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Xiaomi’s initial public offering (IPO) promises to provide an interesting opportunity for those looking to investigate the possibilities offered by Chinese tech firms. The company combines the characteristics of smartphone firms like Apple with the more consumer focus of Procter & Gamble.
Around 70% of the firm’s revenue comes from smartphones, but a steadily growing element derives from its lifestyle products (20%) and internet services (c. 9%). Of gross profit, 47% comes from smartphones, and 40% from internet services, indicating that the latter has wider margins. Indeed, Xiaomi’s focus has been on providing cheap, low-margin smartphones, and then use these to sell higher-margin internet services. Apple has a similar approach, but its high-end smartphones have margins of 64%, compared to just 9% for Xiaomi’s.
On a valuation of $70 billion, the current forecast for the firm, Xiaomi operates on a multiple of 37 times price to operating profit, versus 14.6 for Apple, 194 for Amazon and 50 for Alibaba. This valuation depends on continued success in the handset division, but the 2017 average selling price for its phones was 40% below the average of all other brands in China, making it highly vulnerable to changes in consumer sentiment at this price point.
Xiaomi at least has geographical diversification on its side. Having conquered its home market, it has done well in India and is also one of the top five phone brands in Europe. It also plans to expand into the US either this year or in 2019. This latter move is not without its problems however; China continues to block Google’s mobile apps, allowing domestic apps to flourish, but in the US Xiaomi will compete on a more level playing field, and it is not certain whether it can succeed.
Recent figures showed that Xiaomi made a loss of 7 billion renminbi ($1.1 billion) in the first quarter (Q1), and like many US tech firms, it has yet to turn a profit. It posted revenues of 34.4 billion renminbi for Q1, versus 114.6 billion renminbi for the whole of 2017.
So far, it does look as if the great frenzy surrounding Chinese tech IPOs has fizzled out. The retail portion of Xiaomi’s IPO was oversubscribed by 8.5 times, but this compares to enormous oversubscriptions for others, such as online health care platform Ping An Good Doctor, who’s IPO was 650 times oversubscribed.
As trade wars threaten Chinese economic growth, and fears grow regarding a possible end to the tech stock boom, Xiaomi will have to work hard to keep investors on side.
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