Xiaomi delivered a beating 2Q25 results with revenue and adj. net income surging 30% and 75% YoY to RMB116bn and RMB10.9bn respectively, beating BOCIe by 2% and 5%. While smartphone faces ASP and GPM headwind due to unfavourable mix and BOM pressure, we expect upcoming Xiaomi 16 launch and brilliant IoT growth from large home appliance, tablets and wearables to keep traditional business growth in good shape. EV segment reported 26.4% GPM upon SU7 Ultra delivery and operating loss continued to reduce to RMB279m, staying on track to turn profit at certain point in 2H25. Maintain sector top BUY with unchanged TP of HK$74.4.
　　Key Factors for Rating
　　2Q25 highlight: Revenue reached RMB116bn (+30% YoY), beating BOCIe by 2% and in line with street, mainly driven by strong IoT sales (+45% YoY). GPM was 22.5% while OPM declined 1.2ppts QoQ to 7.7%, mainly due to elevated sales expenses (e.g. logistic, compensations) driven by strong smart large home appliances sales as well as increased R&D expenses for EV, AI and other initiatives. Adj. NI of RMB10.9bn surpassed BOCIe and consensus by 5% and 6% respectively.
　　Smart EV business: 2Q25 revenue advanced 14.4% QoQ, slightly beyond our initial estimate as the larger SU7 Ultra mix lifted blended ASP up 6.4% QoQ to RMB254k. The improved product mix drove sequential gains in gross margin to 26.4% in 2Q25. Combined with widening OPEX, 2Q25 operating loss reduced to RMB279m from 1Q’s RMB495m, staying on track to turn operating profit at certain point in 2H25. Despite the uncertainty about the commissioning timeline of the second-phase factory persists, the mgmt. remains confident that existing capacity will fully support full-year sales target of 350k units through effective technological upgrades. The deliveries upside will largely depend on the timing of the second-phase factory’s operational launch and its production ramp-up pace, which we now estimate at late 3Q25 or early 4Q25.
　　Smartphones: Revenue was RMB45.5bn (-2% YoY) due to ASP decline (-3% YoY and -12% QoQ to RMB1,073). The GPM was down 0.9ppt QoQ to 11.5% due to higher low-mid end smartphone mix in overseas markets, partially offset by strong premium smartphone shipment (accounted for 27.6% market share) in mainland China. Mgmt. slightly guides down 2025 smartphone volume target from 175-180m to 170m citing end demand weakness but expects GPM to rebound in 4Q25 thanks to new high-end model launch, despite increases in memory and battery BOM costs.
　　IoT: IoT segment sustained strong growth in 2Q25, driven by strong shipment and ASP growth across large home appliances (revenue +66% YoY), tablets (revenue +41% YoY), and wearables (revenue +71%). GPM was 22.5%, slightly down QoQ dragged by 618 promotion and competition. Mgmt. is upbeat on large home appliances growth following overseas new retail ramp starting from 2025. We project 31%/8%/13% revenue growth for Xiaomi IoT over 2025-27E.
　　Internet services: Revenue grew 10% YoY to RMB9.1bn, primarily driven by advertising revenue (+15% YoY) with GPM down 1.6ppts at 75.4%. With stable MAU growth in both China and overseas, particularly among premium users, we expect internet services revenue to reach RMB38bn (+11% YoY) in 2025, slightly faster than smartphone revenue growth of 5% YoY.
　　Key Risks for Rating
　　Domestic OEMs competition; Geopolitical conflict and trade war; Component price increase; Tax dispute in India; Unsatisfactory smart driving progress.
　　Valuation
　　We fine tune our model to reflect BOM pressure of smartphone but lift our EV GPM estimate on Xiaomi EV’s strong margins. As a result, we lift 2025E adj. EPS by 2% but keep 2026/27E adjusted EPS unchanged.
　　We use 22x 2026E P/E to derive Xiaomi’s traditional business value of HK$44.0 per share. Together with HK$30.4 TP for EV business, we keep our SOTP TP of Xiaomi at HK$74.4 unchanged. Reiterate BUY.