ok, I think I understand how playlists work.
First, it depends on how big your library is. Mine is 350 GB of lossless files and about 11K tracks total. This is probably a worst case scenario. Here is how I got playlists to work:
1) Don't copy any playlists until you have confirmed that all of your tracks have been indexed.
2) The only way I've been able to verify 100% indexing is to connect to X1 via AFT and browse of the SD Card contents. For me it can take anywhere from 15-30 min after power on for all my folders to show up in AFT. Fortunately it does appear that X1 indexes in alphabetical order so it's pretty obvious when indexing is complete.
3) After you confirm that all files show in the player and AFT, you can copy your M3U playlists files to the X1
4) I export my M3U files and makes sure I place these in the root folder of each SD card and also make sure that the directory path of each track is correct and replicated on the SD card.
5) I power off and reboot.
6) Wait for 30+ min and the playlist and tracks will eventually show up in the player. If you are missing tracks, then your directory path in the M3U may not be correct or you just need to give the X1 more time to index. Playlist seem to get indexed last and the sequence is that the playlist titles will show first, then the tracks start showing up after. This can take a long time depending on how many playlists you have.
This is not practical for frequent power on/off. However, thinking about how I use a smartphone, I never turn it off. Maybe this was the expectation for the X1 - leave it on 24x7. I just did the 1.28 update so will check to see if indexing has improved.
There is one visual flaw - playing an ALAC file from the playlist, it displays as an AAC file for some reason. It does not transcode and I've confirmed that my hi res files are playing at full lossless rates by checking the sampling indicators on my Mojo and CDM. Purely cosmetic bug.