A look at this year’s most-anticipated IPO

What’s behind Xiaomi’s US$100 billion valuation?

Xiaomi looks to tap the capital markets with one of Hong Kong’s most-anticipated IPOs, after recovering in 2017 from several years of supply chain challenges and falling sales


10 Apr 2018


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 AFTER a disastrous 2016 that saw its market share plunge, smartphone vendor Xiaomi Corp has bounced back – revamping its sales model and creating an ecosystem of business partners that expanded sales and placed Xioami once again among the world’s largest smartphone suppliers.

Xiaomi is now gearing up for an initial public offering in Hong Kong. The IPO is valued at US$100 billion – around 60 times its price to earnings ratio – making it one of Hong Kong’s most-anticipated deals.

 “2017 was an extraordinary year for Xiaomi. It was a year of recovery and of leaping ahead,” company CEO Lei Jun said in a speech addressed to Xiaomi employees. Xiaomi has mandated Morgan Stanley, Goldman Sachs and other investment banks for its Hong Kong IPO.


Back in 2011, when Xiaomi launched its debut smart phone, the Mi 1, Lei would never have imagined how it would radically change China's mobile phone industry. The success of Mi 1 not only proved that cheap-but-quality China-made mobile phones can meet customers’ demands, but also demonstrated the success of a business model unprecedented in the mobile phone industry which relies on pure e-commerce distribution. 

With no inventories, low offline marketing expenses, and shorter days sales outstanding, Xiaomi managed to expand exponentially, however with low profit margins. According to Counterpoint Research, Xiaomi only earned US$2 for each mobile phone it sold in Q3 2017, while the profit margin for each iPhone was US$151.

In the early days, Lei relied purely on word-of-mouth and social media. He believed users would be excited about Xiaomi’s products and would refer the products to friends. In 2010 the slogan it used for its product was: “Born for the tech zealot” (为发烧而生). It was widely acknowledged that Xiaomi’s flagship phones used powerful chips and hardware, but sold at a price just above manufacturing expense.

However, Xiaomi’s difficulties started when its successful light asset business model was adopted by its peers, such as OPPO and VIVO. In 2016, Xiaomi’s sales dropped by 36% while all of its main competitors increased their sales volumes dramatically. The use of offline distribution channels won tremendous market shares for OPPO and VIVO, while Xiaomi still relied on online distribution.

“It looks to me that owners of VIVO and OPPO had outdone Xiaomi and Huawei with their flagship phones,” a CIO of a Hong Kong-based asset manager tells The Asset. “If you look at OPPO and VIVO, they are amazing. In my travels to emerging markets, Belt Road countries, it is remarkable how universal you find VIVO and OPPO.” 

This led to the Singles’ Day moment for Lei in 2015, being one of the most difficult day for Xiaomi's chief. The company encountered supply chain difficulties. That meant Xiaomi had to delay the launch of its annual flagship phone, the Mi 5, to after Singles’ Day – much like missing Christmas day in the West. Xiaomi instead had to offer large discounts on their old flagship phone, the Mi 4, launched in 2014.

Supply chain challenges continued even after the eventual launch of the Mi 5 in 2016. While the new phone was welcomed by the market, the shortage of supply for three months frustrated Xiaomi’s fans. According to Chinese media, Xiaomi’s supply chain manager had been inefffective at gaining the support of some of its key suppliers including Samsung.

It was then when Lei decided to take charge of the supply chain himself. Lei was seen on social media spending a lot of time visiting Xiaomi’s suppliers, to maintain relationships and encourage them to acquire automation equipment.

“The pain point of mobile phone industry is that it highly depends on the global supply chain. If your figures go down, all of your resources will be gone and the cost will increase,” says Lei in a note. “Therefore, there is no turning point for mobile phone companies if their sales volume drops.”


Lei's efforts were a success. “There is no mobile phone company in the world that can rebound from a sales drop, except Xiaomi,” said Lei, who could not hide his pride at Xiaomi’s meeting with employees in November 2017. Xiaomi achieved its 2017 sales target of 70 million units and 100 billion yuan (US$16 billion), two months ahead of deadline.

In 2016, Xiaomi began expanding from its core product of cheap-but-quality smartphones, launching the Mi Mix in late 2016 that marked Xiaomi’s ambition to enter the high-end business phone segment.

The phone, designed by Philippe Starck, a renowned French designer, was the first successful full screen mobile phone in the market. It was launched a year earlier than iPhone X and Samsung S8. It won the gold award in the International Design Excellence Awards and Germen Red Dot Award. As of 2017, Xiaomi has over 15.5 million fans on Taobao – the most among all mobile phone companies on Taobao, the largest e-commerce platform in China.

Lei also began steering Xiaomi’s towards a “new retail” model, setting up physical stores, selling not only mobile phone products but also its smart home products including PCs. Its best-selling product, Mi Band, was the most popular wearable device in the world in 2016, with 102.4 million units sold, followed by Fitbit, according to International Data Corporation (IDC), a market intelligence firm.

Despite the deviation from its online sales model, the strategic change extended Xiaomi’s footprints to second- and third-tier cities in China, as well as overseas markets. According to Lei, Xiaomi plans to build 1,000 Mi Home stores by 2019 — about twice Apple’s global store count — targeting 70 billion yuan of retail sales by 2021.

With the large amount of capital needed to fulfill Lei’s global ambition, the proposal of an IPO was again put on the table. According to Chinese media, the pre-IPO round valued Xiaomi at US$54 billion, with the post-IPO valuation standing at over US$100 billion.

The public listing, which will make Xiaomi the third-largest Chinese technology company in market capitalization, after Tencent and Alibaba could well become the largest technology IPO in Hong Kong ever.

In 2017, Hong Kong welcomed several technology issuers including China Literature, Razer, Zhong’An Insurance and Yixin. The Hong Kong Exchange is also consulting on allowing dual-class shares in an effort to attract technology companies like Xiaomi. China’s A-share market is also in Lei’s mind, as the China Securities Regulatory Commission is considering re-launching the Convertible Depository Receipt programme in 2018, which allows dual listing in both the A-share market and overseas. 

To Xiaomi, the IPO is another statement of its international strategy. Currently, Xiaomi is already successful in the Indian mobile phone market, with a market share of over 20% as of Q3 2017, according to IDC data. In addition, by market share Xiaomi also ranked No. 5 in 16 countries, according to Lei. The founder also shared that Xiaomi plans to sell its mobile phones in the US as early as 2018 – a market that its Chinese rival Huawei has failed to enter.

However, not every investor is convinced with Xiaomi’s story. “This is a big branding exercise, Lei’s a smart guy, but I don’t think he executed well,” a CIO of a Hong Kong-based asset manager tells The Asset. “Xiaomi might encounter trouble raising the US$100 billion valuation. But there is a lot of money out there that chase technology IPOs.”


10 Apr 2018


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