Xiaomi’s scorching growth ahead of IPO

The smartphone maker filed for an IPO in HK yesterday, kicking off a process that’s expected to raise at least RM40b

By BLOOMBERG

HONG KONG • Xiaomi Corp, going for wow-factor ahead of what could be the largest initial public offering (IPO) since 2014, has revealed a blistering pace of growth that’ll help it take on Apple Inc and Samsung Electronics Co in global smartphones.

The Chinese smartphone maker filed for an IPO in Hong Kong yesterday, kicking off a process that’s expected to raise at least US$10 billion (RM40 billion) and confer a value of US$100 billion on the eight year old company. That offered investors a glimpse into the inner workings of the company controlled by billionaire Lei Jun (picture), and its ups-and-downs since almost dropping off the radar in 2016.

Revenue surged 67.5% to 114.5 billion yuan (RM68.7 billion) in 2017, after posting anaemic growth of just 2.4% a year earlier, while operating profit more than tripled. The filing caps a remarkable turnaround for a company that encountered serious growing pains in 2016 after an over-aggressive expansion disrupted its supply chain and allowed rivals to grab market share.

The company now has designs on displacing Apple at the top of the market as it ramps up a global expansion.

In an open letter reminiscent of Google’s own pre-IPO manifesto, Lei pledged to transform Xiaomi into more than a hardware company and again promised to cap its hardware profit margins at 5% — returning any excess to its users.

“We are building an open global ecosystem, and not a walled garden,” said Lei, who with co-founder Lin Bin will continue to control the post- IPO company through a special class of shares. “I believe we can create a paradigm shift of efficiency in the business world and use technology to improve the lives of many.”

Xiaomi, reporting detailed financials for the first time, posted a net loss of 43.9 billion yuan in 2017, reversing from a meager profit a year earlier.

Some of that, however, reflected one-time items such as sharebased compensation and changes in the value of preferred shares, the company said in its filing. Excluding those, operating profit reached 12.2 billion yuan.

The company is taking advantage of changes by Hong Kong that allowed companies with different share classes to list. The filing didn’t mention how much it’s looking to raise, with the number of shares and price among details redacted from the document. It’s a big win for Hong Kong Exchanges & Clearing Ltd, whose officials spent years pushing to scrap a ban on the weighted voting rights that give founders control even with minority ownership.

Xiaomi’s decision, four years after Alibaba Group Holding Ltd chose New York, signals a new phase for the city’s ambitions to rival the US market.

“Investors will like Xiaomi’s business model because growing user numbers guarantee profits in the future,” said James Yan, an analyst at Counterpoint.

“A bigger hardware user base will translate to stronger profitability from services and at the ecosystem end.” Xiaomi was little-known in 2014 when it became China’s third-largest smartphone vendor, trailing only Apple and Samsung. Selling phones with the latest processors and features at half the price of competing devices, it used buzzy flash sales to attract online customers mostly ignored by competitors.

At its height, it raised US$1.1 billion in venture capital and became the world’s most valuable start-up. It sold investors on a promise that it was not just a smartphone maker, but that it would use phones as a mechanism to sell services and ads to customers.