By Jacky Wong

Chinese smartphone maker Huawei's loss has been its compatriot Xiaomi's gain. Keeping hold of those gains, however, might be more challenging than investors expect.

Xiaomi on Tuesday reported a stellar performance for the quarter ending in September: revenue grew 35% year over year while operating profit more than doubled. The company sold 45% more smartphones globally in the quarter compared with a year earlier, making it the third largest smartphone maker in the world for the first time.

The global smartphone market has recovered from the earlier dip caused by the pandemic. But Huawei's travails are the key factor behind Xiaomi's bumper performance. Huawei shipped 24% fewer smartphones in the quarter. The Trump administration has blocked the company from buying components made using U.S. technology since September.

Xiaomi has seized its chance, but others are eyeing the same potential gains. Oppo's Realme brand, which like Xiaomi is trying to sell phones with premium features at affordable prices, has been gaining traction. In India -- Xiaomi's most important market outside of China -- the country's largest wireless carrier Reliance Jio may also launch its own low-cost phones.

And the demise of Huawei -- or its progeny -- as a major phone supplier isn't a foregone conclusion. The company said last week it will sell its budget Honor brand, which is targeting the same market as Xiaomi, to a Chinese state-led consortium. The deal may allow Honor to avoid U.S. sanctions.

Huawei's political problems largely stem from its telecommunications equipment business, rather than its smartphones. So it may make sense for the U.S. to permit Huawei's smartphone business, especially the lower-end brand Honor, to keep operating instead of just killing the whole company -- which could hurt American chip suppliers. Honor shipped 41.3 million smartphones in the first three quarters of 2020, according to Counterpoint Research, accounting for around 27% of Huawei's total. Citi estimates that Honor's exit would lead to additional shipments of 10 million to 15 million units for Xiaomi. But the bank says it would have to reduce its profit estimate for Xiaomi if Honor stays in the business.

Xiaomi is now worth $85 billion after gaining 150% this year, pricing in a lot of optimism. The company has certainly had a good year, but the road ahead may not be as smooth as that big sticker price implies.

Write to Jacky Wong at JACKY.WONG@wsj.com

(END) Dow Jones Newswires

11-24-20 0732ET