Xiaomi Group Long-Term Owner-Oriented Research

Hunting ten-year five-baggers among great growth stocks — pressing the upside question: "Can it get much bigger?"

• QHow large is its market ceiling? Is it expanding an existing pie, or creating an entirely new market?5/10

  A

  The ceiling is high enough, but Xiaomi is mainly expanding and taking share from a large existing pie. The part that truly creates a new market is only a small slice within autos, and nearly every arena it has entered is already formed, brutally competitive, and crowded.

  Start with the size of the 3 pies under its feet. Smartphones are a mature giant market with global annual shipments of well over 1 billion units. Xiaomi ranked firmly third globally in 2025 with about 13.3% share (according to Omdia data cited by the report), but this is a pie of long-term stable demand and stock competition, not new demand. The report also notes that mainland China smartphone shipments fell 0.8% year over year in 2025. The EV track has an even higher ceiling: by the International Energy Agency's measure, global EV sales in 2025 had risen above 21 million units, up more than 20% year over year, and the long-term penetration curve still has a long runway. The problem is that Xiaomi is not a pioneer on this strong track but a follower. It delivered 411,082 vehicles in 2025, still nowhere near BYD or Tesla in supply-chain or brand dominance.

  Measured against Baillie Gifford's LTGG question of whether the company is expanding an existing pie or creating a new market, Xiaomi falls almost entirely into the former bucket: smartphones, IoT, and EVs are all huge existing markets already validated by others and packed with players. Xiaomi's role is to use stronger productization and value-for-money execution to take a larger slice, not to define a category that previously did not exist. This is fundamentally different from true market creation, such as the iPhone redefining the smartphone or Tesla pushing pure EVs from the fringe into the mainstream. The latter can enjoy many years of blue-ocean benefits without direct rivals; Xiaomi has been fighting Huawei, Apple, and BYD at close range from day 1.

  The only thing that can be called half a new market is its attempt to stitch smartphones, home devices, wearables, TVs, and cars into a Human x Car x Home ecosystem experience. In Chinese consumer electronics, few companies can genuinely offer this combination at the same time, and the report therefore judges the moat to be stable and slightly widening. But the honest view is that this creates incremental value through better integration of existing categories. It is still some distance from creating an entirely new market out of nothing, and whether ecosystem synergy can truly translate into pricing power and lock-in remains more of a narrative than a realized fact.

  Conclusion: The ceiling is not Xiaomi's bottleneck. A smartphone market of well over 1 billion units and an EV market of more than 21 million units give it enough room to operate for a long time. The real constraint is whether it can keep winning share in huge but crowded existing markets and convert that share into profit. That makes it more like a highly effective share taker in multiple large red oceans than a market creator opening a blue ocean and enjoying years of exclusive returns. This directly limits the ceiling on future returns. It is also the core reason why, at the current HK$26.32 share price, about HK$676.9 billion market cap, and about 17.5 times trailing PE as of June 10, 2026, the market is not giving Xiaomi a creator-style premium.

  Not investment advice. Stock markets involve risk; invest with caution.

  Jun 10, 2026
• QCan its revenue at least double over the next 5 years? Will growth mainly be driven by volume, price, or new businesses?5/10

  A

  Revenue can probably double, and the source of growth is clear: almost all of the burden rests on the volume of one new business, autos. Smartphones and IoT will contribute only modestly through either price or volume. But doubling revenue and doubling revenue profitably are two different things, and that is Xiaomi's biggest uncertainty today.

  Start with the base and the arithmetic. Xiaomi's total revenue in 2025 was RMB457.29 billion, up 25%. To double to about RMB900 billion by 2030, it needs a 5-year compound growth rate of about 14.5%. Breaking down the 3 engines gives a very uneven picture:

  Autos are the only main force that can carry the doubling story, driven by a new business and by volume. Smart EV and AI-related innovative businesses generated RMB106.07 billion of revenue in 2025, up 223.8%, with 411,082 vehicles delivered. Xiaomi's 2026 sales target is about 550,000 vehicles. Its Beijing Phase 3 plant started production after the 2026 Spring Festival, the Wuhan plant is planned to start production in 2026, and overall annual capacity is expected to exceed 600,000 vehicles. If autos can climb from about 410,000 vehicles to the million-unit range over the next 5 years while maintaining a mid-to-high average selling price, autos alone could contribute RMB200-300 billion of incremental revenue. This is the hardest part of the doubling narrative and is typically volume-led. But caution is needed: only about 80,000 vehicles were delivered cumulatively in 2026 Q1, with a completion rate of about 14%. It would need to average more than 52,000 vehicles per month over the following 9 months to hit the target, so execution pressure is real.

