Xiaomi: Will the smartphone face another "cold wave" while the automobile "surge" comes to the rescue?

$XIAOMI-W(01810.HK) released its Q2 2025 financial report (ending June 2025) after the Hong Kong stock market closed on the evening of August 19, 2025, Beijing time. Key points are as follows:

1. Overall Performance: Revenue of 116 billion, up 30.5% year-on-year, with revenue growth mainly driven by IoT and automotive business growth. Gross margin remains at a relatively high level of 22.5%, mainly supported by the improvement in automotive business gross margin, while traditional hardware gross margin declined due to promotions and competition.

2. Automotive Business: Automotive-related revenue of 21.2 billion this quarter, in line with expectations. The company shipped 81,000 vehicles this quarter, with the average price per vehicle further increasing to 253,000 yuan. This was mainly driven by the shipment of high-priced models such as the Ultra model, structurally boosting the average price.

This quarter, the automotive business gross margin continued to rise to 26.4%, exceeding market expectations of 23.5%, mainly driven by scale effects. This quarter, Xiaomi's automotive business operating loss was 300 million yuan, with operating expenses for automotive and innovative businesses totaling 5.9 billion yuan.

With the launch of the YU7 and the ramp-up of the second-phase factory capacity, Xiaomi's automotive business gross margin is expected to continue rising, with potential profitability in the second half of the year.

3. Mobile Phones: 45.5 billion, down 2.1% year-on-year, below market expectations of 48.3 billion. Xiaomi's mobile phone shipments grew 0.5% year-on-year this quarter, while the average price of Xiaomi phones fell 2.6% year-on-year. Under the influence of promotions and market competition, the mobile phone business gross margin fell again this quarter to 11.5%.

By market: Xiaomi's mobile phone shipments in the domestic market grew 3.8% year-on-year, while overseas market shipments fell 0.6%. Although Xiaomi's market share in the domestic market increased under the influence of state subsidies, overall demand in the mobile phone market remains sluggish.

4. IoT: 38.7 billion, up 44.7% year-on-year, exceeding market expectations of 36.2 billion. The company's IoT business continues to grow, mainly driven by the growth in domestic major appliances, wearable products, and tablet revenue. Both major appliances and wearable products achieved over 60% year-on-year growth this quarter.

However, it is worth noting that the growth rate of the IoT business slowed this quarter, and the IoT business gross margin also showed a significant decline. Although state subsidies continue, the sustainability of market demand driven by them still needs observation.

5. Internet Services: 9.1 billion, up 10% year-on-year, in line with expectations. Growth was mainly driven by advertising business, while value-added services slightly declined quarter-on-quarter. MIUI users grew 8% year-on-year, while ARPU value increased by only 2%.

By region: This quarter, overseas internet revenue was 3 billion, while domestic internet revenue was about 6.1 billion, both regions achieving around 10% growth. MIUI user numbers continued to grow in both domestic and overseas markets this quarter.

6. Profit: Core profit of 8.9 billion, adjusted net profit of 10.8 billion. Xiaomi's traditional business core profit was about 9.2 billion yuan, with automotive business losses narrowing to 300 million yuan. The quarter-on-quarter decline in core profit was mainly due to the shrinkage of traditional business profits, affected by the quarter-on-quarter decline in mobile phone and IoT gross margins.

Dolphin Research's overall view: Mobile phones are back in the doldrums, while automotive remains hot.

Xiaomi's financial report this time clearly showcases a "tale of two cities":

a) Cold mobile phone business: The first decline in nearly seven quarters. Xiaomi's mobile phone shipments showed slight growth, while the average price of phones declined, directly leading to a drop in mobile phone revenue.

The growth in Xiaomi's mobile phone shipments mainly came from the domestic market, while Xiaomi's mobile phone shipments in overseas markets still declined year-on-year. Although Xiaomi's market share in the domestic market increased, even with the help of state subsidies, the overall mobile phone market shipments still declined this quarter.

