Yes, you have the basic idea correct. If you haven't already I recommend reading through the xPC Target Product Page. All the features are described there in detail. There is also a nice video that gives a brief overview. I would only make a couple comments on your description:
1) It is certainly used to simulate physical systems for HIL testing as you mention, but it can work with other Simulink models, such as control algorithms, so you can quickly test the algorithm with the actual plant (rapid prototyping).
2) The connection between the host and target can also be through ethernet, which is the more common and recommended approach.
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