2020 ANNUAL REPORT 2020 ANNUAL REPORT This annual report (in both English and Chinese versions) has been posted on the Company’s website at www.mi.com and the Stock Exchange’s website at www.hkexnews.hk. Shareholders who have chosen to rely on copies of the corporate communications (including but not limited to annual report and (where applicable) summary financial report, interim report and (where applicable) summary interim report, notice of meeting, listing document, circular and proxy form) posted on the aforesaid websites in lieu of any or all the printed copies thereof may request the printed copy of the annual report. Shareholders who have chosen or are deemed to have consented to receive the corporate communications using electronic means and who have difficulty in receiving or gaining access to the annual report posted on the Company’s website will promptly upon request be sent the annual report in printed form free of charge. Shareholders may at any time choose to change their choice of means of receipt (in printed form or by electronic means through the Company’s website) and language (in English only, in Chinese only or in both Chinese and English) of all future corporate communications from the Company by sending reasonable prior notice in writing by post to the Hong Kong Share Registrar at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong or by email at [email protected]. CONTENTS OPEN LETTER FROM OUR CHAIRMAN 4 CORPORATE INFORMATION 8 FIVE-YEAR FINANCIAL SUMMARY 10 CHAIRMAN’S STATEMENT 12 MANAGEMENT DISCUSSION AND ANALYSIS 21 DIRECTOR’S REPORT 47 CORPORATE GOVERNANCE REPORT 102 ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT 122 INDEPENDENT AUDITOR’S REPORT 213 CONSOLIDATED FINANCIAL STATEMENTS 219 DEFINITIONS 362 2 XIAOMI CORPORATION 2020 ANNUAL REPORT 3 We relentlessly build amazing products with honest prices to let everyone in the world enjoy a better life through innovative technology 4 XIAOMI CORPORATION OPEN LETTER FROM OUR CHAIRMAN Dear valued investors and friends, It is my great honor to report another set of stellar results in what has been an extraordinary 2020. We recently announced our 2020 annual financial results, in which we reported record achievements, but beyond that, I am also excited to share with you our plans for the next decade and the growth prospects that these plans will bring. Our success comes from placing our users first In 2020, Xiaomi posted solid performance amid the pandemic and global economic uncertainty, with revenue and adjusted net profit growing 19.4% and 12.8% year-over-year to RMB245.9 billion and RMB13.0 billion, respectively. Many of our business and financial metrics achieved all-time highs while we outpaced our global peers in terms of smartphone shipment growth and maintained the leading position in mainland China’s smart TV market. We owe such growth to the support and recognition from our global users. The year 2020 marks our ten-year anniversary, and during this year we systematically reviewed our entrepreneurial experience over the past ten years. We concluded that the core of our success has been built on our respect for our users and putting our users’ interests first. This conclusion is validated through our commitment to relentlessly build amazing products with honest prices. To achieve this, we had in 2018 promised to our users that our net profit margin for our hardware business will never exceed 5%. Just like in the past two years, I am proud to report that we have delivered on our promise, and the net profit margin for our hardware business remained under 1%. Our sincere desire to be friends with our users continues to guide us. While we continue to improve the competitiveness of our products and services, we have also been building a better user community and facilitating closer communication with our users. This will not only strengthen the closed-loop ecosystem of user and internet traffic, but it will also guide the evolution of our products and services over time. This is the most important priority for us, and will provide the foundation for our developments over the next decade. 2020 ANNUAL REPORT 5 We have established a solid foundation for the next decade We enter the new decade with great confidence and a clear strategy, and we have already established a strong foundation to achieve this strategy. Since 2016, we have been strengthening the foundation of our business as we significantly improved our product capabilities while opening and establishing a firm foothold in the premium smartphone market. In the meantime, we have launched our comprehensive brand management system over the past two years, and have been listed among BrandZ’s Top 100 Most Valuable Global Brands for two consecutive years. Our dual-brand strategy has allowed us to achieve tremendous success in the smartphone business. After 7 years of expansion in the overseas markets, our footprint now reaches 100 countries and regions globally. Our smartphone