A mixed bag for Xiaomi in Q2: EV losses narrowed, but smartphone gross margin fell to a three-year low

Overview

The report analyzes Xiaomi's Q2 2026 results, progress in smart vehicles, extended-range SUV product plans, and AI strategy. Quarterly adjusted earnings remained stable, and the EV business reduced losses as sales volume grew, but smartphones were materially affected by higher memory-chip costs and lower shipments. Deutsche Bank therefore lowers its revenue forecast and DCF target price while maintaining a Buy rating.

Core views

Xiaomi's overall earnings in Q2 2026 were broadly in line with market expectations. Non-IFRS adjusted net profit was flat QoQ at RMB 62.2 hundred million, while quarterly gross profit was also flat QoQ at RMB 216 hundred million, showing that overall profitability remained stable despite rapidly rising costs for core components. The gross-profit mix changed significantly: IoT and internet services made stable contributions, and gross profit from smart EVs, AI, and other new initiatives increased 20% QoQ, but smartphone segment gross profit fell 20% QoQ to RMB 36 hundred million, offsetting the former's improvement. Smartphones were the main drag during the quarter. Industry memory-chip contract prices rose by approximately 50% QoQ. Xiaomi increased its blended smartphone ASP by 3% QoQ to a record RMB 1,351 by increasing shipments of the premium "Xiaomi 17T" series in overseas markets, but this was still insufficient to offset the impact of an 8% QoQ decline in sales volume. Smartphone gross margin fell 1.6 percentage points QoQ to 8.5%, a three-year low. Based on a more cautious view of smartphone sales volume, the report lowers its full-year 2026 revenue forecast by 6.3%. Smart EVs, AI, and other new initiatives simultaneously recorded sales growth, higher gross profit, and narrower losses. Sales volume increased 29% QoQ to 104,199 units in Q2 2026, driving a 20% QoQ increase in segment gross profit to RMB 48 hundred million. However, segment gross margin fell 0.9 percentage points QoQ to 19.2%, while blended ASP declined 2% QoQ to RMB 229,312, mainly because of a higher contribution from the lower-priced SU7 sedan and cost pressure from rising memory-chip prices. The report also notes that after cash subsidies of up to RMB 15,000 expired, the prices of both the SU7 and YU7 actually increased on a like-for-like basis. Quarterly operating expenses rose only 4% QoQ to RMB 74 hundred million, ultimately helping narrow the segment's net loss by 16% QoQ to RMB 26 hundred million. The company is expanding from sporty battery EVs into extended-range SUVs aimed at family users. On July 30, Xiaomi unveiled the "Kunlun" technology architecture and the "Skynomad" product series, emphasizing flexible seating space, large-battery extended-range capability, and intelligent features. The seven-seat N90 Max features a 2.9-meter continuous flat floor, offers up to 4.4 square meters of usable cabin space, and has a presale price of RMB 299,900. The five-seat, four-wheel-drive N70 Max is priced at RMB 259,900, and both models are scheduled for official launch in September. The relatively aggressive pricing is supported by more economical battery solutions from Sunwoda and CALB, rather than the CATL and BYD batteries used in the battery EV models. The report expects each of the N90 and N70 to achieve average monthly sales of 15,000 units after production ramps up. The AI strategy covers foundation models, smart homes, and embodied intelligence. The "MiMo-V2.5" foundation model, launched in April 2026, ranked first on OpenRouter with weekly token usage of 10.5 trillion. The open-source, device-native coding agent "MiMo Code," released in June, features persistent cross-session memory, multi-agent collaboration, and a dedicated working mode for long-duration, multi-step tasks. The open-source whole-home intelligence solution "Miloco 2.0," launched in the same month, is based on Xiaomi's proprietary MiMo large model and integrates the OpenClaw agent system. It aims to enable smart homes to proactively understand behavior, remember habits, identify environmental risks, and execute complex tasks rather than relying on fixed automation rules. In embodied intelligence, Xiaomi released the vision-language-action model "Xiaomi-Robotics-1" in July 2026. The model was pretrained on 100,000 hours of real-world data and ranked first in the RoboCasa365 simulation benchmark. Related humanoid robots have been deployed in the logistics area of the final assembly workshop at Xiaomi's automotive factory to sort center-console side covers and fold turnover boxes. Both tasks achieved a 90% success rate, demonstrating that AI technology has begun entering actual production processes in smart factories. Reported earnings were boosted by fair-value gains on financial instruments: quarterly reported net profit doubled QoQ to RMB 94.6 hundred million, while fair-value gains on financial instruments increased 6.6 times QoQ to RMB 64.6 hundred million. Deutsche Bank therefore raises its 2026 reported net profit forecast by 36.3% to RMB 286 hundred million. However, the weaker smartphone revenue outlook leads it to lower its DCF target price from HKD 50.80 to HKD 48.00. The report believes that simple valuation multiples cannot fully reflect Xiaomi's earnings capacity and business transformation over the coming years, and therefore uses a long-term DCF valuation. The model uses a five-year free-cash-flow forecast period through 2030 to cover the maturation of the product portfolio. WACC is 7.4%, comprising a 6.7% cost of debt, a 3.0% risk-free rate, a 4.5% market risk premium, a Beta of 1.0, a 16.3% income tax rate, equity representing 88.8% of the sum of equity and debt, and a terminal growth rate of 0.5%. The target price implies 2.0x expected 2026 EV/sales. The report also explicitly notes that the DCF result depends on long-term forecasts and is relatively sensitive to assumptions for WACC and the terminal growth rate.

