The Chinese-Phoenix Arises: Xiaomi’s Game-Changing $100 Billion IPO
May 17, 2018 | Blog

The Chinese-Phoenix Arises: Xiaomi’s Game-Changing $100 Billion IPO

Source: CNBC, 15 May 2018

Four Chinese Unicorns Valued at $270 Billion Could Go Public Over the Next Twelve Months

Xiaomi, the Chinese Internet-hardware unicorn, also known as the Chinese-Phoenix, recently disclosed plans to go public on the Hong Kong Stock Exchange. We diligently read this 600-page filing, and yes, we noticed more than 1,300 times text redacted in this massive filing. With Xiaomi’s valuation estimated at $100 billion, this filing is another watershed moment for China’s venture ecosystem and adds to the growing list of Chinese unicorns: Lu.com, the online and mobile financial services platform valued at around $60 billion; Didi, the ridesharing giant, valued at $80 billion; and Meituan- Dianping, provider of on-demand online services, valued at $30 billion. Boasting a combined valuation of $270 billion, all three companies plan to go public in the next twelve months.

The Booming State of the Chinese Venture Capital Ecosystem

Over the years, U.S. investors have generally characterized Chinese startups as clones of their U.S. counterparts. But, over the years, we have also learned how the fundamental differences in competitive dynamics, consumer demographics, technology adoption, and access to capital have led to the creation of value in the Chinese private markets. Over the past decade, we have seen a clear reversal in the wave of innovation. More Chinese startups are creating innovative solutions to solve local problems . And, Chinese private tech investors have accordingly stepped up their game. In fact, 2017 was a record year for the Chinese venture capital ecosystem. Chinese VC fundraising hit $50 billion mark in 2017, approaching U.S. levels. Traditional VC investors and corporate investment arms of Chinese tech stalwarts, Alibaba, Tencent, and Baidu poured an estimated $45 billion into Chinese startups last year. Most importantly, China produced more unicorns last year than any other nation, including the United States. According to data by CB Insights, China is now home to 60 private companies with a market cap above $1 billion compared to just a handful 5 years ago.

Growing Number of Unicorns from China
Growing Number of Unicorns from China
Source: SharesPost Research; CB Insights

A quick look at the world’s top 10 unicorns further highlights China’s ascent to a world leader in innovation. Six of the top 10 unicorns hail from China and enjoy a combined market cap of more than $400 billion. The remaining four American unicorns are worth $150 billion. For the Chinese unicorns, the huge potential of the Chinese and Asian markets, where these companies are dominant players, combined with large investments from SoftBank and Tencent, has significantly boosted valuations in recent years.

Six out of the top 10 unicorns are from China
Six out of the top 10 unicorns are from China
Source: SharesPost Research; PitchBook Data Inc. and publicly available data

The Chinese unicorns’ impressive haul of venture money also demonstrates the country’s growing clout. The four Chinese unicorns in Exhibit 3 have collectively raised more than $35 billion, most of it from SoftBank and Tencent though other Chinese companies have invested.

The Top 10 Chinese unicorns have raised more than $35 billion
The Top 10 Chinese unicorns have raised more than $35 billion
Source: SharesPost Research; PitchBook Data Inc. and publicly available data

In addition, the Forbes Midas list, the publication’s annual compilation of the world’s top dealmakers and venture capitalists, features 16 Chinese nationals or people based in China, the country’s largest number ever on the list.

Xiaomi’s IPO could be the largest since Alibaba

Xiaomi’s estimated IPO valuation is $100 billion, making it the largest IPO since Alibaba in 2014. (Recent media reports, however, suggest the company may have cut the IPO valuation to $70 billion to $80 billion.) Xiaomi’s IPO would dwarf all of the smaller IPOs over the past 12 to 24 months. The company started off in 2010 with a mere $150 million valuation, but it grew rapidly and became the world’s fourth largest smartphone supplier. Since 2014, Xiaomi’s valuation has more than doubled. With a market favorable for IPOs this year, it might be the right time for Xiaomi to go public.

Xiaomi: A mammoth IPO in the making
Xiaomi: A mammoth IPO in the making
Source: SharesPost Research; PitchBook Data Inc. and publicly available data

Xiaomi boasts a global list of investors, including Accel, Qualcomm Ventures, DST Global and Green Bay Ventures. Combined, they have invested $3.45 billion into Xiaomi over the past 8 years, a sum greater than the amounts raised by all the unicorns that recently went public.

