Date
18 November 2018
Xiaomi founder and chairman Lei Jun reiterates his company's pledge to keep pricing as close to cost as possible during a press conference on Saturday. Photo: Reuters
Xiaomi founder and chairman Lei Jun reiterates his company's pledge to keep pricing as close to cost as possible during a press conference on Saturday. Photo: Reuters

Xiaomi: Cheap products, expensive valuation

“World-class products at half the price” is one of the best-known slogans of Xiaomi Corp., which is offering its shares to investors in Hong Kong this week.

The Chinese smartphone maker’s founder and chairman, Lei Jun, said his company maintains excellent design and outstanding quality in all its products while pricing them as close to cost as possible through highly efficient online and offline retail channels.

“We are an innovation-driven internet company committed to the principle of ‘amazing products at honest pricing’,”  Lei said during a press conference for Xiaomi’s US$6 billion initial public offering in Hong Kong over the weekend.

The business approach enabled Xiaomi to achieve an unmatched record of over 100 billion yuan (US$15.37 billion) in revenue since it started operating eight years ago.

The company, which made thousands of home appliances and devices from mobile phones to air purifiers and sports watches such as the Mi Band (whose simple version is cheaper by 80 percent than a similar offering by rival Fitbit), became an almost instant success because it consolidated thousands of other mainland copycats that could make knock-offs as soon as the original products hit the market.

Xiaomi tries not to look greedy by promising to maintain a net profit margin of less than 5 percent and return the excess to customers.

That all goes well except that Xiaomi products are now quite expensive after seven years of spectacular growth. Which presents an interesting case, namely that it might be worth more to buy its products rather than its shares.

Analysts point out that Xiaomi, whose 70 percent of revenue comes from mobile phones that look strikingly similar to iPhone designs, is priced twice as high as Apple in terms of price-earnings ratio, although its products are priced only at half as much.

But the quality of earnings matters. Apple reported a revenue of US$61 billion last quarter, thanks to its iPhones, which are sold at an admirable margin of 40 percent. By comparison, Xiaomi reported a revenue of 34.4 billion yuan (US$5.29 billion) with a 12.5 percent margin. The margin for its mobile phones was even lower at 5.1 percent.

In response to the high valuation charge, Lei said Xiaomi is a rare “omnicompetent enterprise that combines e-commerce, hardware and internet and deserves a premium earnings multiple that is higher than that of Apple and Tencent combined.

Well, that does not exactly reflect the initial investor response on the first day of its share offering, which attracted a mere HK$4.6 billion in margin financing, according to the Hong Kong Economic Journal.

And so the emerging sense is that Xiaomi products are much more attractive than its shares.

– Contact us at [email protected]

CG

EJ Insight writer

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