Business, Finance, IPO, Xiaomi

After giving up on a $100 billion valuation, Xiaomi is still dreaming of a fantasy IPO

Xiaomi — a Chinese company that is best known for cheap smartphones but makes any number of other somehow smart things, from a smart digital scale to a smart rice cooker — is preparing for a mega IPO. As recently as May, it was gunning for a $100 billion valuation as it sought to raise $10 billion in Hong Kong. It was only four years ago that it was valued at $45 billion, still a lofty figure, in a fundraising round. It seems like, between May and now, Xiaomi has realized there is no way it will convince investors it’s worth $100 billion. Instead, it’s now looking at a valuation of $70 billion to $80 billion.

The new target is still a stretch built on the rosiest of rosy projections — the bottom end of the range is a large enough figure to make the IPO the biggest since Alibaba’s 2014 stock market debut. A handy calculator built by Reuters Breakingviews lets you play around with numbers to see how hard a sell a $70-something billion Xiaomi would be. The default assumptions are more than lavish. The company would fetch the midpoint of the target range if 1) it continues to grow revenue from hardware sales by 70 percent at a net profit margin of 5 percent this year 2) it doubles revenue from the internet business at a net profit margin of 35 percent 3) a multiple of 24 is applied to 2018 net profit in the former segment and 4) the latter is valued at 38 times earnings.

Although only sky seems to be the limit when it comes to the valuations of tech stocks, particularly Chinese ones, a price-to-earnings ratio of 24 for the hardware division would be hard to justify. Whether Xiaomi can sustain 70 percent revenue growth annually for that business is another question. Apple, which Xiaomi aspires to be, is trading on less than 20 times projected 2018 earnings. As hard as Xiaomi tries to emulate Apple, the Cupertino, California, company is a vastly different proposition than Xiaomi. The Chinese group is predominantly a maker of low-margin hardware, earning 90 percent of revenue from that business, whereas Apple is far more diversified, with high-margin software and services now making up about a quarter of its top line. A multiple of 38 times for the software segment makes more sense, only because this is a much more profitable area where you can pretty much put any number on a popular company, but that doesn’t mean it is sensible either. For starters, Facebook trades on less than 25 times and so does local peer Baidu.

With these assumptions, a $75 billion valuation would translate into more than 38 times overall earnings, an outrageous figure, given Xiaomi would still be nothing but a hardware maker even if software revenue leaps 100 percent this year. The PE ratio for Samsung Electronics, a far purer hardware company than Apple, is not even 10, although granted, its shares are discounted because of risks including poor governance.

But then, corporate governance is also a potentially troublesome area for future Xiaomi shareholders. The company’s stock on offer in Hong Kong has a dual-class structure, giving CEO Lei Jun and co-founders way more voting power per share than minority shareholders. And in theory, the group can convene a board meeting with Lei and only one other director. All this raises governance red flags, which is a good enough reason Xiaomi’s share price should include some discount, rather than command an unreasonable premium.

Xiaomi has been growing extraordinarily fast, and this may help lure investors even at a ludicrous valuation. But anyone falling for that should brace for a big setback when all the euphoria fades and reality sets in.


Kim Jong Un, North Korea, Politics

Kim Jong Un selfie may be a symbol of hopeful change

The Kim Jong Un-Donald Trump summit in Singapore, which everyone likes to call historic, was more theatrical than substantial. For all the buzz and Trump’s bravado about his deal-making ability, Kim remains uncommitted to any detailed denuclearization plan after all.

Perhaps the biggest accomplishment was getting Kim out of his comfort zone and exposing him to the wonders of economic prosperity. The Singapore trip is the longest overseas journey Kim has made since he took power in 2011, and he seemed to like it quite a bit. He made an unexpected public appearance for a nighttime excursion and reportedly marvelled at the beauty of Singapore. He even agreed to take a selfie with Singapore’s foreign minister.

Kim in the selfie is a seemingly normal man enjoying everything a hyper-materialistic society that Singapore is has to offer — a world-class skyline filled with the coolest-looking skyscrapers; the utmost VIP treatment from a nation eager to capitalize on his presence and ready to ignore all the horrific things he has done; and cheers from an entertainment-seeking crowd that saw him as a rock star of sorts, rather than a brutal dictator. And ever so aptly, this image was captured and publicized in a fashion that is symbolic of the awesome technological products of capitalism.

That Kim embraced the public selfie moment suggests his open-mindedness about engagement. And possibly, hidden in his smile in the photo is a sense of envy — envy at the affluence of Singapore and its people. Surrounded by all the wonderful things money can buy, maybe he was asking himself why his own country can’t stop being weird and poor when the rest of the world is reaping benefits of capitalism. The selfie may well be a representation of this mixed state of mind that could nudge Kim into accepting new realities and values to narrow the economic gap between North Korea and the outside world.

Of course, no one can read Kim’s mind, and visibility into North Korea is limited. But there already have been signs of more openness and economic modernization in the country, according to accounts by some journalists, including Japanese freelance photographer Ari Hatsuzawa, who has visited North Korea several times. He says he has witnessed some significant changes over the past four years. People dress better. Men and women do boy friend-girl friend things in public. Car traffic in Pyongyang has almost tripled from four years ago. Most notably, the regime has allowed the creation of a high-income class by turning a blind eye to people amassing wealth through trade or real estate transactions, even though letting any individual get disproportionately rich goes against socialist principles.

All this points to Kim’s desire to achieve a degree of economic success. And that’s great. Nothing will prevent a war on the Korean peninsula more effectively than a strong desire in Kim to turn North Korea into a functioning, prosperous economy. For a Kim concerned with economic development, economic sanctions would be truly painful, and hence they would actually work as leverage in negotiations on disarmament. Also, it would be in his own interest to refrain from doing anything self-destructive, say, starting a war. Someone with something to lose is far less scary than someone with nothing to lose.

Kim’s participation in the selfie exercise may have been a spur-of-the moment decision, but if it was, he may have just spontaneously offered the world a more tangible reason to be hopeful than the fluffy promises he gave to Trump.