January 11, 2019 / 4:41 AM / 12 days ago

Breakingviews - Xiaomi's grand plan gets market reckoning

Senior vice president of Xiaomi, Xiang Wang, speaks at a UK launch event in London, Britain, November 8, 2018. REUTERS/Toby Melville

HONG KONG (Reuters Breakingviews) - Xiaomi’s big vision just got a market reckoning. A grim outlook for Chinese smartphone demand has walloped entrepreneur Lei Jun’s $33 billion company. The stock selloff suggests investors aren’t ready to buy into the internet services hype.  

About a quarter of Beijing-based Xiaomi’s market value has vanished since the start of the year amid a broader tech rout. Apple boss Tim Cook blamed weak sales in Greater China for his rare cut to forecast revenue. Samsung Electronics echoed the bad news, warning this week that fourth-quarter operating profit would fall by 29 percent.

Cooling demand in the People’s Republic will be even more painful for Xiaomi. Even as Lei touts his company as a “new species” that integrates hardware and internet services, it is phones and gadgets that account for some 90 percent of total revenue. And despite a promising overseas push, Xiaomi relies on China for over half its sales. Competition is fierce from compatriots Huawei, Oppo and Vivo, and the market is already saturated. Smartphone shipments in the People’s Republic fell 12 percent last year, and will fall another 3 percent in 2019, research outfit Canalys reckons.

All this has been made worse for Xiaomi by a stock overhang. A six-month lockup period for a huge slug of shares following the company’s market debut last July expired this week. The stock price hit a record low on Thursday.

Even so, doubling down on smartphones is what makes most sense for Lei. Xiaomi delivered an impressive 50 percent surge in third-quarter sales, powered by a promising but early lead in India. The country is expected to be the only major market where handset purchases will grow this year.

Following its market tumble, Xiaomi trades at 17 times the profit expected over the next 12 months, Refinitiv data shows. That is higher than the 12 times at which Chinese hardware peer Lenovo trades, but lower than Tencent’s forward earnings multiple of 29. Sustaining international smartphone sales will do more to keep Xiaomi in that sweet spot than touting connected devices and a revolutionary new business model.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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