Xiaomi IPO: Chinese smartphone maker shows off scorching growth that will help it take on Apple, Samsung

Xiaomi Corp., going for wow-factor ahead of what could be the largest initial public offering since 2014, has revealed a blistering pace of growth that’ll help it take on Apple and Samsung in global smartphones. The Chinese smartphone maker filed for an IPO in Hong Kong Thursday, kicking off a process that’s expected to raise at least $10 billion and confer a value of $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, and its ups-and-downs since almost dropping off the radar in 2016.

Revenue surged 67.5 percent to 114.5 billion yuan ($18 billion) in 2017, after posting anemic growth of just 2.4 percent 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 Inc. 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 percent — 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.”

IPO

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 share-based 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 U.S. 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 Electronics Co. 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 $1.1 billion in venture capital and became the world’s most valuable startup. 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.

Then it tried to expand too fast overseas and competitors undercut Xiaomi on price, copied its online sales model and locked in retailers in rural areas to capture first-time buyers. It looked destined to become an industry laughing stock, with market share sinking to fifth in China and seventh place globally, according to IDC.

Lei scaled back international operations and instead focused on India, where it’s now the top seller alongside Samsung. He personally took charge of the supply chain and ramped up investments in dozens of businesses that made everything from fitness monitors, luggage, water purifiers, rice cookers and personal scooters. To reach more customers, Xiaomi went physical: it now operates more than 500 brick and mortar retail stores, mostly in China and India.

Challenges persist: It’s unclear if Xiaomi can really convince U.S. wireless carriers to sell its phones amid trade tensions with China. The company remains in fourth place in its home market, where Xiaomi generated 58 percent of phone sales in 2017, according to Canalys. Lei has pledged to reclaim the top spot in China in the next 10 quarters, but it won’t be easy in a declining smartphone market. Chinese phone shipments dropped 21 percent last quarter from the year before, Canalys said.

The company is also facing greater competition in emerging markets like India and Indonesia, where competitors Huawei, Oppo and Vivo are expanding. Still, it’s a rare case of a Chinese corporation trying to forge an international brand.

“If you think of China’s tech companies, only a few have a real strategy to expand into the overseas market, and even less have the capability to scale up” globally, said Richard Liu, chief executive of early Xiaomi-backer Morningside Venture Capital. “Xiaomi has more exposure to global expansion opportunities right now.”

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