XREAL Races into a Hong Kong Stock IPO: Concerns Behind the 87.2% Surge in Gross Profit Margin, with Cumulative Losses Exceeding 2 Billion Yuan Over Three Years

Business Model of the Global Leader in AR Glasses Market

XREAL, as a leading global AR glasses company, focuses on the design, development, manufacturing, and sales of its own brand AR glasses. The product lineup covers entry-level Air series, mid-to-high-end One series, and flagship Light-Ultra-Aura products. According to iResearch data, based on sales revenue, the company ranked first in the global AR glasses market for four consecutive years from 2022 to 2025, and in 2025, it ranked second globally and first in China in the broader smart glasses market.

The business model centers on hardware sales, with product sales accounting for over 90% of total revenue, of which AR glasses contribute approximately 78%. The sales channels adopt a combination of direct sales and distribution, with direct sales accounting for 70.8% and distribution 29.2% in 2025. The company has established a global sales network covering 40 countries and regions, with overseas markets accounting for 71% of revenue in 2025, demonstrating effective international expansion.

Structural Changes Behind 30.8% Revenue Growth

In 2025, the company’s operating revenue reached 516 million yuan, a year-on-year increase of 30.8%, mainly driven by product portfolio optimization and the launch of new high-end products. The One series, launched at the end of 2024, sold 111.4k units in 2025, generating 356 million yuan in revenue, becoming the largest revenue contributor. Meanwhile, sales of the Air series declined from 134.1k units in 2023 to 17.4k units in 2025, with revenue share dropping from 77.6% to 14.1%, reflecting the company’s strategic shift toward the high-end market.

Net Loss Continues to Narrow but Cumulative Loss Reaches 111.4k Yuan

Despite revenue growth, the company remains in a loss-making state, but the loss has narrowed for three consecutive years. Net losses for 2023-2025 were 882 million yuan, 709 million yuan, and 456 million yuan, respectively, totaling 134.1k yuan over three years. In 2025, net loss decreased by 35.7% year-over-year, mainly due to improved operational efficiency and revenue growth.

Adjusted net loss (excluding fair value changes and share-based payments) narrowed from 437 million yuan in 2023 to 250 million yuan in 2025, indicating ongoing improvement in operational losses. The main sources of loss include fair value changes of financial instruments like preferred shares (2.03 billion yuan in 2025, accounting for 44.5% of net loss), R&D investment (183 million yuan, 35.5% of revenue), and sales and distribution expenses (131 million yuan, 25.4% of revenue).

Gross Margin Improved by 87.2% Over Two Years to 35.2%

The company’s gross margin showed significant improvement, rising from 18.8% in 2023 to 35.2% in 2025, an increase of 87.2% over two years. The main drivers include rapid sales growth of high-margin products in the One series, economies of scale reducing unit costs, and cost control advantages from self-owned optical module manufacturing bases.

Gross margins across all business segments have increased notably, with service and other business gross margin soaring from 4.4% to 60.8%, accessories from 25.6% to 47.3%, and AR glasses from 19.3% to 30.4%. Although overall gross margin is at a reasonable industry level, it remains below mature tech giants like Apple, reflecting that the AR industry is still in the investment phase.

Net Profit Margin Improved from -226.1% to -88.4%

Net profit margin remains negative but has improved significantly, from -226.1% in 2023 to -88.4% in 2025, indicating progress in revenue growth and cost control. Adjusted net profit margin (excluding fair value changes of preferred shares) improved from -112.1% to -48.5%, reflecting enhanced operational efficiency, though profitability has yet to be achieved.

Revenue Composition: Hardware Accounts for 92.2%, Service Revenue Only 7.8%

The company’s revenue structure is highly dependent on hardware sales, with product sales accounting for 92.2% in 2025, including AR glasses at 78.1% and accessories at 14.1%. Service and other income only make up 7.8%, mainly from technical development services for enterprise clients.

In product lines, the One series has become the largest revenue source, contributing 356 million yuan (69.0% of total revenue) in 2025; Light-Ultra-Aura products contributed 18 million yuan (3.5%), and Air series revenue was 29 million yuan (5.6%).

Geographically, the company relies heavily on overseas markets, with the U.S. contributing 36.9%, Japan 14.6%, Europe 13.8%, and Mainland China only 29.0% in 2025.

Customer Concentration is High: Top Five Customers Contribute 26.9% of Revenue

XREAL faces certain customer concentration risks, with the top five customers contributing 139 million yuan, or 26.9% of total revenue in 2025, including the largest customer with 51.66 million yuan (10.0%). Major customers include large electronics distributors, internet tech companies, and consumer electronics retailers. Among these, two are listed companies from the U.S. and Japan, indicating stable international partnerships.

Direct sales channels decreased from 81.1% in 2023 to 70.8% in 2025, with distribution channels increasing to 29.2%, reflecting a gradually diversified customer base, though concentration risk remains.