  Smartphones can hardly be relied on, with both volume and price weak. Smartphone revenue in 2025 was RMB186.44 billion, down 2.8%, already a negative contributor. The start of 2026 was worse: according to Counterpoint, Xiaomi's global shipments fell about 19% year over year in 2026 Q1, the largest decline among the top 5 brands. In mainland China, shipments fell about 35% year over year and share dropped from about 19% to about 12%, pushing Xiaomi back to fifth place (according to Omdia). The main cause was a 55-95% increase in DRAM/NAND memory prices, which squeezed value-for-money models. Over the next 5 years, smartphones are more likely to stabilize the base and contribute close to zero growth than to serve as a growth source.

  IoT and internet services are moderate positives, mostly volume-led with stable pricing. IoT and lifestyle products revenue rose to RMB123.2 billion in 2025, up 18.3%, a decent mid-speed engine. Internet services revenue was RMB37.4 billion, up 9.7%, with a 76.5% gross margin. Growth is moderate, but gross margin is extremely high, so the profit contribution is much greater than the revenue contribution. Together, the 2 businesses can add to the doubling story, but they cannot by themselves support an overall 14.5% compound growth rate.

  Conclusion: A revenue doubling over the next 5 years is achievable, but it would be highly concentrated growth walking on one leg: auto volume. It is not healthy scaling from 3 engines firing together. That creates 2 layers of risk. First, if the pace of auto scaling stalls, as the 2026 Q1 completion-rate pressure already suggests, the main load-bearing pillar of the doubling story shakes. Second, revenue doubling does not equal profit doubling. Auto gross margin was already solid at 24.3% for the full year, but this is still a capital-intensive business with frequent price wars. The report therefore judges that free cash flow / owner earnings are likely to be below or close to net profit over the long term. At the current HK$26.32 and about 17.5 times trailing PE as of June 10, 2026, the market is buying the assumption that autos can keep scaling and eventually make money. That is precisely the part that must be proven by real data over the next few quarters.

  Not investment advice. Stock markets involve risk; invest with caution.

  Jun 10, 2026
• QAfter 5 years, what will take over as the next growth engine? Does this second curve exist today?5/10

  A

  The second curve already exists in a very real way: autos. It has also moved one step further than when the report was written. In 2025, it generated full-year operating profit for the first time, rather than merely approaching breakeven. But the third curve, AI, remains at the investment and narrative stage and is far from formed.

  Baillie Gifford asks whether the second curve exists today. For Xiaomi, the answer is clearly yes, and it has been validated. Auto revenue in 2025 was RMB106.07 billion, up 223.8%, deliveries were 411,082 vehicles, and segment gross margin jumped from 18.5% in 2024 to 24.3% for full-year 2025. One honest correction and reinforcement to the report is needed here: the report text says EVs moved rapidly from large losses toward breakeven, but the actual result was better. The smart EV and AI-related innovative business segment recorded full-year operating profit of about RMB900 million for the first time in 2025, and first achieved quarterly operating profit of about RMB700 million in 2025 Q3. In other words, the second curve does not merely exist. It has crossed the key turning point from cash burn to self-funding, which is a real advantage versus many EV startups that are still pure cash burners. The report specifically notes that Li Auto's 2025 operating cash flow had already turned negative.

  But it is important to separate an established second curve from a secure one. Autos have a high ceiling, but long-term unit returns are not yet proven. Segment gross margin reached 24.3% in 2025, yet quarterly volatility has already appeared: Q4 gross margin fell to 22.7%, below Q2's 26.4% and Q3's 25.5%, reflecting pressure from price wars and product mix. The start of 2026 also deserves caution: cumulative Q1 deliveries were about 80,000 vehicles, with an annual-target completion rate of only about 14%. To reach the 550,000 vehicle target, monthly deliveries would need to exceed 52,000 vehicles for the rest of the year. So the second curve is real, but it is still in the stage of proving that it can keep making money in brutal competition, not the mature stage of effortlessly collecting cash.

  As for what takes over after 5 years, this is Xiaomi's current weakness. If autos are the second curve, then the only candidate for a third curve around 2030 is AI, and today it is far from a standalone business. Xiaomi's 2025 R&D expense was RMB33.1 billion, up 37.8%, with AI and autos explicitly identified as investment priorities. But AI's current value to Xiaomi lies more in enabling existing businesses, including recommendations and advertising on smartphones/IoT, device interconnection efficiency, and intelligent driving in autos, than in a new curve capable of independently contributing revenue at scale. Put differently, the second curve, autos, has landed; the third curve, independent AI monetization, is still an investment option and cannot be treated as a fact.

  Conclusion: Xiaomi passes the most concrete part of this Baillie Gifford question. The second curve not only exists; it is already profitable and scaling. That is the key attraction that distinguishes it from most single-engine hardware companies. But the honest caveat is just as important: the durability of returns from the second curve has not been tested through a cycle, with 2026 Q1 already showing delivery completion pressure, and the third curve that could succeed autos remains in the R&D investment stage. At the current HK$26.32 and about HK$676.9 billion market cap as of June 10, 2026, the market has already priced in success of the auto second curve, while paying almost nothing for a third curve. That gives the downside some support from auto performance, but the upside imagination must be opened by future delivery in reality.

