We forecast 1Q26 revenue to decline 14% QoQ to RMB100bn, mainly dragged by a 40%+ plunge in vehicle deliveries. However, gross margin for core segments are likely to outperform consensus with smartphone rebounding above 9.5% and IoT returning to 25%. In contrast, the revenue contraction paired with gross margin compression by over 2ppts will likely drive the Smart EV division to an operating loss of RMB2.0-2.5bn. At the group level, we estimate adjusted net profit of RMB5.5bn for 1Q26. To reflect subdued smartphone shipments, softer IoT revenue, and auto drags, we trim our 2026–27E adjusted net profit forecasts to RMB26bn and RMB36bn, respectively. While a near-term turnaround is not yet visible, we stay constructive on Xiaomi’s foundational resilience to drive a cyclical recovery — a prowess proven over its 16-year history, from the 2015 product overhaul to the 2022 downcycle. Over the long run, we believe Xiaomi’s unique “Human- Car-Home” ecosystem and its proprietary AI full-stack capabilities position it to emerge as a frontrunner in the burgeoning Physical AI era. Maintain BUY with TP of HK$41.6.
Key Factors for Rating
1Q26 results preview. We forecast 1Q26 revenue to decline 14% QoQ to RMB100bn, primarily dragged by a 40%+ plunge in vehicle deliveries. Conversely, core segments remain resilient: smartphone and IoT revenues are expected to hold largely flat QoQ, while internet services may see a mild sequential decline. For gross margin, we expect core segments to outperform bearish consensus: smartphone margin is projected to rebound above 9.5%, while IoT should return to a robust 25%. In contrast, a sharp revenue contraction paired with over 2ppts compression in gross margin will likely drive the Smart EV division to an operating loss of RMB2.0–2.5bn. Coupled with stable OPEX ratio, we forecast a group-level adjusted net profit of RMB5.5bn, ahead of the market expectations.
Near-term outlook for multi-business lines. For smartphone, shipments are poised to lag industry growth this year given its value-for-money focus and heightened sensitivity to memory chip price surges within its entry-level portfolio. While quarterly margins may waver following the 1Q26 beat, we expect the full-year level likely to hit the 8% target. For IoT, 618 promotions are set to spur a seasonal revenue uptick, albeit with softening near-term margins; but full-year outlook stays healthy, aligning with last year's profile. For smart EV, 550k-unit target looks a bit challenging amid weak domestic demand and a slower launch cadence. The operating losses may persist, weighed down by under-ultilisation, intensifying rivalry, raw material cost pressure and elevated AI-related outlays.
Valuation
To reflect subdued smartphone shipments, softer IoT revenue, and auto drags, we trim our 2026–27 adjusted net profit forecasts to RMB26bn and RMB36bn, respectively. YTD, the stock has retreated 25%+ to a RMB650bn market cap, and mounting short interests imply the stock has become a consensus short in HK market. While a near-term fundamental turnaround is not yet in sight, we stay constructive on Xiaomi’s foundational resilience to drive a cyclical recovery — a prowess proven over its 16-year history, from the 2015 product overhaul to the 2022 downcycle. Over the long run, we believe Xiaomi’s unique “Human-Car-Home” ecosystem and its proprietary AI full-stack capabilities position it to emerge as a frontrunner in the burgeoning Physical AI era. Maintain BUY with TP of HK$41.60 (17x 2027E P/E for the core smartphone and IoT segments, and 3x 2026E P/S for the Smart EV and new initiatives).