A reality check for the Xiaomi IPO

Xiaomi filed its Application Proof with the Hong Kong Stock Exchange on May 3 for the much-anticipated initial public offering of China’s fourth largest smartphone maker, sometimes referred to as 'the Apple of China'. In our initial analysis on May 9, we said that Xiaomi’s IPO was a monumental symbol of China’s ambitions because it would be the first IPO under the new Chinese securities law allowing CDRs (just like ADRs in the US), making it possible for domestic Chinese investors to buy foreign-listed stocks.

However, Xiaomi has chosen to postpone the CDR listing and only go with the Hong Kong listing.

Realism kicks in

In our initial analysis based on the Application Proof, we highlighted that the valuation was too aggressive despite an interesting growth case in China and India, which are Xiaomi’s main markets. Xiaomi’s initial ambition communicated before the Application Proof was a valuation of around $100 billion and raising $10bn. In the initial filing, Xiaomi only reported numbers ending in December (FY 2017) showing revenues of RMB 114.6bn (USD 17.6bn) and EBITDA of RMB 5.9bn (USD910mn).

Based on these numbers, net debt, and a rumoured market value of $75bn. we calculated the trailing EV/EBITDA at 96.x which was significantly above peers such as Samsung and Apple. This was plainly unrealistic. Today, Xiaomi has filed its first PHIP document which gives a bit more insight into the company, including Q1 numbers. Information on the actual offering has still not been filed with the exchange but after the initial talks we expect this information to be filed next week.

People close to the deal have today leaked that Xiaomi is now closer a market capitalisation of $50bn  (it’s important to state that these figures are still only rumours) and aims to raise $6.1bn, which is half of its initial ambition – the brutal world of financial markets can often overwhelm private companies. On a positive note, Xiaomi’s Q1 figures show impressive revenue growth of 85.7% year-on-year. Based on the Q1 and 2017 figures, we estimate revenue could grow 52% in 2018.

Using recent EBITDA margins, assuming no margin expansion, EBITDA could reach RMB 9.3bn or $1.43bn. Assuming a market value of $50bn, cash and short-term investments of $2.7bn, IPO proceeds of $6bn, and debt of $27.5bn, the enterprise value is $68.9bn.

Using these figures, the FY18 forward EV/EBITDA is 48.1x and EV/Sales is 2.6x. As the overview below shows, the valuation is still significantly above comparable companies but it should be given the growth opportunity. Realism is now part of the IPO process.

Apple

   • EV/EBITDA (FY18): 9.5x
   • EV/Sales (FY18): 2.9

Samsung

   • EV/EBITDA (FY18): 2.5x
   • EV/Sales (FY18): 0.9

HTC

   • EV/EBITDA (FY18): neg.
   • EV/Sales (FY18): 0.1