Xiaomi raised $3.45 billion to date over past 8 years
Xiaomi raised $3.45 billion to date over past 8 years
Source: SharesPost Research; PitchBook Data Inc. and publicly available data

The Upside Scenario:

  • Growing international presence: Xiaomi started off with an entirely Chinese customer base, but is rapidly expanding its presence globally. The company ships the world’s fourth largest number of smartphones after Apple, Samsung and Huawei. Xiaomi, which operates in 74 countries, already generates a quarter of its annual revenue from outside of China. In India, Xiaomi is now ranked No. 1 in smartphone shipments – ahead of Samsung. Overall, the company ranks third in emerging markets after Apple and Samsung.
    Xiaomi is fourth in smartphone market share across the globe
    Xiaomi is fourth in smartphone market share across the globe
    Source: SharesPost Research; Xiaomi’s public filing document
  • Increasing revenues: The company has substantially grown its revenues over the past year as it expanded its product offerings beyond smartphones. From 2016 to 2017, Xiaomi’s revenue jumped 63 percent. With its growing number of non-smartphone products and Internet services, the company will grow at a healthy rate post IPO this year.
  • Product diversification: In addition to becoming one of the largest smartphone makers in the world, the company has created a complete connected home ecosystem of smart products, including TVs, speakers, Wi-Fi routers, water purifiers and lighting. Xiaomi is heavily betting on IoT and claims to have the largest number of in-home connected IOT devices globally.
  • Improving margins: Despite growing revenues, Xiaomi managed to significantly reduce its cost of sales to 86.8 percent from 89.4 percent. Those expense savings has fattened its bottom line. The company was able to almost double its profit margins to 10.5 percent last year from 5.5 percent in 2016. Xiaomi’s margins are smaller compared to Apple’s 26.9 percent and Samsung’s 22.3 percent. But with its continued reduction in sales, marketing and research and development costs, combined with further growth in its services business, the company can close this gap.

The Downside Risk:

  • A hardware business focused on low-cost products with low overall margins: Xiaomi has reported a gross margin of 13 percent for 2017, a figure almost three times lower than Apple (38 percent) and four times lower than Samsung (47 percent). Xiaomi competes heavily on price. Some of its products are up to 50 percent cheaper than merchandise from Apple and Samsung. With razor-thin margins in hardware, the company will continue to be sensitive to changes in hardware volume sales until it further diversifies its revenue.
    Xiaomi lags behind in both gross and operating margins
    Xiaomi lags behind in both gross and operating margins
    Source: SharesPost Research; Xiaomi’s IPO filing document, Apple, Samsung financial statements
  • U.S. market challenges: Chinese companies are finding it increasingly difficult to penetrate the American market. The U.S. government has expressed growing security concerns about using Chinese hardware. For example, the government has prohibited the military from using any hardware from Huawei. Xiaomi is likely to face similar pushback. If so, the company would miss out on a huge market opportunity that could drive revenues and margins.
  • Increased competition: Xiaomi will find it hard to incrementally grow margins and market share in China because of rising competition. Although Xiaomi currently holds roughly 12 percent of the Chinese smartphone market, behind Huawei, Oppo and Vivo, Apple has been aggressively expanding its presence in the country. The Cupertino, California computing giant just reported its best quarter in China over the past 10 quarters. To compensate, Xiaomi needs to expand further into emerging markets where smartphone and Internet usage is still relatively new. The company has performed well in India and needs to replicate that success in Brazil, Indonesia and other developing countries.
  • Limited IP to enter the Western market: Xiaomi’s lack of innovation and limited intellectual property has made it difficult for the company to penetrate the United States and Europe. The company holds over 9,000 patents, but most of them are in China. Xiaomi is facing several lawsuits, both domestically and internationally. To gain access to the U.S. market, the company has been on a patent-acquisition spree, acquiring over 2,000 patents from big tech companies like Microsoft, Intel and Broadcom. Moving forward, Xiaomi will need to leverage its trove of patents to create groundbreaking IP and innovation strategies.

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This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

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Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own financial advisors before making any investment decisions. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about the subject matter therein, including all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be during their employ directly or indirectly related to their specific views contained in this report.

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.