1Q26 revenue fell 10.9% YoY to RMB99.1bn, largely in line; adjusted net profit came in at RMB6.1bn, modestly above expectations. Segmental performance was mixed in 1Q26: smart EV and AI division underperformed on weaker ASP and higher OPEX, resulting in a largerthan- expected operating loss of RMB3.1bn; smartphone gross margin beat at 10.1% on effective use of low-cost inventory to mitigate memory inflation; internet revenue slightly missed on softer pre-installs. Looking ahead, the gross margin of smartphone may see a pullback in 2Q-3Q26, but we expect full-year target of 8% to remain on track. EV deliveries are poised to recover from 1Q26 bottom, though aggressive AI investment will weigh on profitability in coming quarters. IoT will continue to face a tough YoY comparison in 2Q26, but revenue is expected to turn decently positive in 2H26, fueled by strong overseas demand. We believe cyclical headwinds across Xiaomi’s businesses have been largely priced in, while ongoing R&D and ecosystem investment should strengthen its long-term positioning. We remain constructive on its Human x Car x Home ecosystem and integrated technology stack as foundations of a cross-platform moat in the coming physical AI era. Maintain BUY.
Key Factors for Rating
1Q26 broadly in line whereas clear segment divergence. Smart EV revenue grew 6.9% YoY but missed on weaker ASP, dragged by purchase-tax subsidies and ready-stock promotions. Gross margin of 20.1% was broadly on track, but wider OPEX drove a RMB3.1bn operating loss, below expectations. Smartphone revenue was broadly flat at RMB44.3bn, with richer mix and higher ASP fully offsetting weaker shipments. Gross margin of 10.1% beat on effective use of low-cost inventory to cushion memory inflation. Internet revenue rose 4.3% YoY to RMB9.5bn, modestly missing our forecast due to weaker preinstalls following disciplined smartphone shipment control.
Full-year outlook. (i) smartphone business. We expect smartphone gross margin to track at around 8% in 2026, with mix optimisation providing some buffer against ongoing memory cost headwinds. (ii) smart EV business. We expect delivery momentum to improve from the 1Q26 bottom, helped by the YU7 family ramp in 2Q26 and a large SUV launch on the new platform in 2H26. Even so, with management maintaining an aggressive AI investment stance, we expect the segment loss to persist in coming quarters. (iii) IoT will continue to face a tough YoY comparison in 2Q26, but revenue is expected to turn to a solid positive growth in 2H26, fueled by strong overseas demand.
Valuation
We believe near-term cyclical operational headwinds across Xiaomi’s all business lines are largely priced in by the market. Longer run, current R&D and ecosystem investment should reinforce its strategic positioning. We remain constructive on Xiaomi’s differentiated Human x Car x Home ecosystem and integrated technology stack as key pillars of a cross-platform moat in forthcoming physical AI phase. 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).
Key Risks for Rating
Domestic OEMs competition; geopolitical conflict and trade war; component price increase; unsatisfactory smart EV and new initiatives progress.