Analysis framework

The report first breaks down Q2 gross profit and net profit performance by segment, then uses sales volume, ASP, product mix, component costs, and operating expenses to explain the divergence between the smartphone and automotive businesses. It subsequently evaluates the products, pricing, suppliers, and sales plans for the extended-range SUVs and reviews AI progress in areas including foundation models, smart homes, and factory robots. On this basis, it adjusts its 2026 revenue and reported net profit forecasts, and finally updates the target price using a DCF valuation based on free-cash-flow forecasts through 2030.

Methodology notes

• Valuation methodologyDCF discounted cash flow

  Five-year free-cash-flow DCF valuation

  The report forecasts Xiaomi's free cash flow through 2030, discounts it using a 7.4% WACC, and applies a 0.5% terminal growth rate to calculate long-term value. This method is used to reflect the contribution of new products and business transformation to long-term revenue rather than relying solely on short-term valuation multiples.

• Industry/sector analysis frameworkVolume-price decomposition

  Segment performance decomposition by sales volume, ASP, and gross margin

  The report separately examines smartphone and EV sales volume, blended ASP, product mix, costs, and gross margin to explain changes in revenue and profit. For example, smartphone price increases failed to offset declining sales volume and rising memory costs, while EV sales growth increased gross profit and narrowed losses.

Asset mapping & comparison

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

• Xiaomi (1810.HK)

  The core company covered by the report; narrower smart-vehicle losses, expansion into extended-range SUVs, and AI deployment are positive factors, while pressure on smartphone margins weighs on near-term operating performance.

  Strengths

  EV sales volume is growing and driving narrower losses, IoT and internet-services gross profit remains stable, and the company has a multilayered AI strategy spanning foundation models, smart homes, and embodied intelligence.

  Weaknesses

  Smartphone sales volume declined QoQ, memory-chip costs increased, and smartphone gross margin fell to a three-year low of 8.5%.

  Comparison

  The report states that the N90 and N70 feature competitive pricing and aim to catch up with Xiaomi's battery EV series in sales volume. Aggressive price cuts by automotive peers may continue to create pressure.

  Risks

  Aggressive price cuts by automotive peers may create greater-than-expected margin pressure, and new product launches may also be delayed.

Key data

• Q2 2026 non-IFRS adjusted net profitRMB 62.2 hundred millionFlat QoQ and broadly in line with market expectations
• Q2 2026 gross profitRMB 216 hundred millionFlat QoQ
• Smartphone segment gross profitRMB 36 hundred millionDown 20% QoQ
• Blended smartphone ASPRMB 1,351Up 3% QoQ to a record high
• Smartphone sales volume-8% QoQDown QoQ
• Smartphone gross margin8.5%Down 1.6 percentage points QoQ to a three-year low
• Industry memory-chip contract pricesApproximately +50% QoQCreated cost pressure for the smartphone and automotive businesses
• Sales volume for smart EVs, AI, and other new initiatives104,199 unitsUp 29% QoQ
• Gross profit from smart EVs, AI, and other new initiativesRMB 48 hundred millionUp 20% QoQ
• Gross margin for smart EVs, AI, and other new initiatives19.2%Down 0.9 percentage points QoQ
• Blended automotive ASPRMB 229,312Down 2% QoQ, mainly due to the higher contribution from the SU7
• Operating expenses for smart EVs, AI, and other new initiativesRMB 74 hundred millionUp 4% QoQ
• Net loss from smart EVs, AI, and other new initiativesRMB 26 hundred millionNarrowed 16% QoQ
• Q2 2026 reported net profitRMB 94.6 hundred millionDoubled QoQ
• Fair-value gains on financial instrumentsRMB 64.6 hundred millionIncreased 6.6 times QoQ
• 2026 reported net profit forecastRMB 286 hundred millionRaised by 36.3%
• 2026 revenue forecast adjustment-6.3%Lowered due to a more cautious outlook for smartphone sales volume
• N90 Max presale priceRMB 299,900Seven-seat extended-range SUV scheduled for official launch in September 2026
• N70 Max priceRMB 259,900Five-seat, four-wheel-drive extended-range SUV
• N90 and N70 sales forecastAverage monthly sales of 15,000 units per modelExpected after production ramps up
• MiMo-V2.5 weekly token usage10.5 trillion tokensRanked first on OpenRouter
• Xiaomi-Robotics-1 pretraining data100,000 hoursReal-world data
• Automotive factory robot task success rate90%Both center-console side-cover sorting and turnover-box folding reached this level
• DCF target priceHKD 48.00Previously HKD 50.80, implying 2.0x expected 2026 EV/sales
• DCF weighted average cost of capital7.4%The free-cash-flow forecast period extends through 2030

Impact & implications

The report believes Xiaomi's stable adjusted earnings in Q2 masked a clear divergence in its business mix: growth in automotive sales volume and narrower losses provided support, while the smartphone business faced rising memory costs, declining sales volume, and margin compression. Extended-range SUVs and AI applications broaden long-term growth drivers, but a more cautious smartphone sales forecast still results in lower revenue expectations and a reduced DCF target price. Fair-value gains on financial instruments, meanwhile, significantly increase the reported net profit forecast.

Risks

• Aggressive price-cutting strategies by automotive peers may create greater-than-expected margin pressure for Xiaomi's automotive business.
• New product launches may be delayed.