  Not investment advice. Stock markets involve risk; invest with caution.

  Jun 10, 2026
• QWhat is its core competitive advantage? Will this moat widen or narrow over the next 3 to 5 years?5/10

  A

  Xiaomi's core competitive advantage is not any single deep moat. It is the stacking of multiple shallow moats plus extremely strong productization execution. Over the next 3 to 5 years, the ecosystem side is likely to widen slightly while the core smartphone side narrows. The net effect depends on whether autos can make the ecosystem truly substantive. This is a medium-strength moat with a non-linear direction.

  First, where does its real advantage lie? The report's judgment is accurate: Xiaomi has medium strength, built from multiple shallow moats stacked together, rather than a single very deep moat. Layer by layer:

  • Scale and cost: This is the most concrete layer. Smartphones, IoT, and internet services formed a revenue base of about RMB351.2 billion in 2025. Its supply chain, channels, and R&D scale (R&D expense of RMB33.1 billion) cannot be quickly replicated by new entrants.
  • Ecosystem and switching costs: Medium and gradually rising. Switching from one Android phone is easy, but once users add Mijia, wearables, tablets, TVs, routers, and then a car, switching costs gradually increase. Internet services gross margin of 76.5% and a record high in overseas internet revenue (RMB12.6 billion, 33.8% of internet services) prove that the ecosystem is indeed generating value beyond the hardware itself.
  • Brand and execution: Xiaomi's most prominent soft moat is actually very fast productization and commercialization execution. From smartphones to IoT, then to making autos profitable for the full year within 3 years, the ability to quickly build products, sell them, and control costs is its truly scarce capability.

  Now the weakness, which is also the root of the moat's lack of depth: weak pricing power. The report's checklist directly marks "Does it have pricing power?" as failed. Premium pricing power is clearly weaker than Apple's, and the core smartphone business remains competition-driven. The data makes this clear: smartphone segment gross margin fell from about 12.6% in 2024 to about 10.9% in 2025, showing that Xiaomi cannot hold price through brand the way Apple can.

  Will it widen or narrow over the next 3 to 5 years? The honest answer requires 2 separate tracks:

  The track moving narrower is the standalone smartphone moat. The start of 2026 has already flashed red: according to Counterpoint, Xiaomi's global shipments fell about 19% year over year in 2026 Q1, the largest drop among the top 5. In mainland China, share fell from about 19% to about 12%, pushing Xiaomi back to fifth place (according to Omdia). Although the main cause was memory price increases hurting value-for-money models, partly a cyclical disturbance rather than a permanent decline in competitiveness, it precisely exposes the shallow nature of the moat. When there is even a small disturbance on the cost side, share cannot be defended. That is the price of lacking pricing power.

  The track moving wider is the combination of multi-device ecosystem, internet services, and the auto entry point. If autos can truly make the Human x Car x Home ecosystem real and significantly raise users' total switching costs inside the Xiaomi system, the moat will widen. The report's core judgment is the same: the core moat is stable and slightly widening, but not widening linearly.

  Conclusion: The moat's direction is split. The smartphone side is narrowing, the ecosystem side is widening, and the net result is not yet locked in. It depends heavily on the success or failure of the auto move. If autos are only a capital-heavy volume business and fail to strengthen ecosystem lock-in, the moat will not widen and may instead be diluted by autos lowering overall returns on capital. Only if autos both scale and make ecosystem stickiness real will the moat genuinely widen. At the current HK$26.32 and about 17.5 times trailing PE as of June 10, 2026, the market is not assigning a deep-moat valuation. That broadly matches the true strength of Xiaomi's moat: medium and directionally unsettled.

  Not investment advice. Stock markets involve risk; invest with caution.

  Jun 10, 2026
• QIf its core business is disrupted, does it have the DNA to reinvent itself? How does it handle mistakes and bad news?5/10

  A

  On reinvention, Xiaomi scores highly in one of the few dimensions among the 10 questions where it can do so. It has one successful reinvention already validated by the market, from the 2022 trough to new highs in 2025, and it is using autos to actively escape the fate of smartphones. In handling mistakes and bad news, it is generally candid and provides adequate disclosure, but it is better at describing strategic progress than laying out per-share value destruction for shareholders.

  The implicit premise in this Baillie Gifford question is the ability to reinvent when the core business is disrupted. Xiaomi happens to have a real history to examine, not just speculation. In 2022, it experienced a cyclical break in the core business, with both smartphone inventory and demand hit. Full-year revenue was RMB280.04 billion, operating profit plunged to about RMB2.82 billion, and operating cash flow turned negative at about -RMB4.39 billion according to the report draft. For a company with a shallow moat and no self-repair capability, that trough could have become a decline. But over the following 3 years, Xiaomi completed a textbook reinvention through recovery, destocking, repair, and scaling: 2025 total revenue reached RMB457.29 billion, and adjusted net profit reached RMB39.17 billion (+43.8%), while operating margin rebounded from about 1% to about 10.5%. This shows it was not luck. It has the ability to reorganize product mix, the share of internet services, and new businesses together.

