI application launches.
• Changes in EV deliveries, wait times, selling prices, and segment gross margins.
• Recovery in internet services revenue, overseas and China ARPU, and Mi Home monthly active users.