What justifies Xiaomi’s proposed IPO valuation of US$100 billion?

Xiaomi’s potential IPO is arguably Hong Kong’s most anticipated deal for 2018

IT was a cold winter night in 2015 when Xiaomi’s founder and CEO Jun Lei (雷军) was standing in his Beijing office, gazing at the TV screen. That Singles’ Day (an online shopping holiday in China), Lei witnessed as Xiaomi came close to losing its Singles’ Day sales crown to Huawei, its biggest domestic competitor. In the same year, an unprecedented supply chain crisis caused Xiaomi to fail to meet its 80-million-unit mobile phone sales target.

Two years later, Lei and his team concluded 2017 with a surprising comeback. Underlining its global ambitions, Xiaomi is seeking to list in Hong Kong in 2018. The IPO is valued at US$100 billion – around a price to earnings ratio of 60. Its sister company Huami, raised US$110 million through its New York IPO in early February.

Xiaomi’s potential IPO is arguably the most anticipated deal in Hong Kong, and not just for its size (it could be the largest technology IPO since Alibaba in 2014), but also due to the incredible speed at which Xiaomi recovered from a sharp decline in shipment volume in 2015 and 2016. In Q4 2017, the Chinese mobile phone unicorn was again ranked among the top four mobile phone manufacturers globally, behind only Samsung, Apple, and Huawei. “2017 was an extraordinary year for Xiaomi. It was a year of recovery and of leaping ahead,” Lei said in an internal speech to Xiaomi employees.

Having recovered and survived through two difficult years, Lei realized that with such strong momentum it could be the best time to tap the capital markets. As a result, Xiaomi has mandated Morgan Stanley, Goldman Sachs and other investment banks for its Hong Kong IPO, likely to be in the second half in 2018.

For Xiaomi, the IPO would be a fitting catalyst for what has been a long-running attempt to expand globally. In an interview with Chinese media in 2015, Lei said that Xiaomi would not consider an IPO for at least five years. For him, however, Xiaomi’s future is not going to be just selling cheap phones in China. Since then, international and Chinese investment bankers had sought to win Xiaomi’s nod, despite original valuations as high as a hefty US$200 billion.

While Lei and Xiaomi both have not responded to the public regarding its IPO plan, it offers promising prospects for the Hong Kong market. The public listing, which will make Xiaomi the third-largest Chinese technology company in terms of market cap, after Tencent and Alibaba and followed by Baidu and JD.com, 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 the idea of allowing dual-class shares to attract technology companies.

To Xiaomi, the IPO is another statement of its international strategy. Currently, Xiaomi already dominates the Indian mobile phone market, with a market share of over 20% as of Q3 2017, according to IDC data. In addition, Xiaomi also ranked top five in 16 countries, according to Lei.

However, not every investor is convinced with Xiaomi’s story. “There 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. “Personally, I think they (Xiaomi) will have trouble raising the US$100 billion valuation level. But there is a lot of funny money out there which chase technology IPOs.”