02.06 Xiaomi under the storage cycle

Currently, Xiaomi's stock price is around 35, with little change from a week ago.

I. Core Dilemma: This Year's Two "Black Swans"

I think the two main "black swans" affecting Xiaomi's valuation this year are: one is the complex public opinion environment, and the other is the recent surge in memory chip prices that has given the entire industry a headache.

Looking at recent research institutions' interpretations of Samsung's financial reports, it's jaw-dropping.

Ridiculous Price Hikes: Recently, it's mainly because AI servers' demand for HBM (High Bandwidth Memory) is 8-10 times that of regular servers, severely squeezing the production capacity of LPDDR5X and UFS 4.0 used in mobile devices. The year-on-year increase in DRAM contract prices for 2025 once exceeded 75%, with some models even doubling. The proportion of memory costs in a phone's BOM (Bill of Materials) has skyrocketed from 15% to nearly 30%.
No Increase in Production Capacity: Samsung predicts that profits will return to the peak of $50 billion in 2026, but institutional interpretations show that Samsung has clearly stated it will not expand traditional production lines on a large scale. Instead, it will direct all capital expenditures (CAPEX) toward AI-related HBM and advanced processes. In other words, it tacitly wants to maintain the high prices of a seller's market.

Originally, when investing in Xiaomi, I didn’t want to overly ride the AI hype. We were in it for the long haul, but I didn’t expect AI’s demand for memory to squeeze the supply capacity of phones and other products. It’s really an unexpected blow. As a company building an ecosystem on a hardware foundation, Xiaomi is greatly affected by this. Not just Xiaomi, but other consumer electronics stocks have also fallen a lot. Now, shipments face a dilemma: ship more, and supply chain costs eat into profits; ship less, and you can’t cover R&D amortization.

II. Why Only Sell YU7 These Past Few Months?

My understanding is that this is a tactical trade-off in response to the high-cost cycle:

Gross Margin Moat: Excluding the Ultra, Xiaomi SU7's gross margin is generally between 15.4% and 18.5%, while YU7's gross margin is expected to be around 22% to 25%. This means the net profit from selling one YU7 may be equivalent to selling 1.5 or even more SU7s. Moreover, in the domestic market, SUVs generally have a higher market share than sedans. Therefore, against the backdrop of a 20%-30% increase in memory and chip costs, only YU7's high gross margin can cover this cost increase.
"Horse Racing" for Production Capacity: The so-called "SU7 production halt" is essentially a reallocation of production line resources. With core components (such as automotive-grade chips and high-capacity flash memory) in short supply, allocating limited capacity to the more in-demand and more profitable YU7 is the optimal business solution.

So, the short-term single sales model and overall sales decline are actually preparations for higher gross margins in 2026 to hedge against cyclical impacts.

III. Confidence in Holding Shares

To be honest, in the short term, I didn’t expect the pullback to go from 61 to the current 35, a drop of over 40%. Now that I’ve experienced all the emotions I should have, I still feel that my long-term confidence in holding shares remains unchanged. This confidence comes directly from two points:

Xiaomi’s Pragmatic Style and Long-Term Focus: Cycles and pressures are touchstones. Even under black swan events, Xiaomi can still rely on solid and outstanding product strength to withstand pressure and sell volume. This resilience is unimaginable for other automakers. And although there is a huge gap in market capitalization compared to other foreign tech companies, judging from its growth rate and internationalization ratio, Xiaomi’s story is far from over. The stories of overseas markets and tech-enabled commerce are far from finished.
Confidence in East China Manufacturing and Supply Chains: Xiaomi as a company can’t be viewed in isolation. According to inaccurate data, Xiaomi has invested in over 500 companies, mainly distributed as follows:
1. Semiconductors and Chips (30%): Xiaomi is one of the most active venture investors in the domestic semiconductor field. It has invested in over 120 chip companies, aiming to build its own "alternative library" beyond Samsung and Qualcomm, with hedging and substitution capabilities.
2. Automobiles and "Three Electrics" (30%): Covering power batteries, smart driving, chassis, and execution across multiple fields.
3. AI and Smart Manufacturing (Robotics) (20%): Results are expected in the next five years.

In fact, AI software stocks have also seen significant pullbacks recently, while Coca-Cola, which seemed half-dead hovering around 60 at the beginning of the year, has shown steady performance over the year. The irony of the stock market is: Short-term experience won’t give you the right perception; only perception that transcends cycles is worth believing in.

IV. Thoughts on Holding Shares

Counting from October, it’s been four consecutive months of declines. I’ve experienced all the panic, anger, and despair I should have. Now, I’m used to the drops and have figured out a few things:

Accept the Uncontrollable: You have to accept that many things in this world (like Samsung’s production strategy, geopolitics, market sentiment) are beyond individual control. Since you can’t control them, don’t waste your emotions.
Control What You Can: Besides the uncontrollable, there are many things in the world you can control, want to do, and are worth doing. During this time, it’s better to focus on these.
Accept Volatility: I’ve realized that volatility is the norm in this world. Even seemingly stable work life, while avoiding the risks of volatility, also gives up surplus value. Accepting and getting used to volatility is the real world.

$XIAOMI-W(01810.HK)