  The stronger evidence of reinvention DNA is that Xiaomi did not stay trapped in the narrowing smartphone track. It actively opened a second curve in autos, taking a brand-new capital-intensive business to about RMB900 million of full-year operating profit in 2025 and 411,082 vehicles delivered within 3 years. A company that dares to, and can, jump into a completely different industry to prove itself again while the core business is still profitable has given the strongest evidence of reinvention DNA. The report also lists corporate culture and operating capability, specifically extremely fast productization and commercialization execution, as Xiaomi's most prominent advantage.

  How does it handle mistakes and bad news? The answer is: honest disclosure, positive framing. The positive evidence is that, according to the report's citation of the 2025 annual report, the company clearly disclosed the India-related investigation (restricted cash of about RMB3.78 billion), weighted voting rights risk, and the chairman and CEO's deviation from the Hong Kong Stock Exchange governance code. It also disclosed the use of proceeds from the March 2025 placement in some detail. This shows that it does not avoid bad news and is willing to put risks on the table. It also did not hide smartphone weakness: the 2.8% year-over-year decline in 2025 smartphone revenue was reported as it was.

  But the weakness must be stated honestly. The report notes that management is better at talking about strategic progress and ecosystem vision, and less inclined than the best capital allocators to break down per-share value creation or destruction for shareholders. One specific example is buying back shares while conducting a large placement. According to the report, Xiaomi completed an 800 million-share placement in March 2025, with net proceeds of about HK$42.49 billion and a discount of about 6.6%, while continuing buybacks. This is not concealment, since it was disclosed, but it shows management prefers to emphasize expansion opportunities rather than proactively calculate the dilution cost to existing shareholders' per-share interests. The highest standard for handling mistakes is to lay out wins and losses per share the way the best capital allocators do. Xiaomi has not reached that level.

  Conclusion: On reinvention DNA, Xiaomi is one of the rare cases among the 10 questions where a strong affirmative answer is justified. It has a real, cycle-tested record of reinvention and is using autos to actively rewrite its fate. Its culture has strong error-correction and restart capacity. Disclosure of bad news is honest, compliant, and adequate. The only discount is that its transparency on shareholder per-share value has not reached the strictest owner standard. This strength partly offsets its weaknesses in pricing power and moat depth, but it does not change the report's overall Watch stance.

  Not investment advice. Stock markets involve risk; invest with caution.

  Jun 10, 2026
• QDoes management, especially the founder, have a long-term vision and deep alignment with the company? Is it willing to sacrifice current profit for 5 to 10 years from now?7/10

  A

  Yes. This is one of Xiaomi's clearest strengths: Lei Jun is deeply aligned as founder, has an extremely long-term view, and has shown through actions, including consecutive years without dividends and continued reinvestment in R&D and autos, that he is willing to sacrifice current profit for 5 to 10 years from now. The cost is a governance discount. Under weighted voting rights, minority shareholders have almost no constraint over capital allocation. You must accept handing the future to the founder's judgment.

  First, is the alignment deep? Very deep, and that is positive. Lei Jun remains chairman and CEO, holds about 61.0% of voting rights through Class A shares under the weighted voting rights structure according to the report's citation of the 2025 annual report, and controls a large number of Class A and Class B shares through family trusts. Lin Bin also holds a substantial stake. This is not a hired-manager model. It is a founder-led company in which the founder's economic interest and control are highly unified. This is exactly what Baillie Gifford values: the decision-maker is betting his own wealth, so the time horizon naturally lengthens.

  Second, is it willing to sacrifice current profit for the long term? The evidence is very strong:

  • No dividend for 3 consecutive years. The 2023, 2024, and 2025 annual reports all show that the board did not declare a final dividend, retaining all capital inside the company for technology, channels, autos, and expansion. For value investors seeking cash return, this is a drawback. But for the question of willingness to sacrifice the present for 5 to 10 years from now, it is a textbook yes.
  • Large and accelerating R&D investment. R&D expense in 2025 was RMB33.1 billion, up 37.8%, explicitly directed toward AI and autos, 2 long-term areas that take years to pay off.
  • Willingness to use core-business cash to feed a new capital-intensive business. Autos went from a roughly RMB6.2 billion adjusted net loss in 2024 to about RMB900 million of full-year operating profit in 2025. This trade-off of first bearing years of losses to earn a second curve is the strongest action-based proof of sacrificing the present for the long term.

