Is Xiaomi's IPO worth a punt?

Is Xiaomi's IPO worth a punt?

Samantha Chiew
25/06/18, 03:02 pm

SINGAPORE (June 25): Xiaomi Corp has planned its initial public offering (IPO) since last year and in Dec 2017, it was reported that the group was seeking a valuation of about US$50 billion ($67.4 billion).

See: Xiaomi seeks valuation of at least US$50 bil in IPO

This has since changed and now the group plans to raise around US$6 billion at HK$17-22 per share, still making it the world’s largest tech listing since Alibaba in 2014.

Currently, the Chinese smartphone maker is the world’s fourth largest smartphone company based on smartphone shipments, which produces low-cost but high-specification handsets and strives to create an ecosystem of devices such as drones or rice cookers that could be controlled from smartphones.

Its internet of thing (IoT) platform (excluding smartphones and laptops) is now the world’s largest with more than 100 million connected devices and their internet services have 190 million monthly active users.

In a Monday report by KGI, the research house sees strong growth in Xiaomi’s higher margin segments.

The group’s smartphones and IoT/lifestyle device sales make up more than 90% of total revenues by gross profit margins are low at 8%.

Its internet services segment however makes up 10% of total revenues but has higher gross profit margins of 60% and has grown at an average of 77% y-o-y since 2015.

In 2017, the group saw 395 of its gross profits coming from its internet services.

“Given that the firm sells its hardware at close to cost prices, internet services should become the key segment of Xiaomi’s growth in the coming years,” says KGI.

Currently, valuation based on the group’s earnings is not possible as it has been loss-making for the past two to three years. In 2017, the group reported a loss of RMB 44 billion.

In comparison, other smartphone makers such as Apple Inc and Samsung Electronics are trading at 6 times and 16 times 2018 EPS with positive earnings and cash flows.

Meanwhile, Tencent, which owns the largest Chinese Android App store and a competitor to Xiaomi’s MIUI App store, trades at 37/28/21 times 2018/19/20 EPS and generated US$15 billion free cash flow in 2017.

However, Xiaomi expects its expenses to increase in the future as it expands into markets such as Europe and Southeast Asia, as well as invests in research and development (R&D).

The group has said that it plans to spend 30% of its IPO proceeds on R&D, 30% on global expansion, 30% to expand and strengthen its ecosystem and 10% for working capital purposes.

Despite the fact that Xiaomi’s internet services monetisation strategy has been successful in China, as Google Play is banned there and android users are thus dependent on Xiaomi’s platform for apps, it might not see the same outcome outside of China.

The group will face intense global competition due to the dominance of established brands like Apple and Samsung, which have a combined market share of about 40% of the global smartphone market in 1Q18 shipments.

Comparatively, Xiaomi has a market share of 8%, while other Chinese brands Huawei and Oppo have a market share of 12% and 7% respectively.

In addition, Xiaomi may also face pushbacks against Chinese smartphone vendors in the US after Huawei lost out to AT&T due to national-security concerns and ZTE was banned by the Commerce Department from buying from US suppliers for the next 7 years.

Xiaomi’s public open date for public offering is on June 25 and will close on June 28 at 12.00pm. It is expected to trade on the Hong Kong Stock Exchange (HKSE) on July 9.

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