Xiaomi IPO could plug into Internet of Things hype

RYOHIN KEIKAKU

22/12/2017 05:53

(The author is a Reuters Breakingviews columnist.  The opinions 
expressed are her own.) 
    By Robyn Mak 
    HONG KONG, Dec 22 (Reuters Breakingviews) - Xiaomi's initial 
public offering could plug into hype over the Internet of 
Things. Sales at the Chinese tech company are booming, Reuters 
reports, which is probably thanks to a turnaround in 
smartphones. A mooted $100 billion valuation for an upcoming 
listing sounds highly aggressive. But Xiaomi might be able to 
position itself as the first big consumer-facing play on the 
connected home. 
    The unicorn led by entrepreneur Lei Jun is preparing for a 
blockbuster IPO next year. Xiaomi has told bankers it is on 
track to roundly beat a 2017 sales target of $15 billion, 
Reuters reports, citing sources with knowledge of the matter. 
Bankers also forecast earnings will double to $2 billion in 
2018. If rapid growth continues, a valuation of $100 billion 
would be "reasonable", a source told Reuters. 
    A 12-digit price tag for a budget smartphone-maker seems a 
stretch. Analyst Arun George, who publishes on Smartkarma, 
reckons handsets account for up to 90 percent of sales. But 
while the business has rebounded impressively in China and 
India, it's not a big generator of earnings, and market share 
gains can easily be reversed.  
    So, Xiaomi is looking elsewhere, rolling out stores across 
China that sell "Mi"-branded air purifiers, kettles, rice 
cookers, and so on, which can be controlled from a single app. 
Lei has likened his brand to Japan's Muji, which sells 
minimalist-style household goods and clothes. That means 
Xiaomi's real value lies in the margins it makes from Mi gadgets 
made by third parties, and in the potential for collecting data 
and selling ads on its app. This is presumably what is driving 
the surge in earnings. 
    Optimistically, then, Xiaomi could be valued as a cross 
between a consumer retailer and a tech company. Muji's 
Tokyo-listed parent Ryohin Keikaku  7453.T  trades at 28 times 
forward earnings, while Chinese smartphone peer and selfie-app 
specialist Meitu  1357.HK  fetches 35 times. If the market 
believes Xiaomi's earnings can rise another 50 percent to $3 
billion in 2019, that would put a $100 billion price tag in 
sight. 
    Excitement is building around smart home devices, thanks 
partly to products from Apple  AAPL.O , Google, Amazon  AMZN.O  
and others. With Xiaomi offering a more concentrated and 
China-focused bet on IoT, investors may roll out the welcome 
mat. 
    On Twitter https://twitter.com/mak_robyn 
     
    CONTEXT NEWS 
    - Chinese smartphone maker Xiaomi has told banks it would 
exceed its annual revenue target by as much as 18 percent this 
year, Reuters reported on Dec. 22, citing sources with knowledge 
of the matter. 
    - Bankers project the company will generate earnings of at 
least $1 billion on the back of $17 to $18 billion in revenue 
this year, Reuters said. Earnings for 2018 are forecast to reach 
about $2 billion. 
    - A spokeswoman for Xiaomi confirmed to Reuters the company 
had beaten its sales goal, of about $15 billion, but declined to 
comment on other financials, or on matters related to an initial 
public offering. 
    - The company has asked banks to pitch for a 2018 IPO, 
Reuters has previously reported. One source told Reuters 
expectations of continued sharp growth into 2019 would make an 
IPO valuation of $100 billion "reasonable". Xiaomi's last 
fundraising in 2014 valued it at $46 billion. 
    - For previous columns by the author, Reuters customers can 
click on  MAK/    
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Reuters: IPO hopeful Xiaomi set to blow past 2017 revenue target 
-sources     urn:newsml:reuters.com:*:nL4N1OL2BY 
BREAKINGVIEWS- A $50 bln Xiaomi comeback is hard to figure    
 urn:newsml:reuters.com:*:nL3N1O508S 
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 (Editing by Quentin Webb and Sharon Lam) 
 ((robyn.mak@thomsonreuters.com;)(Reuters Messaging: 
robyn.mak.thomsonreuters.com@reuters.net)) 
 
Keywords: XIAOMI PROFITS/BREAKINGVIEWS