  But the governance discount must be explained fully, or the analysis only sees the good side. This model of founder leadership plus sacrificing the present for the long term has a dark side:

  1. Weighted voting rights mean minority shareholders have almost no constraint. The company itself warns in the annual report that the interests of WVR beneficiaries may not always be fully aligned with those of all shareholders. When the founder's judgment to sacrifice the present for the long term is right, you benefit. If he misjudges, such as continuing to expand when he should not, you have almost no ability to correct course.
  2. Long-term investment and per-share value damage are separated by only a thin line. The clearest tension is buying back shares while issuing a large placement. According to the report, Xiaomi repurchased shares in 2023-2025, with cash outlays of about RMB1.36 billion, RMB4.05 billion, and RMB6.17 billion respectively, but completed an 800 million-share placement in March 2025, raising net proceeds of about HK$42.49 billion at a discount of about 6.6%. The placement is not necessarily wrong, since it finances the second curve, but it means Xiaomi remains a company that needs capital to drive growth, and management prioritizes expansion opportunities above maintaining a stable per-share ownership claim. The report therefore judges capital allocation to have both bright spots and contradictions.
  3. Share-based compensation causes real dilution. According to the report draft, share-based payment expense in 2025 was about RMB5.37 billion, and weighted average shares rose from about 24.83 billion in 2024 to about 25.66 billion in 2025. That means buybacks did not fully offset dilution. While incentivizing the team for the long term, it is also continuously diluting old shareholders.

  Conclusion: By Baillie Gifford's 3 measures of long-term vision, alignment, and willingness to sacrifice the present for 5 to 10 years out, Xiaomi hits almost all of them. Lei Jun is the kind of founder this framework likes most. This is where the report gives points for execution and alignment within its 3/5 management and capital allocation score. All deductions come from governance structure. You are investing in a company where the founder makes long-term capital allocation decisions on your behalf, and you have almost no say. If you trust Lei Jun's past execution record and can accept that delegated relationship, this item is a positive. If you are highly sensitive to WVR and expansion taking priority over per-share value, this is why you should stop at Watch.

  Not investment advice. Stock markets involve risk; invest with caution.

  Jun 10, 2026
• QIf it disappeared tomorrow, how much would customers miss it? Is its growth model sustainable and not dependent on harming society or regulation?5/10

  A

  If Xiaomi disappeared tomorrow, a considerable number of people would be inconvenienced, but not devastated. It would be missed for value for money and ecosystem convenience, but it has not reached the irreplaceability of iPhone or WeChat. Its growth model is generally healthy and not built on harming society, but 2 regulatory and sustainability gray areas must be watched: the India investigation, and auto safety and capacity ramp-up.

  This Baillie Gifford question asks for a dual test of indispensability and social/regulatory sustainability, so the answer must be separated honestly.

  First: indispensability, medium-to-strong but not extreme. Xiaomi reaches a huge user base (about 754 million global monthly active users in December 2025) and has strong mindshare in value-for-money technology consumption. It remained in the global top 3 in smartphones (about 13.3% share in 2025). For deep users who have filled their homes with Mijia devices, wearables, TVs, routers, and perhaps even drive a Xiaomi car, Xiaomi's disappearance would create real inconvenience and migration costs. These users would miss it. But the honest point is that the report marks pricing power as failed and switching costs as medium precisely because most users have strong substitutes. Switching a single Android phone is not hard, and IoT devices have many affordable alternatives. In other words, Xiaomi is missed because it is affordable, useful, and convenient within an ecosystem, not because users cannot live without it. The fact that Xiaomi's smartphone share in mainland China fell from about 19% to about 12% in 2026 Q1, pushing it back to fifth, itself shows how elastic user voting with their wallets can be. Once the value-for-money advantage was eroded by memory price increases, they left. That is the opposite signal from indispensability.

  Second: whether growth is earned by harming society or regulation. Overall it is healthy, but 3 gray areas need watching.

  • The core growth method is legitimate. Xiaomi mainly makes money by selling decent hardware to the mass market at competitive prices plus monetizing high-margin internet services. The 76.5% gross margin in internet services comes from advertising, game distribution, value-added services, and overseas monetization. This is a common and compliant industry model, not a business built on extraction or regulatory arbitrage. On this point it is clean.
  • Gray area 1: India regulation. According to the annual report cited by the report, the India-related investigation is still ongoing, restricted cash is about RMB3.78 billion, and the outcome and timetable are uncertain. This is a real item the report lists under regulatory and geopolitical risk. It is a disclosed uncertainty and has not yet become a defined financial loss, but it reminds investors that Xiaomi's globalization will repeatedly touch regulatory boundaries in different countries.
  • Gray area 2: auto safety and social trust. Autos are a life-and-death business. Any mistake in intelligent driving, capacity ramp-up (Beijing Phase 3 and the Wuhan plant entering intensive production in 2026), or delivery quality can quickly turn into a regulatory and brand-trust crisis. The social sustainability threshold of this track is much higher than for smartphones, making it the largest risk exposure in Xiaomi's growth model.
  • Gray area 3: the boundary of internet monetization. High-margin internet services depend on advertising and data-driven recommendations. These businesses are always subject to potential data compliance and advertising regulation over the long term. It is not a problem today, but it belongs to the sustainability category of needing to keep within the lines.