Supplier Concentration is Controllable: Top Five Suppliers Account for 29.0%

In 2025, procurement from the top five suppliers totaled 158 million yuan, accounting for 29.0% of total procurement, with the largest supplier at 66 million yuan (12.1%). Supplier concentration is at a reasonable level. Key suppliers include optical component manufacturers, electronic assembly firms, and raw material providers, including industry leaders like Luxshare Precision. The company has adopted a dual-supplier strategy to mitigate supply chain risks.

Equity Structure: Founder Holds 28%, Strong Institutional Investor Presence

The company’s ownership shows the founder, Dr. Xu Chi, indirectly controls 22.2% through entities like Heritage Anchor and Infinite Halcyon, and holds 4.54% via Fortitude Savour, totaling 28.0% voting rights, making him the actual controller.

Major institutional investors include Alibaba Group (6.68%), Kuaishou Technology (6.66%), Sinovation Ventures, Pudong Innovation, Luxshare Precision, among others, indicating strong capital market confidence in the AR industry. Pre-IPO common shares account for about 29.3%, with preferred shares at 70.7%, presenting potential same-share but different-vote rights risks.

Core Management Team with International Tech Background

The board comprises 7 members: 3 executive directors, 1 non-executive director, and 3 independent non-executive directors. The core management team mainly comes from Magic Leap, Apple, and other international tech firms, with extensive experience in optical engineering, software development, and product management.

Dr. Xu Chi (41, Chairman/CEO), former NVIDIA and Magic Leap engineer, holds a Ph.D. in electronic engineering from the University of Minnesota and has 52 patents. Chief Optical Scientist Xiao Bing (Master’s in Optical Engineering from Zhejiang University) and Chief Algorithm Scientist Wu Kejian (Ph.D. from the University of Minnesota) each have over 10 years of AR/VR industry experience. In 2025, the total director compensation was 3.919 million yuan, with an equity incentive plan granting 28.06 million restricted stock units to 249 employees.

As of the end of 2025, the company employed 364 people, including 188 R&D personnel, accounting for 51.6%, demonstrating strong R&D capabilities.

Financial Challenges: Working Capital Liabilities of 17.4k Yuan, Cash Only 64 Million Yuan

The company faces multiple financial challenges, including:

2. Ongoing losses and cash flow pressure: Despite narrowing losses, operating cash flow in 2025 was -203 million yuan, with cash and cash equivalents dropping from 205 million yuan in 2024 to 64 million yuan, indicating tight liquidity.

3. High liabilities: As of the end of 2025, total liabilities reached 2.05B yuan, with current liabilities at 203M yuan, mainly comprising preferred shares and convertible notes of 3.92M yuan, with a high debt-to-asset ratio of 659%, indicating fragile financial structure.

4. Inventory turnover efficiency: Although inventory turnover days improved from 209 days in 2024 to 187 days in 2025, it remains above industry average, with inventory impairment provisions reaching 46.85 million yuan at year-end.

5. Working capital management: Net current liabilities stood at 3.49B yuan, with significant short-term debt repayment pressures and high reliance on external financing.

Peer Comparison: Market Leader but Profitability Under Pressure

Compared to peers, XREAL leads in AR glasses market share but faces notable gaps in profitability and financial health:

• Market position: First in global AR glasses market, with 133.7k units sold in 2025, a CAGR of 7.1%
• R&D investment: 183 million yuan in 2025, accounting for 35.5% of revenue, higher than industry average
• Profitability: Gross margin of 35.2% outperforms peers, but net loss rate remains high at 88.4%, indicating scale effects are still developing
• Financial health: Asset-liability ratio of 659%, much higher than industry average, indicating high financial risk

Risk Factors: Industry Competition and Technological Iteration

XREAL faces multiple risks, including:

2. Intensified industry competition: New products like Apple Vision Pro may squeeze market share, with direct competition from tech giants
3. Technological iteration risk: Rapid technological updates in AR, including optical display and computing tech, require continuous R&D investment to maintain competitiveness
4. Persistent losses: The company has yet to turn profitable, with a net loss of 456 million yuan in 2025 and total accumulated losses exceeding 2 billion yuan
5. Customer and supplier concentration risks: Top five customers contribute 26.9%, top five suppliers 29.0%
6. Intellectual property litigation risks: Currently involved in multiple patent infringement lawsuits
7. High dependence on overseas markets: Overseas revenue accounts for 71%, facing uncertainties in international trade policies and geopolitical risks
8. Financial sustainability risks: Working capital liabilities of 3.49B yuan, cash reserves only 64 million yuan, with short-term debt repayment pressures

Conclusion

As a global leader in AR glasses, XREAL leverages technological advantages and global channel deployment to achieve rapid revenue growth, significant gross margin improvement, and narrowing losses. However, it still faces ongoing losses, high debt levels, and cash flow pressures, while also needing to contend with increasing industry competition and technological change. Investors should closely monitor the performance of new high-end products, cost control capabilities, and cash flow improvements to assess long-term profitability prospects and investment risks.

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