Friday, June 29, 2018

IPO ANALYSIS: Xiaomi Inc - Overpriced - Avoid

Image result for xiaomi

Issue Details :

Issue size
$ 4.72 billions
Trading to start on 09-07-2018
HK$ 17-22
Electronics company
Lei Jun, chairman
Hong Kong
Goldman Sachs, Morgan Stanley and CLSA


Xiaomi is a Chinese electronics company headquartered in Beijing. Xiaomi makes and invests in smartphones, mobile apps, laptops, and related consumer electronic products.

Xiaomi was founded in 2010 by serial entrepreneur Lei Jun, who believes that high-quality technology doesn't need to cost a fortune. Company creates remarkable hardware, software, and internet services for and with the help of Mi fans. The product range,among others includes the Mi Note Pro, Mi Note, Mi 4, Redmi 2, Mi TV, Mi Band and other accessories.

Xiaomi is expanding its footprint across the world to become a global brand. Currently Xiaomi is the world’s fourth largest smartphone company. Company’s revenue exceeded $ 18 billions in 2017, of which India contributed 32%. Company has many verticals including smartphone, Retail, Internet services, networking  Cloud, big data and AI.

  1. Limited operational history.
  2. Smartphone revenues accounts for nearly 75% of the total revenue. Any decrease sales in this segment will hit the company hard.
  3. Business is subject to risk of international operations.
  4. Highly competitive business.


The offer is made at 40 PE, based on its 2017 earnings and around 23 times Xiaomi's 2019 earnings estimate. Comparable peers are Apple and Samsung. Apple is trading at 17 times on its last year earnings and 14 times forward earnings. Samsung is trading at 7 PE.
The IPO has been overpriced as compared to its established peers. Most of Xiaomi's revenues comes from two price sensitive markets - China and India. Margin expansion in these countries will have negative impact on sales. More importantly there is publicly proclaimed and self imposed margin restriction by Xiaomi on some of its products (5%). Xiaomi will find it difficult sustain the exponential growth that it achieved in the recent past.

Avoid the IPO.

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