<p>Amidst near-term profit pains stemming from sharply rising memory costs, pressure on smartphone gross margins, and high R&amp;D investment in new energy vehicles, Goldman Sachs believes that Xiaomi's AI strategy has the potential to unlock long-term value through ecosystem empowerment and embodied intelligence. The &#34;backbone profit,&#34; comprising internet services, AIoT, and other revenues, serves as an effective buffer for the group to navigate short-term industry headwinds.</p>
<p>According to the &#34;Zhui Feng&#34; trading desk, Goldman Sachs released its report on Xiaomi's Q4 2025 performance on March 25th. Xiaomi's revenue for the quarter grew 7% year-on-year, slightly exceeding Goldman Sachs' forecast of 1%, while adjusted net profit decreased 24% year-on-year, largely in line with market expectations. Following the earnings release, Goldman Sachs slightly lowered its revenue and adjusted net profit forecasts for 2026-2028 by 1% to 2%, but maintained its target price of HK$41. This corresponds to a per-share value of HK$46 (41% upside) in a bull case and HK$27 (17% downside) in a bear case.</p>
<p><img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/cc12583a-cd2a-48cf-9e76-ad79e03b6acc.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/cc12583a-cd2a-48cf-9e76-ad79e03b6acc.png"/></p>
<p>In terms of AI deployment, Xiaomi announced plans to invest a total of RMB 60 billion in artificial intelligence over the next three years, with approximately RMB 16 billion planned for 2026. The company concentrated on releasing three large language models on March 19th. Subsequently, its weekly token usage market share on the OpenRouter platform surged from 7.7% in the week of March 15-21 to 19% in the week of March 22-28, briefly surpassing Google, Anthropic, MiniMax, and OpenAI to rank first globally.</p>
<p>Goldman Sachs estimates Xiaomi's &#34;backbone profit&#34; (covering internet services, AIoT, and other revenues) to be approximately RMB 33.6 billion in 2026, equivalent to 110% of the group's adjusted net profit of RMB 30.2 billion for the same year. This implies that even if the smartphone and new energy vehicle businesses face temporary profit pressure due to cost pressures, the stable profitability of internet services and AIoT businesses will ensure the group's overall profitability, forming the core support for the current valuation.</p>
<h2>Q4 Performance Meets Expectations, Operational Efficiency Control Expected</h2>
<p>Goldman Sachs pointed out that <strong>Xiaomi's key metrics in the fourth quarter were largely in line with expectations, but smartphone gross margin faced the most significant pressure, declining 3.8 percentage points year-on-year and 2.8 percentage points quarter-on-quarter to 8.3%, primarily due to a sharp increase in global memory prices.</strong> According to Goldman Sachs data, as of March 24, 2026, the price of LPDDR4X 6GB to 12GB memory had increased by 78% to 100% from the end of 2025 and surged by 580% to 674% year-on-year from the first quarter of 2025.</p>
<p>In terms of operating expense control, Goldman Sachs expects non-IFRS operating expenses to increase by 11% year-on-year to approximately RMB 75 billion in 2026. However, core operating expenses are projected to decrease by 3% year-on-year to about RMB 43 billion, representing approximately 12.8% of core revenue. Sales and marketing expenses, and administrative expenses are expected to grow by only about 2% and 8% year-on-year, respectively, while R&amp;D expenses are projected to increase by about 21%. This reflects an orderly balance between efficiency control and technological investment. Goldman Sachs also noted that during the industry downturn in 2022-2023, the company successfully reduced core operating expenses to flat year-on-year and a 9% decrease year-on-year, respectively, indicating historical precedent for organizational efficiency optimization.</p>
<h2>AI Strategy Accelerates Implementation, Dual-Line Layout in Ecosystem Empowerment and Embodied Intelligence</h2>
<p>AI is the core theme heavily analyzed in Goldman Sachs' earnings review. Xiaomi's management positions AI capabilities as the core engine empowering the entire ecosystem. MiClaw is designed as a prototype for the future AIOS (Artificial Intelligence Operating System), aiming to provide superior security and user experience compared to third-party solutions. In the field of embodied AI, the company lists autonomous driving and humanoid robots as key focus areas, with commercialization through third parties not being the primary goal at the current stage.</p>
