A reality check for the Xiaomi IPO A reality check for the Xiaomi IPO A reality check for the Xiaomi IPO

A reality check for the Xiaomi IPO

Peter Garnry

Head of Saxo Strats

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

Xiaomi IPO
Xiaomi IPO data (source: Saxo Bank)

CDR listing postponed

According to news sources, China Mobile and Qualcomm have agreed to acquire a stake in Xiaomi, becoming cornerstone investors (China Poly Group and China Merchants Group are also being cited as potential cornerstone investors). Part of the initial plan was to do a CDR listing on a mainland exchange but that plan has now been scrapped due to 84 questions from Chinese regulators (CSRC) that probably overwhelmed management and would have prolonged the whole IPO process.

Given the potential for trade war escalation, Xiaomi might have decided not to take the risk of delaying the IPO against falling market sentiment impacting pricing. According to South China Morning Post, some of the questions were about the valuation (much higher than Apple), but also why the company is positioning itself as an internet company.

The latter is arguably a marketing angle to raise the valuation, but at this point the facts are clear: Xiaomi is mostly a hardware-driven company aiming to secure a majority of future profits from online services on its smartphones and other products.

The CSRC has recently warned Chinese technology companies to not overinflate IPO valuations in a defense of retail investors dominating the Chinese market. The warning came as recent Chinese IPOs have experienced wild price swings after the IPO.

As soon as Xiaomi files its offering range and other key IPO details, we will update our numbers for the analysis.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992