December 6, 2017 / 1:12 AM / 4 months ago

BREAKINGVIEWS-A $50 bln Xiaomi comeback is hard to figure

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Robyn Mak

HONG KONG, Dec 6 (Reuters Breakingviews) - Xiaomi’s $50 billion comeback is hard to figure. After a fall from grace, the Chinese handset maker may be mulling an initial public offering again. Only the most optimistic assumptions and Hong Kong’s tech fever can justify the eye-popping valuation.

If the Beijing unicorn manages to go public as early as next year, as Bloomberg reported, it would be a remarkable turnaround. Following a 2014 funding round that valued Xiaomi at $45 billion, it was eclipsed by domestic rivals including Huawei. A fresh China strategy and a renewed focus on India are paying off, though. Smartphone shipments have more than doubled to 28 million in the third quarter of 2017, according to research outfit IDC.

The revised business model makes Xiaomi harder to assess now. Three years ago, it was wowing investors by selling online. At the time, Breakingviews estimated that at an 11 percent net profit margin the company might be able to live up to an Apple-like valuation, provided revenue kept growing.

Expansion probably has not come cheaply, though. Xiaomi is opening bricks-and-mortar shops to reach more consumers, as well as selling a range of items such as rice cookers and wireless routers under its own brand. A marketing blitz that enlisted Chinese pop star Kris Wu also will have added expenses.

Xiaomi, which doesn’t disclose any financial information, is expected by Morgan Stanley analysts to ship 132 million phones in 2019. Assume an average price of $175 each and that adds up to about $23 billion. At a generous 5 percent net margin – a Xiaomi executive said in November 2016 that the company “wouldn’t make a single dime in profits” from phones – the bottom line would be $1.2 billion.

Giddy investors would have to apply the same 38 times expected earnings on which currently unprofitable rival Meitu trades to get to a $46 billion valuation for Xiaomi. That would overlook that Meitu is starting to generate recurring revenue from apps while Xiaomi is making appliances, albeit in a market where a growing middle class is buying more such goods. Only with special tech-tinted glasses can Xiaomi achieve such a rose-coloured valuation.

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- Chinese smartphone maker Xiaomi is in talks for a possible initial public offering that would value the company at $50 billion or more, Bloomberg reported on Dec. 4, citing unnamed people familiar with the matter.

- Xiaomi is considering an offering as soon as next year, and most likely in Hong Kong, according to the report.

- The company shipped almost 28 million phones in the third quarter of 2017, more than double the amount last year, according to estimates from research outfit IDC. Xiaomi ranks fifth in the global smartphone market, with 7.4 percent market share, behind Samsung, Apple and Chinese rivals Huawei and OPPO.

- The Beijing-based company last raised money in 2014 at a $46 billion valuation.

- For previous columns by the author, Reuters customers can click on


Editing by Jeffrey Goldfarb and Katrina Hamlin

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