shipments ranked top three globally in the fourth quarter in 2020, with leading positions in key markets, laying a solid foundation for future growth. In 2020, half of our revenue came from overseas markets, making us a truly global company. We have been experimenting with the omni-channel “new retail” model in mainland China since 2016, and after 5 years of testing, we are beginning to establish a new model which is widely accepted, paving the way for us to expand our offline channel in mainland China. In 2021, we plan to expand Mi Homes to all counties in mainland China. In addition, we have also made a breakthrough in the carrier market in Europe, opening new pathways for us to gain further market share globally. Since our IPO in 2018, we have established a robust corporate governance structure and a capable and dynamic management team. During this period, in addition to recruiting a number of young and experienced executives from the outside, we have also promoted young group executives and general managers internally. We believe that this dynamic team will provide strong, visionary leadership for our growth over the next decade. After more than four years of planning and validation, we unveiled our core strategy of “Smartphone × AIoT” for the next decade in August 2020. Under this strategy, we established that smartphones will be the cornerstone of our business while our AIoT platform will build a smart living ecosystem around smartphones, further amplifying Xiaomi’s value. As smart connectivity becomes more integrated into people’s lives, our core strategy of “Smartphone × AIoT” will further strengthen the multiplier effect and help us penetrate more scenarios, acquire more users and deepen the moats of our business model. This will help us achieve our mission of letting everyone in the world enjoy a better life through innovative technology and also make Xiaomi a true leader in smart living in the future. Meanwhile, we will adhere to the three guiding business principles: “never cease to explore and innovate”, “continue to offer products with the best price-to-performance ratio”, and “always make the coolest products.” 6 XIAOMI CORPORATION OPEN LETTER FROM OUR CHAIRMAN Over the past three years, we have made significant progress in key technologies such as imaging, wired/wireless charging, artificial intelligence and IoT platforms, allowing us to establish leading industry positions globally. This is attributable to our strong and sustained investment in research and development. In 2020, our research and development expenses were close to RMB10 billion, and we expect this to increase by more than 30% to over RMB13 billion in 2021. We will further expand our research and development team by recruiting over 5,000 engineers this year. Despite encountering many unexpected difficulties along the way, Xiaomi has reached new heights through our continuous exploration and development over the past few years, which built a strong foundation and revolutionized our management capabilities. Xiaomi is stronger than ever as we stride into the future with confidence. Embracing global uncertainties through continuous improvements Over this past year, we have witnessed tremendous uncertainty and the impact this has brought to the world. In the years to come, we expert such uncertainty will be the new normal. Such uncertainty presents us not only with challenges but also with great opportunities. For example, the expansion of the contactless economy promises to be a huge driver of growth in smart devices and communication services. The rebound in demand during the pandemic has contributed to our excellent performance in both mainland China and overseas, and we have received strong support from our upstream and downstream partners, users and Mi Fans. These have all reinforced our confidence in our future growth. In 2021, we will continue to implement our core strategy of “Smartphone × AIoT.” As we seek to achieve greater breakthroughs in the smartphone market, we will also systematically develop smart home solutions to provide users with a more complete, convenient and personalized living experience. At the same time, we have a series of ambitious long-term plans to drive Xiaomi’s continuous evolution. In the coming days, you will witness the great changes they will bring. As the saying goes, “Good timber does not grow with ease. The stronger the wind, the stronger the trees.” In times of greater uncertainty and unpredictable challenges, the more we need to stay persistent with our dreams, to keep pace with the times, to stand by our users, to adjust, to adapt, to innovate, and to make advancements. These are the characteristics expected of an excellent company in these unique times. 2020 ANNUAL REPORT 7 We may not be able to change the uncertainty of our environment, but we can make the best of the situation through improving ourselves and encouraging one another to embrace and change such uncertainties for a better future.