Combined with the slowing growth of the IoT business, the impact of state subsidies on Xiaomi's traditional business is weakening, reflecting the current sluggish demand in the traditional hardware market.

b) Hot automotive business: Gross margin far exceeds expectations. Since sales data are generally public, the market is more focused on Xiaomi Automotive's average price per vehicle and gross margin. This quarter, Xiaomi Automotive's average price continued to rise to 253,000 yuan, mainly driven by the increased proportion of Ultra models.

More strikingly, Xiaomi Automotive's gross margin reached 26.4% this quarter, far better than market expectations. In fact, due to the impact of Ultra sales and capacity ramp-up, buyers had already raised their expectations for automotive gross margin from the original 23.5% to 24.5%. The gross margin exceeding 26% this quarter clearly reflects the effect of the company's automotive product average price increase and scale effects.

Overall, Xiaomi's financial report this time shows the "weak" state of traditional business, which basically aligns with preview expectations. The automotive business's gross margin situation is clearly better than market expectations. Recently, Xiaomi's stock price has shown continuous decline, indicating that the situation of traditional business has been largely digested by the market.

In the absence of highlights in traditional business, the market is more focused on changes in the automotive business:

Xiaomi Automotive's SUV model YU7 was officially launched at the end of June. For specific launch event details and model information, you can read Dolphin Research's previous article "Xiaomi Automotive: YU7 Explosive Start, Will It Knock Tesla Off the "Throne"?".

Xiaomi positions the YU7's main competitor as Tesla's Model Y, with both forming competition in the 250,000-350,000 yuan price range.

For Xiaomi Automotive, more important are order, capacity, and gross margin indicators:

① Orders: YU7 locked in orders exceeding 240,000 units within 18 hours of launch. Combined with Xiaomi's factory capacity situation, this means, "even if you order today, you won't get the car until the end of the year".

From the current production cycle: SU7's average delivery cycle is about 9 months; YU7's delivery cycle is over 1 year. Even with the recent launch of YU7, SU7's delivery cycle has not been significantly shortened, and YU7 further exacerbates Xiaomi Automotive's "supply shortage" situation;

② Capacity situation: Before the second-phase factory opens, Xiaomi Automotive's monthly delivery volume is difficult to break through the 30,000-unit barrier, with SU7 maintaining a delivery cycle of over 9 weeks. Currently, the second-phase factory is also entering the mass production ramp-up stage, with Xiaomi Automotive's July delivery volume exceeding 30,000 units.

However, the mass production of the second-phase factory has not shortened delivery times, and the launch of YU7 has brought nearly 300,000 orders. Combined with the second-phase factory capacity ramp-up situation, Dolphin Research expects the company's current SU7+YU7 combined orders in hand to exceed 500,000 units, requiring scheduling until the second half of next year to complete existing order deliveries.

③ Automotive Gross Margin: For Xiaomi Automotive business, the revenue side is mainly affected by capacity release, relatively certain. Gross margin is the main factor affecting the automotive department's performance at this stage. This quarter, the company's automotive business gross margin further increased to 26.4%, mainly benefiting from the company's automotive product average price increase and scale effects.

With the mass production ramp-up of the second-phase factory, the company's automotive business gross margin will continue to rise, Dolphin Research expects Xiaomi Automotive business to achieve positive core operating profit in the second half of the year, no longer being a "drag" on the company's overall performance.

From an investment perspective, the current development stages of automotive business and traditional business are different, so Xiaomi's valuation should be viewed in two parts:

① Traditional Business Part: Due to relatively weak demand for mobile phones and other electronic products, Dolphin Research has lowered expectations for mobile phone business and IoT business (Xiaomi mobile phone annual shipments lowered to 177 million units, IoT annual growth rate adjusted to 36%).

Assuming traditional business is given a reference PE of 25 times for 2025 post-tax core operating profit (revenue +18%, gross margin 22%, tax rate 14%), the valuation corresponds to about 830 billion market value;

② Automotive Business Part: With the improvement in automotive business gross margin, Xiaomi's automotive department is expected to achieve profitability in the second half of the year, thus Xiaomi's automotive business will gradually shift from PS valuation to PE valuation.

