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‘Chinese Apple’ Set for Biggest IPO Since Alibaba in 2014: Can You Invest?

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It’s the fourth largest smartphone maker in the world but few in the UK will have heard of Xiaomi. The Chinese company, founded only 8 years ago in 2010, yesterday filed for a $10 (£7.3) billion stock exchange listing. That would value Xiaomi at an initial $100 billion and be the world’s biggest IPO since Alibaba, the ‘Chinese Amazon’ listed on the New York Stock Exchange in 2014. Despite an initial dip in share price over its first year as a public company, Alibaba shares are now trading at almost twice their debut price. That represents an average annual return of almost 25% for early investors who will be wondering if Xiaomi can repeat the trick.

So what do you need to know about Xiaomi? The company started out selling cheaper iPhone alternative smartphones in 2010 and has since grown extraordinarily quickly. It’s the biggest smartphone seller in India, ahead of Samsung, though its domestic market is still by far its most important, accounting for 72% of sales in 2017. The company is quickly expanding its international presence though and 30% of the IPO capital raise has been pledged to continuing that trend. The company’s smartphones will also soon be available on the UK market with an announcement that Three will start to carry them made almost simultaneously to the IPO announcement.

The smartphone models themselves are judged to be of a very high quality with flagship models now judged to be of comparable quality to those of the leading brands popular in the West, including those of Samsung and Apple. However, they are far cheaper. Xiaomi’s business model is different to that of Apple and Samsung and the company operates on very low margins, which the CEO and founder has pledged to cap at 5%. Sales volume and generating revenue through additional services such as an app store, retail business and internet services such as payments and streaming.

The company has also invested heavily in IoT companies in recent years and sells smartwatches, fitness bands and even rice steamers. Smart devices account for 20% of the company’s revenues, services 10% and smartphones the remaining 70%. In addition to the 30% of IPO capital that will go to international expansion, another 30% will go to R&D and the company’s IoT ‘ecosystem’ of interconnected devices. The remaining 10% will be held back as working capital.

The company made an operating profit of $1.9 billion in 2017, triple its 2016 figure. However, due to its aggressive expansion it is also burning through cash, its reserves reduced by over $156 million last year.

If, after further research, you wanted to invest in the Xiaomi IPO, how would you go about it? It isn’t clear if the IPO will have a retail offering so it is probably necessary to wait for the company’s stock to start trading freely. An added complication is that the listing will be on the Hong Kong Stock Exchange. However, several of the UK’s major online stock brokers do offer Hong Kong listed shares so once the shares start trading Brits investing online will be able to buy them if they decide the company’s prospects look good.

Risk Warning:

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

Paul

The author Paul