Ok sounds like a break line problem... Are you working on Mac? You should have a CR and LF on windows, LF on Unix, and CR on Mac (this last doesn't work). Perhaps you could test with another edit program...
I'm extremely excited, it works!! So here is the definitive answer for placing your m3u playlist in the root of the SD Card and having all your music in a directory called HD that is off the root. It appears that CR and LF works together, I switched to Notepad++
#EXTM3U
./HD/The Smiths/The Smiths/04 - Pretty Girls Make Graves.flac
./HD/Billie Holiday/Lady Day_ the Complete Billie Holiday 1933-1944 Disc 5/10 - Let's Dream in the Moonlight [78 Rpm Version].flac
./HD/Triumph/Thunder Seven/05 - Time Goes By.mp3
What is unbelievable is that Fiio wouldn't just post this on an FAQ on their own site!?! I could not listen to music without playlists. With 18000 tracks across 25 genres I would be wearing my fingers to the bone selecting songs and listening. Now I can actually use this device.
Thank you for doing what Fiio failed to document, Kioufou5!!