Assuming Xiaomi's third-phase factory starts mass production ramp-up in 2026, Xiaomi's annual delivery volume reaches over 700,000 units, potentially surpassing Tesla. However, it should not be overlooked that Xiaomi Automotive will still be affected by "supply shortage" in 2026, so performance estimates more refer to the situation in 2027.

Assuming subsequent model releases and third-phase ramp-up proceed smoothly, Xiaomi Automotive's annual sales in 2027 are expected to reach 1 million units. If Xiaomi Automotive maintains the price range of 250,000-350,000 yuan, after domestic annual sales exceed 1 million units, the growth rate expectation for automotive business will show a significant slowdown (referencing annual sales of 700,000-800,000 units for BBA in China in 2020, and 660,000 units for Tesla in China in 2024).

Correspondingly, Lei Jun mentioned the plan for "Xiaomi Automotive to go overseas in 2027," which aligns with the timeline.

Assuming Xiaomi Automotive's 2027 sales are 1.01 million units, average price per vehicle is 271,000 yuan, gross margin 29.3%, then Xiaomi Automotive's 2027 post-tax core operating profit will reach 29.8 billion yuan (tax rate 15%).

Given a reference PE of 25 times (2027 post-tax core profit), discounted to present, the automotive business valuation is about 585 billion yuan (reference 10.16% discount rate).

Combining traditional business and automotive business, the total market value corresponds to 1.5 trillion Hong Kong dollars (HKD/RMB=0.92), approximately 59 HKD/share.

Due to the weak performance of traditional business, Dolphin Research has lowered the overall valuation of Xiaomi's traditional business. While the automotive business's gross margin exceeded expectations, the corresponding profit release is expected to accelerate further.

As the automotive business achieves profitability, Xiaomi Automotive's valuation will gradually shift from PS to PE. Due to the gross margin exceeding expectations, the valuation of Xiaomi Automotive has also been adjusted upward.

It is worth noting that the weak performance of traditional business is basically presented in the preview, and the market has already digested it. However, the automotive business gross margin still significantly exceeds preview expectations, which is incremental information. The automotive business is expected to inject confidence into the market, but it should not be overlooked that traditional business still contributes a large part of Xiaomi's valuation.

The following is a detailed analysis of Xiaomi's financial report by Dolphin Jun:

1. Overall Performance: Smartphones vs. Automotive: A Stark Difference

With the addition of its automotive business, Xiaomi's financial report now includes two new categories: "Automotive and Innovative Business," in addition to the previous "Smartphones x AIoT" segment.

The fact that Xiaomi discloses "Automotive and Innovative Business" as a separate item clearly demonstrates the company's emphasis on the automotive business. The company's market capitalization has broken through the trillion-yuan mark primarily due to the expectations generated by its automotive business, which is also a key factor in the company's future breakthroughs.

1.1 Revenue

Xiaomi Group's total revenue in the second quarter of 2025 was 116 billion yuan, a year-on-year increase of 30.5%, in line with market expectations of 115.3 billion yuan. The company's growth this quarter was primarily driven by IoT and automotive.

1) The core business—Smartphones x AIoT (traditional business)—achieved revenue of 94.7 billion yuan, a year-on-year increase of 14.8%. This was primarily driven by a 44% increase in IoT, while the mobile phone business experienced another decline this quarter.

2) Xiaomi's new businesses, including smart cars, achieved revenue of 21.2 billion yuan this quarter. Both shipment volume and average selling price increased this quarter, with shipments of the Ultra model driving the average selling price up to 253,000 yuan.

1.2 Gross Margin

Xiaomi Group's gross margin for the second quarter of 2025 was 22.5%, in line with market expectations of 22.3%. The gross margins of both the mobile phone and IoT businesses declined quarter-over-quarter this quarter, with the increase in automotive gross margin being the largest contributor.

a) Xiaomi's traditional business had a gross margin of 21.6%. This quarter, due to promotional activities and rising component costs, both the mobile phone and IoT gross margins declined quarter-over-quarter.

In addition, the company's other traditional businesses continued to incur a gross loss of 320 million yuan this quarter, including related services such as air conditioner installation. If this loss is included in the IoT business, the actual gross margin for IoT would be around 21.7%.

