Xiaomi Q2 earnings report interpretation: High gross margin from automotive business offsets weak smartphone sales, key to watch in the second half is the ramp-up of production capacity at the Beijing second factory

Xiaomi's Q2 2025 performance exceeded expectations, with adjusted net profit reaching RMB 10.831 billion, a year-on-year increase of 75.4%, setting a record for the highest quarterly profit in history, and significantly improving profitability.

According to news from the Chasing Wind Trading Desk, Morgan Stanley believes in its interpretation of the performance that, the explosive growth of Xiaomi's electric vehicle business is effectively compensating for the slowdown in its smartphone business, and the ramp-up of production capacity at the second factory in Beijing in the second half of the year will become a catalyst for the stock price. Based on this, Morgan Stanley maintains an "overweight" rating with a target price of HKD 62, indicating an 18% upside potential from the current stock price.

So far this year, Xiaomi's stock price has risen by more than 50%.

UBS also expressed a similar view in its latest research report, believing that the current key focus is on:

1. The profit margin improvement brought by the high-end model mix in the electric vehicle business exceeds market expectations;

2. Weak smartphone demand has led management to lower shipment expectations;

3. Performance growth in the second half of the year will heavily rely on the ramp-up progress of production capacity at the second factory in Beijing, UBS maintains a delivery expectation of 720,000 units for 2026.

Significant improvement in profitability, but sector differentiation appears

The company's overall gross margin reached 22.5%, an increase of 1.8 percentage points year-on-year, but a decrease of 0.3 percentage points quarter-on-quarter. The profitability of various business segments shows significant differentiation:

The gross margin of the electric vehicle business reached 26.4%, a substantial increase of 3.3 percentage points quarter-on-quarter, indicating a good profit outlook.

The gross margin of the AIoT business is 22.5%, an increase of 2.8 percentage points year-on-year, but a decrease of 2.7 percentage points quarter-on-quarter.

The gross margin of the smartphone business is 11.5%, with year-on-year and quarter-on-quarter declines of 0.7 and 0.9 percentage points, respectively, reflecting intense market competition pressure.

Electric vehicle business becomes the biggest highlight of the quarter; EV deliveries will be a key catalyst

UBS believes that the electric vehicle business has become Xiaomi's biggest highlight this quarter. The average selling price increased by 6.4% quarter-on-quarter to RMB 254,000, mainly benefiting from the contributions of the SU7 Ultra and YU7 high-end models. According to registration data in China, these two models delivered 2,253 and 2,212 units in June, respectively, and reached 2,506 and 5,859 units in July. Given that the production levels are similar to those in the first quarter, this performance indicates that the profit enhancement effect brought by the high-end model mix may be more significant than market expectations Looking ahead, Morgan Stanley analysts believe that after the YU7 model received strong orders, electric vehicle delivery volumes will become a key driver of stock prices in the second half of the year. Once Xiaomi's electric vehicle delivery volumes begin to grow rapidly, investors' views on the fundamental outlook may turn positive, as the YU7 has a higher average selling price, which is expected to bring better profit margins and greater earnings contributions.

UBS maintains its delivery expectation of 720,000 units for 2026, assuming that the second-phase factory operates at full capacity throughout the year, but achieving this assumption requires capacity to stabilize at sufficient levels by the end of the fourth quarter.

Diversified Business Portfolio Drives Revenue Growth but Smartphone Business Declines

Xiaomi's total revenue in the second quarter reached RMB 115.956 billion, a year-on-year increase of 30% and a quarter-on-quarter increase of 4%, exceeding Morgan Stanley's expectations by 3%. This strong performance is mainly attributed to the outstanding growth of AIoT and electric vehicle businesses, effectively offsetting the weakness in the smartphone business.

Specifically, AIoT business revenue was RMB 38.7 billion, a significant year-on-year increase of 45%, 18% higher than expected; electric vehicle business revenue was RMB 21.3 billion, more than doubling year-on-year, 6% higher than estimated.

In contrast, the smartphone business faces challenges, with revenue of RMB 45.5 billion, a year-on-year decline of 2%, 8% lower than expected. However, Morgan Stanley expects that the gross margin of the smartphone business is likely to bottom out in the third quarter and reverse in the fourth quarter, which will provide further support for the company's overall profitability.

Internet Services Show Steady Growth

Internet services revenue reached RMB 9.1 billion, a year-on-year increase of 10%, but 5% lower than expected. Notably, overseas internet services revenue reached RMB 3 billion, a year-on-year increase of 12.6%, accounting for 32.9% of total internet services revenue, setting a new historical high. Advertising revenue increased by 14.6% year-on-year, demonstrating a continuous improvement in monetization capabilities.

The number of monthly active users on MIUI reached 731 million, a year-on-year increase of 8%, with overseas users at 546 million, a year-on-year increase of 7%. The stable growth of the user base lays a solid foundation for the long-term development of the internet services business.

Xiaomi's outstanding performance this quarter demonstrates the effectiveness of its diversification strategy, with the rapid development of the electric vehicle business opening up new growth opportunities for the company. As capacity is further released and delivery volumes increase, Xiaomi is expected to occupy an important position in the high-growth track of new energy vehicles