China's Xiaomi Picks Hong Kong For USD 10 Billion IPO, Lifts Lid On Financials

Chinese smartphone and connected device maker Xiaomi is bringing its blockbuster initial public offering to Hong Kong, where it could raise about $10 billion in the largest listing globally in almost four years.

The IPO plans, filed on Thursday, will be one of the first in Hong Kong under new rules designed to attract tech listings, a major win for the bourse as competition heats up between Hong Kong, New York and the Chinese mainland.

The listing is expected to give Beijing-based, Cayman-domiciled Xiaomi a market value of between $80 billion and $100 billion, just eight years after it came onto the scene in China, people familiar with the plans told Reuters.

The $10 billion fund-raising target, if achieved, will make it the biggest IPO since Chinese internet giant Alibaba Group Holding Ltd raised a total of $25 billion through a New York listing in 2014.

The IPO could be launched as early as the end of June, according to the people close to the process who requested anonymity as the details were not yet public.

Two separate people said the company's valuation would likely be lowered to a bit above $70 billion. One said Xiaomi was looking to sell about 15 percent of its enlarged capital in the offering.

Xiaomi declined to comment on the valuation.

The prospectus gave investors the first detailed look at Xiaomi's financial health ahead of the IPO, showing resilience in a slowing global smartphone market thanks partly to a push into overseas markets like India.

Revenue was 114.62 billion yuan ($18 billion) in 2017, up 67.5 percent against 2016, the company said. Operating profit was 12.22 billion yuan, up from 3.79 billion yuan year-on-year.

Xiaomi made a net loss of 43.89 billion yuan versus a profit of 491.6 million yuan in 2016, though this was impacted by the fair value changes of convertible redeemable preference shares.

THIN MARGINS

Xiaomi plans to spend most of the IPO proceeds on three areas: research and development, overseas expansion, and investments, according to its filing.

Alongside smartphones, Xiaomi makes dozens of internet-connected home appliances and gadgets, including scooters, air purifiers and rice cookers.

It has a hard core of followers in China known as "mi fans", but there are concerns in the market over whether it will be able to replicate this fan base overseas.

The company boasts large gross margins - 60 percent last year - from internet services, including gaming and advertising linked to its homegrown user interface, MIUI, which had 190 million monthly active users as of March 2018.

Yet margins on its smartphones are razor-thin. Xiaomi posted a gross profit margin of just 8.8 percent for its smartphone business in 2017 compared to 60 percent for its internet services business.

According to some analyst estimates, Apple's flagship iPhone X and iPhone 8 have gross margins of around 60 percent.

Canalys analyst Mo Jia said that while Xiaomi's finances looked "positive", the firm needed to bolster its internet services business to warrant a high valuation. The segment slipped as a proportion of overall revenues last year.

"Xiaomi markets itself as an internet company, its valuation is closely linked to whether the market buys this concept," he said. "Otherwise, as a smartphone brand, Xiaomi couldn't reach (such) a high valuation with what's on paper."

To be sure, its relatively cheap smartphones pose a rising challenge to market leaders Samsung Electronics Co Ltd and Apple Inc. Earlier this year it toppled Samsung as the top smartphone seller in India.

Xiaomi doubled its shipments in 2017 to become the world's fourth-largest smartphone maker, according to Counterpoint Research, defying a global slowdown in smartphone sales.

It is making a broader push outside China's borders, with 28 percent of its sales derived from overseas markets last year, up from 6.1 percent in 2015.