The mobile phone gross margin was also sluggish. Due to promotional activities and rising component costs, the company's mobile phone gross margin fell to 11.5%, directly impacting the company's profit projections for traditional businesses.

2) The gross margin for new businesses, such as automotive, was 26.4%, significantly exceeding the buyer's expectation of 24.5%. The automotive business's gross profit margin continued to rise this quarter, primarily driven by Ultra model shipments and increased production capacity. With the launch of the YU7 and the ramp-up of mass production at the Phase II factory, Xiaomi's automotive gross profit margin is expected to continue to rise.

Overall, Xiaomi's automotive business's gross profit margin has already exceeded that of its traditional businesses. With increased production scale, the company's automotive business gross profit margin will continue to rise, and it is expected to achieve profitability in the second half of the year, no longer being a drag on the company's performance.

II. Automotive Business: Significant Increase in Gross Profit Margin

The automotive business generated 20.6 billion yuan, and combined with the automotive peripheral business, totaled 21.2 billion yuan, generally within market expectations.

Of this total, 81,300 units were sold, with a unit price of 253,000 yuan, representing a 6.2% month-over-month increase. The company's shipments of the Xiaomi SU7 Ultra drove an increase in the average price of the units.

Gross profit margin for this quarter was 26.4%. The increase in gross profit margin this quarter was primarily due to the shipment structure. The higher-priced SU7 Ultra version is also produced on the SU7 production line. Phase 1 factory reached full capacity this quarter, reaching nearly 360,000 units annually. As more shipments lead to more orders, the ASP structure is essentially a function of production allocation based on the backlog of orders for each model.

This quarter, Xiaomi already stockpiled some YU7 vehicles at the Phase 1 factory, which somewhat impacted June delivery performance. With the launch of the YU7 and the ramp-up of mass production at the Phase 2 factory, I expect the company's guidance of 350,000 units will be exceeded, with full-year sales expected to reach approximately 400,000 units.

Based on the delivery times listed on Xiaomi's official website, the SU7 still requires over nine months, and the YU7 wait time will be over a year. I speculate that Xiaomi Auto currently has an order backlog of over 500,000 vehicles. Given the current "supply outstrips demand," the company may also advance its Phase III plant deployment while accelerating mass production at its Phase II facility to address supply shortages.

Precisely because Xiaomi's orders far exceed its production capacity, current revenue does not actually reflect the company's true operating performance. This is why Xiaomi's automotive business enjoys a higher PS multiple than its peers. As the automotive business becomes profitable, its valuation will shift from PS to PE.

III. Mobile Phone Business: Sluggish Demand

In the second quarter of 2025, Xiaomi's smartphone business achieved revenue of 50.6 billion yuan, marking another year-on-year decline. Even with the support of government subsidies, this cannot mask the sluggish mobile phone market.

Dolphin Jun breaks down Xiaomi's smartphone business by volume and price:

Volume: Xiaomi smartphone shipments reached 42.4 million units this quarter, a year-on-year increase of 0.5%.

By market: ① In the domestic market, thanks to government subsidies, Xiaomi's smartphone market share rebounded to 15.1% year-on-year, but overall domestic smartphone shipments continued to decline this quarter. ② In the overseas market, Xiaomi's smartphone sales declined by 0.6% year-on-year, continuing its downward trend.

Price: The average selling price of mobile phone shipments this quarter was 1,074 yuan, a year-on-year decrease of 2.6%. Low-priced models accounted for a larger proportion of sales this quarter, and this structural impact led to a decline in the company's average selling price.

The mobile phone business's gross profit margin for the quarter was 11.5%, a 0.9 percentage point decrease from the previous quarter. This was primarily due to the combined effects of rising costs and product cycles. On the cost front, rising prices for memory and battery materials put significant pressure on mid- and low-end products. Furthermore, the second quarter is a low season for new product releases, and the product mix temporarily impacted gross profit margin performance.

IV. IoT Business: Growth Rate Begins to Decline

In the second quarter of 2025, Xiaomi's IoT business achieved revenue of 38.7 billion yuan, a year-on-year increase of 44.7%. This was primarily due to significant growth in major appliances and wearables, driven by government subsidies. Both products achieved year-on-year growth of over 60% in the quarter.

