How weak are third-quarter earnings expected to be?
- Citi expects Xiaomi's third-quarter 2026 revenue to be 104 billion yuan, down 8% year on year and 4% quarter on quarter, and 4% below Bloomberg consensus. It expects adjusted net profit of 4.8 billion yuan, down 58% year on year and about 18% below Bloomberg consensus.
- The bank expects a consolidated gross margin of 20.1%, up 0.3 percentage points quarter on quarter but below Bloomberg consensus of 20.7%. The improvement in smartphone gross margin comes alongside weakness in the IoT, internet and electric vehicle businesses and the drag on earnings from AI operations.
Why is gross margin improving despite a sharp drop in smartphone shipments?
- IDC data show Xiaomi shipped 30.7 million smartphones globally in the third quarter, down 29% year on year; global market shipments fell 22% over the same period. Citi believes Xiaomi deliberately reduced shipments of low-margin models to protect profitability.
- Citi expects Xiaomi's third-quarter smartphone revenue to be 44.3 billion yuan, down 4% year on year. It expects the average selling price to rise 7% quarter on quarter to 1443 yuan, with a higher share of premium model sales lifting smartphone gross margin by 0.3 percentage points quarter on quarter to 8.8%.
- Citi maintained its smartphone shipment forecasts for 2026 through 2028 at 126 million, 130 million and 135 million units, respectively, but raised its forecast for year-on-year average price growth in 2026 from 20% to 23%, and in 2027 from 1% to 4%.
Which businesses offset the improvement in smartphone mix?
- Citi expects third-quarter IoT revenue of 26.2 billion yuan, down 5% year on year, and internet revenue of 9.4 billion yuan, flat year on year. Although IoT gross margin is expected to rise quarter on quarter to 21.6%, internet gross margin may fall 3.4 percentage points year on year to 73.5%, as lower smartphone shipments reduce pre-installation revenue and advertising revenue also weakens.
- According to Yiche data, Xiaomi shipped approximately 101 thousand electric vehicles in the third quarter. Citi expects the average electric vehicle selling price to fall 5% quarter on quarter to 226 thousand yuan, with revenue of approximately 23 billion yuan, down 8% quarter on quarter; gross margin is expected to remain flat quarter on quarter at 19.3%.
- Stable electric vehicle gross margin does not mean losses in the related segment are narrowing. Citi expects the third-quarter operating loss for smart electric vehicles, AI and other businesses to widen to 3.6 billion yuan as AI research and development and automotive selling expenses rise.
How has Citi adjusted its full-year forecasts and valuation?
- Citi cut its 2026 electric vehicle shipment forecast from 450 thousand to 407 thousand vehicles and lowered its electric vehicle gross margin assumptions for 2026 through 2028. It also widened its forecast for the year-on-year decline in 2026 IoT revenue from 7% to 11%.
- The bank cut its adjusted earnings per share forecasts for 2026, 2027 and 2028 by 7%, 9% and 7%, respectively. The new forecasts are 16%, 12% and 3% below market consensus, respectively.
- Citi maintained its Buy rating and cut its target price from HK$34 to HK$33.2. Its sum-of-the-parts valuation applies a price-to-earnings multiple of 17.7 times to the core smartphone, IoT and internet businesses and a price-to-sales multiple of 1.5 times to smart electric vehicles, AI and other businesses. The bank sees third-quarter results and fourth-quarter guidance as near-term catalysts.