In China, Xiaomi has long stayed ahead of Apple in market share. Huawei’s troubles have strengthened its position. A strong third quarter has helped the smartphone maker raise billions in capital. But opportunistic timing and reduced pricing send investors a discouraging signal.
Xiaomi sold shares worth HK$23.7bn ($3.1bn) in a record follow-on offering in Hong Kong on Wednesday. Accounting for both debt and equity the total raised comes to nearly $4bn.
Xiaomi does not need the money. It has more than $10bn in cash and short-term investments. The shares, which performed badly following the group’s 2018 flotation, have gained 170 per cent in the past year. Smartphone shipments rose nearly 50 per cent in the third quarter.
That is thanks to low and mid-range handsets — big beneficiaries of US sanctions on Huawei. In Europe, where Huawei once had a stronghold, Xiaomi’s sales nearly doubled in the latest quarter.
Nagging doubts remain. The new shares were sold at a 9.4 per cent discount to the previous close, near the bottom of the range. The stock fell 7 per cent on Wednesday.
This is still too high. Shares trade at 36 times forward earnings, more than double global handset rivals. That reflects the opportunity Huawei’s absence has provided. But the pricing assumes Xiaomi is no longer a serious local rival.
That underplays prospects for the budget Honor smartphone business Huawei recently sold to a consortium. The US has meanwhile granted licenses for suppliers like Sony to resume some business with Huawei, which still makes higher-end phones.
The bigger problem is that even in premium handsets, Xiaomi’s margins are unsustainably low. Its gross profit margin for smartphone sales stood at 8.4 per cent in the third quarter, bringing the group total to 14 per cent. Huawei’s group margins exceed 37 per cent, with its network gear unit padding the figure.
It is hard to shake the suspicion that Xiaomi is bolstering its cash pile now because the window to do so may be closing.
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