The gross profit margin of the IoT business was 22.5% this quarter, down 2.7 percentage points from the previous quarter, mainly due to seasonal promotions and increased obsolescence costs for some product components. Considering the growth rate of the IoT business, the effect of the national subsidy policy has weakened.

V. Internet Services: Advertising Remains the Core Monetization Method

In the second quarter of 2025, Xiaomi's internet services business achieved revenue of 9.1 billion yuan, a year-on-year increase of 10%, with the growth rate continuing to decline. Advertising remained the primary growth driver for this quarter:

1) Advertising Services: Quarterly revenue reached 6.8 billion yuan, a year-on-year increase of 13.3%. This quarter's advertising growth primarily came from overseas markets, driven by the expansion of its overseas user base and enhanced localized operational capabilities, which led to more brand partnerships with the company.

In essence, the core advertising scenarios occupied by Xiaomi Advertising—app distribution and app pre-installation—are essentially mandatory distribution taxes for all major app manufacturers. App pre-installation, in particular, is strongly correlated with phone shipments, making advertising virtually a passive profit.

2) Value-Added Services: This segment primarily includes game distribution, Xiaomi's e-commerce platform Youpin, and Xiaomi Finance. Revenue from this segment was 2.3 billion yuan, showing little year-on-year growth. With the financial sector dormant amidst macroeconomic headwinds, the influence of game distribution channels declining, and Youpin's e-commerce platform lacking momentum, there is little hope for this value-added business.

Overall, this business still relies on hardware shipments for revenue in the long term. In its reclassification of revenue, Xiaomi has classified it as a legacy business. Only after integrating software and hardware can the company, as a mobile phone manufacturer, continue to pursue the logic of internet monetization. However, even if the internet business is classified as a legacy business, the overall gross profit margin has been surpassed by that of the automotive business.

VI. Overseas Market: Overall Decline in Hardware Business

In the second quarter of 2025, Xiaomi's overseas revenue reached 36.7 billion yuan, a year-on-year decline of 3.6%. With the implementation of government subsidies in the domestic market and the breakthrough of Xiaomi Auto, the company is currently focusing primarily on the domestic market, with the proportion of overseas revenue declining to approximately 30%.

Specifically, Xiaomi's overseas internet business grew by 11.1% this quarter, reaching 3 billion yuan; however, the company's overseas hardware revenue declined by 5% year-on-year, reflecting weak demand in the overseas hardware market.

7. Profit: The automotive business is expected to be profitable in the second half of the year

In the second quarter of 2025, Xiaomi's three expenses totaled 17.17 billion yuan, and the expense ratio rose slightly to 14.8%. This was partially due to the automotive business, which saw operating expenses increase to 5.9 billion yuan.

Excluding the automotive business, operating expenses for the traditional business segment were approximately 11.2 billion yuan, showing increases both year-on-year and quarter-on-quarter. The operating expense ratio for the traditional business was 11.9%, a year-on-year increase of 0.2 percentage points.

The adjusted net profit for the second quarter of 2025 is 10.8 billion. However, I have always disagreed with Xiaomi's way of adjusting net profit - not adjusting financial income and not adjusting dividend income from its own investment companies. However, even if these are sustainable, they are not considered the company's core business and cannot reflect the long-term sustainability of profitability.

Overall, I'm more focused on the core operating profit (revenue - costs - expenses) mentioned above, as it's the truest indicator of a company's ongoing profitability from its core business.

This quarter, the company's actual core operating profit was 8.9 billion yuan, with a core operating profit margin of 7.7%, primarily due to a quarter-over-quarter decline in gross profit margins for its traditional mobile phone and IoT businesses. Specifically, the company's core operating profit from its traditional businesses was approximately 9.2 billion yuan, while its automotive business incurred an operating loss of approximately 300 million yuan. With the automotive business's gross profit margin gradually improving, profitability is expected in the second half of the year.

Risk disclosure and statement of this article: Dolphin Research Disclaimer and General Disclosure