July, 2018

Xiaomi's IPO underwhelms investors

Original article: Business Next

Chinese smartphone maker Xiaomi's long anticipated Hong Kong IPO was underwhelming, as the company reached just half of its targeted $100 billion valuation. The lackluster performance illustrates the risks for investors in the booming China tech sector, in which private valuations are sometimes grossly inflated, analysts say.


Xiaomi's underwhelming IPO is not a surprise. For all Xiaomi's talk of building an ecosystem, it is still best known for selling cheap smartphones that pack a lot of bang for the yuan (or rupee). In fact, that's exactly how it has become the top selling smartphone maker in India, where most consumers cannot afford pricey handsets. 

In a May research note, IHK Markit pointed out that Xiaomi has been growing ahead of the market since the quarter ended June 2017. "The company’s focus on increasing offline distribution — via additional Mi stores and retail collaborations in China and India — has started to pay off," IHS Markit said.

But that's not a viable long-term strategy. Firstly, Xiaomi's profit margins remain razor thin. As The Financial Times pointed out in a July 13 report, the company was only able to list in Hong Kong because it received a waiver from regulations requiring three years of profits. 

Further, China's smartphone market is notoriously volatile, especially for Android devices. Yes, Xiaomi tweaks Android with its customers in mind, but ultimately, a Xiaomi phone is still just a generic piece of Chinese hardware running Google's software. Chinese consumers could lose interest in Xiaomi phones at any time, just as they have in Lenovo, ZTE and Coolpad. 

Meanwhile, Huawei, Oppo and Vivo all offer better phones than Xiaomi, albeit at a higher price. Those brands also don't copy Apple so shamelessly. Xiaomi's Mi 8 phone, released in May, is a near carbon copy of the Apple flagship smartphone. At this stage in Xiaomi's development, to blatantly copy Apple suggests a dearth of ideas. Surely, investors took note ahead of the Beijing-based firm's Hong Kong listing. One wonders if Xiaomi's costly, high-profile patent purchases (from Microsoft, Nokia, Casio, Qualcomm and Broadcom, to name a few) were money well spent. 

Taiwan's Business Next argues that Xiaomi's branding is hazy, despite founder Lei Jun's insistence that the smartphone maker is a new type of company: "hardware, internet services and new retail." In 2017, internet services accounted for just 8.6% of Xiaomi's revenue, while consumer electronics (smartphones, home appliances and more) contributed more than 90% of revenue. Smartphones alone provided 70% of revenue. It's risky to be so dependent on a market segment that is saturated and unlikely to see significant growth in the years ahead. 

Chiu You-fang, an analyst at the Taiwan Institute of Economic Research, told Business Next that Xiaomi's ability to expand in Europe and the U.S. is uncertain. In particular, trade tensions between Beijing and Washington could stymie any near-term attempt by Xiaomi to expand to the U.S., Chiu said. If Xiaomi is shut out of the U.S. market, the company will struggle to boost sales substantially in the short term, he added.