  Conclusion: Under Baillie Gifford's dual standard, Xiaomi's indispensability is medium-to-strong rather than extreme. It would be missed, but substitutes are plentiful, and the 2026 Q1 share decline is evidence. Its growth model is generally healthy and does not rely on harming society, with a legitimate core business model and honest disclosure. The long-term tracking issues are not whether it is doing harm, but whether the India investigation turns from uncertainty into a defined loss, and whether auto safety and capacity can meet higher social and regulatory requirements. Xiaomi passes this item, but it has not crossed the higher threshold of indispensability. That is exactly what limits its ability to enjoy the through-cycle pricing power of a platform company.

  Not investment advice. Stock markets involve risk; invest with caution.

  Jun 10, 2026
• QWhat are the unit economics of this business, including gross margin and incremental returns? Do they improve or deteriorate with scale? Where does the money it earns go?5/10

  A

  Xiaomi's unit economics are a mix of a small high-margin core (internet services), a medium-margin large body (IoT/autos), and a low-margin entry point (smartphones). As scale grows, overall gross margin is indeed improving, but this improvement comes mainly from revenue mix optimization, not from increased pricing power in any single business. Almost all of the money earned is reinvested into R&D, auto capacity, and expansion. That is its growth logic and also the reason its free cash flow is less abundant than that of mature platform companies.

  Start with layered unit economics. The differences are huge:

  • Internet services: top-tier unit economics, but a small base. 2025 revenue was RMB37.4 billion with a 76.5% gross margin. This is software-like high incremental return: one more active user or one more ad/game distribution has very low marginal cost. The problem is that it accounts for only about 8% of total revenue. Its contribution to profit is much greater than its contribution to revenue, but it cannot support the whole company's unit economics by itself.
  • IoT and lifestyle products: medium and improving. 2025 revenue was RMB123.2 billion, up 18.3%, with a corresponding gross margin of about 23.1% according to the report's segment calculation. This is a scale-driven business with reasonably good unit economics.
  • Autos: medium gross margin, capital intensive, with unit economics improving with scale but capped by price wars. Segment gross margin rose from 18.5% in 2024 to 24.3% for full-year 2025, so initial scale effect is real. But quarterly volatility has already appeared, with Q4 falling back to 22.7%. More importantly, incremental returns in autos are heavily consumed by working capital, capacity, and R&D. The report judges that free cash flow / owner earnings are likely to be below or close to net profit over the long term. This is the natural weakness of a capital-intensive business's unit economics.
  • Smartphones: a low-margin entry point, and deteriorating. Segment gross margin fell from about 12.6% in 2024 to about 10.9% in 2025. Smartphones are essentially a low-margin user entry point. The unit economics were thin to begin with and are further squeezed when pricing power is lacking.

  Do overall unit economics improve or deteriorate as scale grows? The answer is that overall gross margin improves, but it is important to see where the improvement comes from. Company-level gross margin rose from about 17.0% in 2022 to about 22.3% in 2025, and operating margin rebounded from about 1.0% to about 10.5%. But the source of improvement matters: it is not from price increases in one business, since smartphone gross margin is falling. It comes from revenue mix optimization: the rising share of high-margin internet services and improving autos lifts the gross-margin structure of the whole company. This is structural improvement, but it has a ceiling. If autos continue to rise as a share of revenue while smartphones remain weak, further improvement in overall gross margin will depend entirely on whether autos can hold 20%+ gross margin in a price war. That is not secure. So the proposition that scale improves unit economics holds for Xiaomi, but it is much more fragile than for a true software platform.

  Where does the money it earns go? Almost all of it is reinvested into growth, with no cash return to shareholders. There are 3 destinations: first, R&D, which was RMB33.1 billion in 2025, up 37.8%, directed toward AI and autos; second, auto capacity, with Beijing Phase 3 and the Wuhan plant entering intensive production in 2026; third, working capital, with inventory increasing by RMB26.07 billion in 2025 and consuming a large amount of cash. In shareholder returns, there have been no dividends for 3 consecutive years. Buybacks exist but are partly offset by placements and share-based compensation. This means the cash generated by Xiaomi's unit economics is currently not being paid to you, but reinvested on your behalf into the second curve. Returns must come through intrinsic value growth, not cash dividends.

  Conclusion: Xiaomi's unit economics are improving and scale effects are real, but they are improving through mix rather than pricing power. The highest-margin piece, internet services, is too small to support the whole company, while the largest incremental piece, autos, is capital intensive and will have incremental returns eaten by capacity and working capital. This is exactly why the report marks both whether it can generate stable free cash flow and whether its return on capital is excellent as uncertain. At the current HK$26.32 and about 17.5 times trailing PE as of June 10, 2026, the market is buying the assumption that unit economics will continue to improve with auto scale. The direction of that assumption is right, but realization depends on the intensity of auto price wars and is far from locked in.

