Chinese serial entrepreneur Lei Jun has been compared with Steve Jobs. Now, analysts are saying the smartphone giant he built could be twice as expensive as Apple.
Xiaomi deserves to trade at a premium to global smartphone brands because of its market share gains and faster growth trajectory, according to research from Morgan Stanley, one of the banks leading its Hong Kong initial public offering (IPO).
The Beijing-based company has a fair value of about US$65 billion to US$85 billion, translating into around 27 times to 34 times forecasts for its 2019 adjusted earnings, Morgan Stanley wrote in a report this week.
That is roughly double Apple’s valuation of 14.5 times estimated 2019 adjusted earnings, data compiled by Bloomberg show.
Xiaomi should also fetch richer multiples than rival smart hardware makers like Fitbit and GoPro, as well as some major Chinese internet firms including Alibaba Group Holding and Baidu, according to Morgan Stanley. Alibaba is the parent company of the South China Morning Post.
While such pre-deal research is prepared by a bank’s equity analysts, not their investment bankers, it may provide a clue into how Xiaomi plans to sell its growth story.
Xiaomi, which has been planning to seek about US$10 billion, is considering raising about half that amount from its Hong Kong IPO and the other half from an offering in mainland China, people with knowledge of the matter have said.
The Chinese firm could be valued at as much as US$92 billion given the strong growth in its cash flows beyond 2020, JP Morgan Chase & Co analysts wrote in a separate report. Its success is based on offering “world-class products” at low prices, while selling high-margin services, according to CLSA.
Founded in 2010, Xiaomi could boost its smartphone shipments 42 per cent this year to 130 million
units, according to CLSA estimates.
Its smartphone shipments may rise further to 179 million units in 2019 and 218.6 million in 2020, analysts at CLSA wrote in a research report. That is in the neighbourhood of the 216.8 million iPhones shipped by Apple in its latest financial year.
Xiaomi has emerged as the gateway to about 100 million users in China, who are monetised via a suite of online services, Goldman Sachs analysts wrote in their own report. Analysts at the bank, one of Xiaomi’s IPO sponsors, gave the Chinese firm a forward equity valuation range of US$70 billion to US$86 billion. That translates into 26 times to 32 times its forecast adjusted 2019 net income, according to Goldman Sachs.
“Xiaomi integrates the internet user experience with hardware to offer an unrivalled user experience,” Goldman Sachs wrote in the report. “The company’s hardware aggregates traffic, its software builds platforms, and its internet services generate revenue and profit.”
The Chinese company is coming to market as the smartphone industry plateaus: replacement cycles are lengthening, even as more mature markets approach saturation. Xiaomi is trying to increase higher-margin services as a proportion of revenue.
CLSA, Goldman Sachs and Morgan Stanley are leading Xiaomi’s Hong Kong IPO as joint sponsors, according to an exchange filing last month. Credit Suisse Group, Deutsche Bank, JP Morgan and six Chinese banks are also helping arrange the share sale, people with knowledge of the matter have said.