Fitch Ratings has changed Xiaomi's (HKG:1810) outlook to positive from stable while affirming its long-term foreign and local currency issuer default ratings at BBB, Fitch Ratings said in a Wednesday release.

The rating actions reflect the consumer electronics company's robust free cash flow, expanding internet of things (IoT) segment, and an increased smartphone market share.

Moreover, the company's electric vehicle (EV) expansion has strengthened its brand awareness, according to Fitch.

However, the EV investments continue to have medium-term risks, with the segment expected not to make a profit for a number of years due to tight competition and high research and development (R&D) and capital expenditure needs, Fitch said.

The rating agency expects the company's free cash flow to exceed 15 billion yuan annually in the next three years, above the historical average.

Meanwhile, Fitch expects the company's profitability to be supported by higher-margin products and increased advertising revenue.

Xiaomi's diversified operations, including internet services and IoT products, mitigate the cyclical nature of the smartphone market, contributing to a strong financial profile, Fitch said.