2019 2019 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 20 DIRECTOR’S REPORT 44 CORPORATE GOVERNANCE REPORT 98 ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT 118 INDEPENDENT AUDITOR’S REPORT 177 CONSOLIDATED FINANCIAL STATEMENTS 183 DEFINITIONS 326 2 XIAOMI CORPORATION 2019 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 investors and friends: The world is still under the dark shadows of COVID-19, and during these extraordinary times, nothing is more important than your well-being. As such, I sincerely wish good health for you and your loved ones. We have just released our full year financial results for the year ended December 31, 2019. Besides reporting on our growth, I believe it is equally important for us to share our vision and strategies on how we can overcome economic “black swan” events. A year of prudent management and proactive progress In 2019, Xiaomi exceeded RMB200 billion in revenue for the first time, reaching RMB205.8 billion, an increase of 17.7% year-on-year, as well as adjusted net profit of RMB11.5 billion, an increase of 34.8% year-on-year. Against the backdrop of uncertainties related to Sino-US trade tensions, Xiaomi’s commendable results stood out in strong contrast. In 2019, Xiaomi hit a series of significant milestones. We made our inaugural entry into the Fortune Global 500 list, becoming the youngest company on the list. We entered Brandz’s global brand TOP100 for the first time, ranking 74th. We also accomplished an unprecedented record, becoming the first smart TV brand to ship more than 10 million units annually in China ever. Foresight, confidence, resilience and strong execution are key to our continued progress Mobile telecommunications is at a critical juncture globally, as the industry transitions from 4G to 5G. We have adopted a sound business strategy, focusing on product quality, innovation, and delivery, while making key adjustments to our brands, product portfolios, organizational structure, and management systems. Combined together, these initiatives have paved a solid foundation for our future. We have officially launched a dual-brand strategy for our smartphones business, with the brand separation of Redmi from Xiaomi. Their independent operations have brought us great success. Our market share is consistently ranked among the top four globally, while our healthy and prudent inventory levels have enabled us to step forward boldly with our 5G game plan. In the fourth quarter of 2019, close to half of our revenue came from overseas markets, making Xiaomi a truly global company. Our internet services business has become more dynamic and diverse, while our AIoT business maintained its global leadership, becoming recognized across our industry as a “first mover in smart living”. 2019 ANNUAL REPORT 5 Business success on the back of technological innovation At Xiaomi, we firmly believe that our business success is underpinned by technological innovations, and to that effect, we have continually increased our research and development (“R&D”) investment. In 2019, our R&D investment reached RMB7.5 billion, a 29.7% year-on-year increase on the back of substantial R&D expansion for the three prior years. In 2020, we expect our R&D investment to increase to RMB10 billion. At the same time, we are also proactively attracting top R&D talent from around the world. Recently, we have successfully recruited Daniel Povey, a top international expert in artificial intelligence (AI), to join Xiaomi. Starting from 2019, we have set up the Xiaomi Annual Technology Award, which awards a US$1 million bonus to core R&D project personnel with the highest technical achievements each year. Last year, the award was shared by 10 engineers from the Xiaomi MIX Alpha project. Our strategic roadmap of “5G+AI+IoT and next generation super internet” To us, 5G is not merely about a faster smartphone network, while AIoT is also not just about AI technologies or IoT platforms. Instead, “5G+AIoT” will be a revolutionary combination that will fundamentally change all Xiaomi’s products, platforms and user scenarios, catalyzing the next stage of our growth in the next generation of internet era. At the start of last year, we first proposed our “All in AIoT” initiative, allocating an investment of RMB10 billion in AIoT over the next five years. One year in, we believe we are moving in an important strategic direction. As such, we will increase our investment to at least RMB50 billion over the next five years in “5G+AIoT”, to ensure our absolute dominance over the new smart living era. This bold initiative will enable us to create greater value for you and is a tangible reflection of the philosophy we adhere to: By making a connected world a reality for billions of people globally. We believe technology can be a force for good to improve lives everywhere. We firmly believe that a connected world is better than an isolated one. We also firmly believe in the economic value created by global collaboration, and how the world can truly change when technology is freely accessible. During the COVID-19 outbreak, as we witnessed people in isolation connecting with their family, loved ones and even their pets through their smart devices, we could feel the very human desires to connect and to care. It is famously said that no man is an island. At Xiaomi, we deeply believe in this. As we build the next generation super internet, we will continue to use technology to connect and improve lives everywhere. 6 XIAOMI CORPORATION OPEN LETTER FROM OUR CHAIRMAN Operational efficiency as the ultimate way to overcome crises While our industry and the entire world are currently facing huge challenges, we have absolute confidence in navigating through these extraordinary times together with our partners. During this period of adversity, the strength of our operational efficiency will be more obvious than ever. At Xiaomi, we have always been very focused on efficiency. We believe that the pursuit of efficiency is an exercise in self-discipline and contingency planning. Having experienced the SARS epidemic and global financial crisis in 2003 and 2008 respectively, my colleagues and I know crises are the ultimate litmus test that separates successful companies from others. Our efficient operations, strong execution capabilities and consumer trust will enable us to seek out opportunities during crises and stay on a sustainable growth trajectory. During our IPO, we said that a company that is able to achieve world-class efficiency will have the ability to survive multiple economic cycles, continuously seize new opportunities and sustain excellent operational performance in the long run. Now more than ever, we want to reiterate this. We are also safeguarding our competitiveness through a series of organizational restructuring. Over the past year, we have established the Organization Department to improve our management processes. We have also set up our employee training campus and ramped up our college recruitment efforts. These initiatives form a key part of our overall effort to grow and sustain our operational efficiency. In the face of challenges, perseverance is key Our mission is to relentlessly build “amazing products with honest prices” to let everyone in the world enjoy a better life through innovative technology. In order to ensure that we stay true to our mission, our board of directors passed a special resolution before our IPO last year. According to the resolution, we pledged to our existing and potential users that the overall net profit margin of Xiaomi’s hardware business will never exceed 5%. 2019 ANNUAL REPORT 7 A commitment to our consumers and a testament to our efficiency As we stay true to our commitment to our users, we are pleased to share that, similar to last year, our hardware business net margin in the year ended December 31, 2019 maintained positive and less than 1.0%. It is also worth highlighting that Xiaomi as a standalone smartphone brand has been re-launched early last year. With the release of Mi 9, Mi 9 Pro 5G and CC 9 Pro last year, and the release of the Mi 10 series earlier this year, it is proven that the Xiaomi brand can move upscale while continuing to win over our users via “amazing products at honest prices”.