<p>In terms of investment plans, out of the three-year RMB 60 billion AI investment, approximately RMB 16 billion in 2026 will be primarily allocated to R&amp;D expenses (about 70%). The proportion of capital expenditure will gradually increase to 60% or more in the next two years, reflecting intensified infrastructure construction efforts. Goldman Sachs believes that the accelerated pace of Xiaomi's LLM releases and the rapid increase in market share on the OpenRouter platform demonstrate the company's swift conversion of AI R&amp;D investments into quantifiable stage achievements.</p>
<h2>&#34;Backbone Profit&#34; Guards Group Profitability, Internet and AIoT Act as Stabilizers</h2>
<p>Goldman Sachs introduced the &#34;backbone profit&#34; framework in its report as a key indicator for assessing the profit resilience of Xiaomi Group. This metric includes the net profit from internet services, net profit from AIoT, and other income (including interest income and investment gains). <strong>The estimated total for 2026 is approximately RMB 33.6 billion, a decrease of about 11% year-on-year.</strong> The decline is mainly due to Goldman Sachs' more conservative assumptions regarding asset disposal gains—this gain was approximately RMB 5 billion in 2025 and is expected to be difficult to replicate in 2026.</p>
<p>From a segment breakdown perspective, Goldman Sachs forecasts the smartphone business to incur a net loss of over RMB 4 billion in 2026, based on a combination of 145 million units in shipments and an approximately 8% gross margin. The new energy vehicle and other new businesses are expected to contribute about RMB 1 billion in net profit in 2026 with 600,000 vehicle deliveries and an approximately 21% gross margin (lower than the approximately RMB 2.5 billion in 2025). With relatively limited net profits from both smartphone and electric vehicle businesses, the RMB 33.6 billion backbone profit covers 110% of the group's RMB 30.2 billion adjusted net profit, providing strong fundamental support for the valuation.</p>
<p>Based on a sum-of-the-parts (SOTP) valuation, Goldman Sachs maintains its target price of HK$41, implying an upside of approximately 25%. The per-share value in the bull and bear cases are HK$46 (41% upside) and HK$27 (17% downside), respectively.</p>
<h2>Smartphone Business: Proactive Inventory to Hedge Cost Pressure, Margin Improvement May Be Delayed</h2>
<p><strong>Memory prices are in a long-term upward cycle, which Goldman Sachs expects to continue until 2027, posing sustained pressure on Xiaomi's smartphone business gross margins.</strong> The company has implemented two main coping strategies: first, leveraging its scale advantage as a top global purchaser to actively secure supply and gain a relative cost advantage; second, proactively planning its inventory strategy. Raw material inventory increased by 67% quarter-on-quarter and 26% sequentially in the current quarter, while finished goods inventory rose by 23% year-on-year and 12% sequentially, aiming to achieve a more favorable pricing environment or better gross margins in 2026 through early shipment.</p>
<p>The RMB 2.1 billion inventory provision recognized in the fourth quarter (representing 4.8% of quarterly smartphone revenue, the highest level since Q4 2022) creates accounting space for gross margin improvement in 2026. Goldman Sachs believes its effect is similar to the arrangements made during the industry downturn in 2023.</p>
<p>In terms of market share, Xiaomi's global smartphone market share declined by 2.6 percentage points quarter-on-quarter and 2 percentage points year-on-year to 11% in the fourth quarter. Declines were seen year-on-year in mainland China, Europe, Latin America, Southeast Asia, the Middle East, and Africa. Goldman Sachs maintains its smartphone business forecast largely unchanged: 2026 shipments are expected to decrease by 12% year-on-year, revenue by 8% year-on-year, with a gross margin of 8.0%; shipments and revenue are expected to resume growth in 2027, with gross margin improving to 9.0%.</p>
<h2>New Energy Vehicles: SU7 Facelift Orders Strong, 600,000 Unit Delivery Path for the Year Clear</h2>
