Xiaomi: The gross margin of its car business is 2.3 times that of its phone business, so why is it the one losing money?

Xiaomi is running two engines. One has been selling phones and IoT devices for over a decade; the other, focused on EVs and AI, just turned three this quarter. The efficiency ranking of these two engines flipped positions—but it's still the older engine that's actually generating profit.

$XIAOMI-W(01810.HK) Q2 revenue was RMB 108.9bn (-6.1% YoY); adjusted net profit was RMB 6.22bn (-42.6% YoY), slightly below market expectations of RMB 6.31bn.

Gross margins have inverted

Innovative businesses like smart EVs and AI posted a segment gross margin of 19.2%, while smartphones sat at 8.5%. A year ago, those figures were 26.4% and an even lower tier—the auto division's margin is declining but still more than double that of smartphones.

The profit hierarchy hasn't shifted

The Auto & AI segment reported an operating loss of RMB 2.6bn this quarter, down from RMB 3.1bn last quarter, narrowing steadily. Its ~RMB 4.8bn in gross margin was entirely consumed by R&D and expenses. Meanwhile, the Phone × AIoT segment generated RMB 84bn in revenue with a 20.0% gross margin, effectively carrying the group's profitability.

Where did the RMB 9.46bn come from?

GAAP net profit hit RMB 9.46bn, significantly beating the RMB 5.76bn consensus. However, the income statement includes RMB 6.46bn in gains from fair value changes of financial instruments (vs. RMB 3.36bn YoY) and RMB 2.16bn in other income, both non-operating items. Stripping these out leaves the RMB 6.22bn adjusted net profit, which came in slightly below estimates—a classic 'GAAP beat, adj. miss' report.

Smartphones trading volume for ASP

Smartphone revenue totaled RMB 42.1bn on shipments of 31.2mn units (-26.5% YoY). ASP rose to RMB 1,351 (+25.9% YoY), setting a record high, with the share of models priced above RMB 3,000 in mainland China climbing to 32.1%. Rising memory costs capped gross margins at 8.5%, as price hikes failed to fully offset cost pressures.

Where is the cash going?

R&D spending reached RMB 9.2bn this quarter, up 18.9% YoY, bringing H1 cumulative spend to RMB 18.2bn. Capex stood at RMB 3.6bn, with innovative businesses accounting for RMB 2.4bn.

What's the bet?

Betting on this earnings report means betting on when the auto business can turn its 19.2% gross margin into positive operating profit.

Demand isn't the issue: deliveries hit 104,199 units in Q2 (+28.2% YoY), outperforming the mainland China passenger vehicle retail market which contracted 22%. Losses are also trending in the right direction.

The challenge is timing. With an annual target of 550,000 units and 216,322 delivered through July, the remaining five months require nearly 67,000 units per month—more than double the current pace. The Xiaomi Pengcheng N70/N90 Max launching in September is the only variable left to close the gap.

A favorable external condition is still needed on the cost side. Lu Weibing stated during the earnings call that the industry's toughest period has passed, expecting memory prices to enter a slow-growth phase in H2, though levels remain elevated.

Four business lines laid out

The largest segment by volume is the least profitable, while the most profitable segment is the smallest—internet services boast a gross margin nine times that of smartphones, yet generate only one-fifth of its revenue.

[Prize Discussion]

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