  Not investment advice. Stock markets involve risk; invest with caution.

  Jun 10, 2026
• QWhat conditions must hold simultaneously for it to rise 5-fold in 10 years? Are those conditions realistic? What expectations are implied in today's share price?3/10

  A

  For Xiaomi to rise 5-fold in 10 years, 4 conditions must hold simultaneously: autos scale from about 410,000 vehicles to several million without gross margin collapsing, internet services keep expanding at high margins, the smartphone base stops bleeding, and the market continues to price it as an ecosystem platform stock rather than a hardware cycle stock. This combination is not impossible, but the joint probability that all 4 happen is not high. Today's HK$26.32 share price implies a neutral-to-optimistic expectation that fundamental strengthening has been recognized and auto success is partly priced in. It is not a pessimistic starting point with open 5-fold upside. That is exactly the source of the insufficient margin of safety.

  First, translate 5-fold into concrete numbers. Xiaomi's current market cap is about HK$676.9 billion as of June 10, 2026, at HK$26.32. A 5-fold rise in 10 years means market cap would need to reach about HK$3.4 trillion, or about US$430 billion, implying about 17.5% annualized return. To support that valuation, either profit must rise 5-fold while the valuation multiple stays unchanged, or profit must rise 3-fold and the market must rerate it from about 17.5 times to a higher multiple. The latter can happen only if Xiaomi is fully treated as a software-like ecosystem platform.

  Which conditions must hold simultaneously? Baillie Gifford focuses on joint probability, not single-point optimism:

  1. Autos scale 5 to 10 times while gross margin holds. Deliveries must climb from 411,082 vehicles in 2025 to the million-unit range and keep segment gross margin above 20%+ (24.3% for full-year 2025). This is the biggest load-bearing pillar of the 5-fold story. But 2026 Q1 already flashed a warning: cumulative deliveries were about 80,000 vehicles, the annual-target completion rate was only about 14%, and Q4 gross margin had already fallen to 22.7%. On a track with frequent price wars, scaling while making money is itself a low-probability task.
  2. Internet services continue to expand at high margins. The 76.5% gross margin cannot be eroded by regulation, advertising cycles, or slower overseas monetization, and the overseas share (already 33.8%) must keep rising.
  3. The smartphone base stops bleeding. Xiaomi must at least hold a global top 3 position and core China share, and avoid another result like 2026 Q1, when global shipments fell about 19% year over year and China fell to fifth. Otherwise the low-margin entry point will keep dragging on profit.
  4. The market maintains platform-stock pricing. This is the most hidden but most important condition. The 5-fold path works only if the market keeps giving Xiaomi a high multiple close to platform companies. Once it is reclassified as a hardware plus auto expansion stock, the valuation center will move down, and profit growth may not translate into share-price growth.

  Are these conditions realistic? Each single condition is not absurd, and Xiaomi's execution over the past 3 years proves it is not just talk. But Baillie Gifford's discipline is to look at simultaneous success. If any one of the 4 is clearly falsified, whether auto scaling stalls, internet services are compressed, smartphones continue to bleed, or the market reclassifies the business, the 5-fold path cannot be completed. At the start of 2026, conditions 1 and 3 are already under pressure at the same time. So a 5-fold return over 10 years is an optimistic scenario requiring almost everything to go right, not the base case.

  What expectations are implied in today's share price? This is the key part of the question. Comparing the report's 3 owner-earnings DCF scenarios with the current HK$26.32 price:

  • Conservative intrinsic value of HK$18-22, according to the report's DCF: starting owner earnings of RMB26 billion and 5% growth for the first 5 years;
  • Neutral scenario of HK$23-28;
  • Optimistic scenario of HK$31-36, with smartphones stabilizing, internet ARPU rising, and autos continuing to improve and generate reasonable returns.

  The current HK$26.32 sits inside the neutral scenario range. This means today's market price already implies a neutral-to-positive expectation that fundamental strengthening has been recognized and the auto second curve is likely to succeed. It is not cheap enough to reflect a pessimistic or cyclical-stock assumption, which would require HK$18-22, but it also has not yet fully priced in a 5-fold blue-sky outcome, which would require far above HK$36 plus a valuation rerating. In other words, if you buy Xiaomi today, the price you pay already treats execution success as the base assumption, leaving little room for error. The report therefore judges the margin of safety to be insufficient, with an ideal buy range of HK$18-22.

  Conclusion: A 5-fold return over 10 years is an optimistic narrative in which 4 independent conditions must all come true at the same time. Two of them, auto scaling and stopping smartphone bleeding, have already flashed warning lights at the start of 2026, making the joint probability low. Today's HK$26.32 share price does not provide a safe low starting point for that 5-fold story. It already sits in the neutral scenario range and implies that improvement has been recognized. This is why Xiaomi can be a stronger good company, but not a cheap stock at the current price from which to seek a 5-fold return over 10 years: good company plus not-cheap price means upside has been prepaid by expectations, downside is supported by fundamentals, and the risk/reward is not attractive.