<p>The new energy vehicle business continues its strong momentum. The SU7 facelift model received 30,000 confirmed orders within 3 days of its launch, with order confirmation speed surpassing the first-generation SU7. Of these orders, 60% of buyers are iPhone users, and 60% chose paid colors, which management believes will positively support gross margins. The proportion of female users also increased compared to the first generation, indicating expanding brand appeal.</p>
<p><strong>Goldman Sachs expects Xiaomi's new energy vehicle deliveries to reach 600,000 units in 2026, slightly exceeding the company's guidance of 550,000 units.</strong> The gross margin for the smart electric vehicle and other new business segment is projected to be 21.8% in 2026, slightly lower than the 22.7% in the fourth quarter, influenced by memory cost pressures. Due to increased R&amp;D investment in large language models, robotics, and chips, the adjusted net profit margin is expected to decrease from 2.4% in 2025 to 0.6% in 2026. Goldman Sachs anticipates that the continued ramp-up of SU7 model sales will be a significant driver of delivery growth in 2026. The standard and Pro versions of the SU7 facelift are expected to be deliverable between May and June, while the Max version is expected between May and July.</p>
<h2>AIoT: Overseas Growth Becomes New Engine, Growth Rate Expected to Turn Around in Second Half</h2>
<p>The AIoT business faces pressure from a high base in the domestic market. <strong>Goldman Sachs expects full-year revenue to decrease slightly by 2% year-on-year in 2026, with domestic revenue down 14% year-on-year.</strong> However, overseas AIoT revenue is expected to grow by 27% year-on-year (higher than 19% in 2025). Goldman Sachs anticipates this growth momentum will drive an inflection point in the quarterly year-on-year growth rate for overall AIoT revenue in the third quarter of 2026. Specifically, Goldman Sachs forecasts AIoT revenue to decrease by approximately 24% and 14% year-on-year in the first and second quarters of 2026, respectively. Entering the second half of the year, as the base normalizes, the growth rate is expected to rebound significantly.</p>
<p>Management holds a positive view on the mid-to-long-term growth prospects of AIoT. In the domestic market, the company continues to promote its high-end strategy. Taking Xiaomi air conditioners as an example, their domestic market share has reached 10%, while refrigerators and washing machines are still at 4% to 5%, indicating significant room for improvement. In overseas markets, the target market size for overseas AIoT is about three times that of the domestic market. The company is expanding its overseas retail network at a more measured pace, planning to open approximately 1,000 stores by the end of 2026 (compared to about 450 in 2025). In terms of internet services, global monthly active users increased by 7% year-on-year to 754 million in the fourth quarter. Goldman Sachs expects internet service revenue to grow by approximately 4% year-on-year in the first quarter of 2026, with overseas revenue growing by approximately 11% year-on-year and domestic revenue remaining largely flat, indicating continued steady growth overall.</p>
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<p>Goldman Sachs holds an optimistic outlook on Xiaomi's prospects, believing its AI strategy will unlock long-term value for the company. Despite facing short-term challenges such as rising memory costs and declining smartphone gross margins, Xiaomi's internet services and AIoT businesses will provide stable profit support. Goldman Sachs estimates Xiaomi's "backbone profit" to reach RMB 33.6 billion in 2026, sufficient to offset pressure from its smartphone and new energy vehicle businesses. Xiaomi plans to invest RMB 60 billion in AI over the next three years and aims to achieve a leading position in the large language model market</p>

- Goldman Sachs reports on Xiaomi's Q4 2025 performance, highlighting a 7% revenue increase year-on-year, while adjusted net profit fell 24%.  
- Despite pressures from memory costs and low margins in the smartphone sector, Xiaomi's AI strategy is expected to enhance long-term value through ecosystem empowerment and stability in its "backbone profit" from internet services and AIoT.  
- Goldman also forecasts Xiaomi's 2026 backbone profit at approximately RMB 336 billion, supporting overall profit despite challenges in mobile and new energy vehicle sectors.

Ignoring Short-Term Pain, Goldman Sachs Remains Bullish on Xiaomi: AI Poised to Unlock Value, AIoT Provides a Safety Net