Xiaomi: What IPO valuation does it deserve?

Chinese smartphone maker Xiaomi Corp is believed to be making preparations for an initial public offering this year, with Hong Kong as the likely listing venue.

Ahead of the IPO, various figures are doing the rounds as to the firm’s target valuation, with some of the numbers sounding too fanciful and crazy.

In early December, Bloomberg reported that Xiaomi was in talks with investment banks and that it was seeking a valuation of at least US$50 billion.

Now, a Chinese media report suggests that Xioami has set the second half of 2018 as the target period for the IPO and that the company expects its valuation to reach as much as US$200 billion.

The number is a real whopper and somewhat hard to believe, but apparently the company seems to think that its overseas expansion story should support the high valuation.

Many critics as well as consumers of Xiaomi, however, feel Xiaomi can’t shoot for such valuation, noting that the firm is yet to prove a premium positioning against other Chinese phone makers like Huawei, Vivo and OPPO.

The brand is no different from other players as it seeks to gain market share through low-price products, rather than trying to develop original products with own technology and ecosystem, the argument goes.

But Xiaomi appears to think otherwise and feels it deserves a huge valuation in view of its growth prospects amid aggressive investment in retail stores and overseas expansion, particularly in India.

If the plans of the company, which had been referred to by media as “China’s answer to Apple”, succeed, it could lead to the biggest tech IPO since 2014, when Alibaba Group raised US$25 billion in a deal that offered over US$231 billion in market value.

Xiaomi has seen its valuation more than double in less than a decade. In its previous funding round in 2014, the Chinese firm was valued at US$46 billion. At the reported current US$200 billion goal, Xiaomi is equivalent to roughly 37 percent of Tencent’s market capitalization, and around 40 percent of Alibaba, as well as 2.3 times that of Baidu and more than 3 times that of JD.com.

It may be just a target, but the question is this: what prompts Lei Jun, chairman and founder of Xiaomi, to seek such a high valuation and why he seems confident his firm can chase that goal?

Lei may argue that Xiaomi shook off declining sales in 2016 and swung back to strong growth last year with a series of new smartphone products like Mi Mix 2 and Mi 6. However, the fact remains that Xiaomi is yet to regain its market leader position in its home market, even though smartphone shipments were tipped to reach 90 million units last year, up from about 41 million units in 2016.

The sharp rebound in shipments points to Xiaomi’s growth capability, with the number quite impressive. But we should bear in mind that the average selling price of Xiaomi smartphones is much lower than that of competitors, as almost 80 percent of Xiaomi phones were priced below 2,000 yuan, with some even sold at just 699 yuan each.

In comparison, global giant Apple, which took almost 80 percent share of the profit in the smartphone market, had an average selling price of more than US$600 each.

Xiaomi’s profitability is much lower than that of Apple and its valuation can’t be justified based on the phone business.

Perhaps realizing this, the Chinese company has been expanding its footprint to non-smartphone products. The Beijing-headquartered company has established an ecosystem for Internet of Things technology and is investing in upstream manufacturers of IoT products.

For example, Xiaomi is now offering fans, air purifiers, lamps and light bulbs, and other gadgets which can be connected to the Internet and controlled through users’ smartphone. In November, the company announced that it has connected more than 85 million units of IoT devices globally, making it one of the biggest IoT systems in the world.

The tech firm, which was once considered the most valuable startup in the world, is betting on IoT gadgets to boost its overseas exposure.

Xiaomi is also expanding its offline retail business to sell its products. The company aims to have 2,000 new stores within the next three years, a company executive told CNBC in July last year.

Half of those shops will be opened overseas with partners and the other half will be owned and operated by Xiaomi in China, Wang Xiang, who oversees Xiaomi’s global strategy, said, adding that it’s all part of the company’s big ambitions to keep growing abroad and be a global player.

The company also invested in India to produce smartphones for the high-growth market. The investment has paid off as Xiaomi was the biggest smartphone brand in India last year.

The Chinese firm apparently feels its India growth story could be one of the selling points to support an extremely high valuation when it launches its IPO.

As it prepares for the IPO, Xiaomi has found itself in the media spotlight for another eye-catching initiative — a partnership with global social network giant Facebook on virtual reality headsets.

On Wednesday, Facebook announced that Xiaomi will be its hardware partner for the VR Go device and that the two firms will also jointly launch a headset, called Mi VR Standalone, for the China market.

The tie-up will help boost Xiaomi’s brand profile, but it is doubtful whether it will be enough to prompt a massive valuation spurt for the Chinese firm.

What might have really made a difference is if Facebook had joined hands with Xiaomi for collaboration on social media.

As of now, Xiaomi’s reported US$200 billion valuation target just seems far too ambitious and, frankly, somewhat surreal.

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Originally published at www.ejinsight.com on January 10, 2018.

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