  Not investment advice. Stock markets involve risk; invest with caution.

  Jun 10, 2026
• QWhy has the market not recognized all this yet? Is it failing to understand, looking down on it, or not looking far enough? What will become the narrative inflection point?3/10

  A

  For Xiaomi, this Baillie Gifford question must be answered honestly in reverse: the market has not mispriced it by failing to understand, looking down on it, or not looking far enough. On the contrary, the market sees it quite clearly. It has already recognized the stronger fundamentals, giving it about 17.5 times earnings rather than a single-digit cyclical multiple, while also using the 2026 decline to reflect smartphone share loss and uncertainty around auto scaling in real time. This is not an ignored cheap growth stock. It is a broadly fairly priced stock with clear long-short disagreement. The real question is not why the market has not recognized it, but which variable will break the current stalemate and become the narrative inflection point.

  First, reject the premise that the market has not recognized it. This Baillie Gifford question assumes a perception gap, where the market has missed something good. Xiaomi's evidence points in the opposite direction:

  • The market is not looking down on it. The current HK$26.32 share price, about HK$676.9 billion market cap, and about 17.5 times trailing PE as of June 10, 2026, is not a multiple that treats it as a cheap smartphone cycle stock. The report is right: the current price no longer looks like obvious mispricing, but is prepaying for smartphones stabilizing, successful EV scaling, and AIoT expansion. The market has already recognized its evolution from hardware vendor to ecosystem platform.
  • The market is also not failing to look far enough. It has given substantial forward-looking credit to the auto second curve. Otherwise, the stock would not already be inside the report's neutral DCF scenario range of HK$23-28 when autos only just turned profitable in 2025.
  • The market is not failing to understand it either. On the contrary, the 2026 decline shows the market understands it quite well. It clearly knows that smartphone shipments in 2026 Q1 fell about 19% year over year globally and China fell to fifth, and that auto deliveries in Q1 had a completion rate of only about 14%. It then priced in those bad news items. The share price falling from about HK$30.70 when the report was written to HK$26.32 now is itself evidence that the market has recognized the risks, not that it has failed to recognize the value.

  So Xiaomi's current real state is fair pricing plus a long-short stalemate, not a perception-gap arbitrage opportunity. Bulls point to record highs in 2025 revenue, gross profit, and profit, autos at about RMB900 million of full-year operating profit, a net cash position, and deep founder alignment. Bears point to smartphones as a brutal red ocean with share already under pressure, autos as capital intensive with frequent price wars and unproven long-term returns, a governance discount, and a current price that is not cheap. The report explicitly says this opposing logic is strong and must not be ignored. Both sets of logic are on the table and have been digested by the market, so the price sits in the neutral range. That is exactly what no obvious perception gap looks like.

  So what will become the narrative inflection point? Since the current state is a stalemate, the only thing that can break it is hard data that falsifies one side of the bull-bear debate. There are clear triggers in both directions:

  • Upside inflection point, forcing the market to rerate toward a platform stock: autos deliver volume growth for several consecutive quarters while holding 20%+ gross margin and forming meaningful segment operating profit, rather than showing 2026 Q1-style completion-rate anxiety, while smartphone share stabilizes. Once the market is convinced that autos are not a cash-burning hole but a high-return second curve, the valuation center can rerate upward from about 17.5 times. This is the trigger condition for the report's optimistic scenario of HK$31-36.
  • Downside inflection point, driving the market to cut valuation toward a hardware cycle stock: smartphone share and ASP decline together for several quarters and internet services cannot offset it; auto gross-margin improvement stalls or volume rises without profit; inventory keeps growing faster than revenue; or the India investigation turns from a disclosed uncertainty into a defined financial loss. If any one of these is confirmed, the market will reclassify Xiaomi as a hardware plus auto expansion stock, the valuation will move down, and the report's warning of a 40%-55% downside scenario will be triggered.

  Conclusion: For Xiaomi, the honest answer to Baillie Gifford's question of why the market has not recognized it is that the market already has. It has given the appropriate recognition to improved fundamentals and used the share-price decline to reflect risk. Pricing is broadly fair, with no obvious perception gap or margin of safety. This is not an undervalued stock waiting for the market to wake up. It is a good company at a reasonable price, waiting for the next set of quarterly data to break the long-short stalemate. The narrative inflection point will not come from the market suddenly understanding it, but from real delivery on 2 variables: auto scaling and smartphone share. Upside proof brings rerating; downside falsification brings multiple compression. This is the core logic behind the report's Watch conclusion and its advice to wait patiently for a larger margin of safety or more quarterly data.

  Not investment advice. Stock markets involve risk; invest with caution.

  Jun 10, 2026