LeEco – Electric millstone.

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I think, LeEco must exit automotive to survive.

  • It looks very much like LeEco is giving up its grand plans for a 12,000 employee eco-headquarters in return for hard cash in order to give the ecosystem strategy time to succeed.
  • Despite these radical actions, I still think that LeEco’s only chance is to give up its automotive ambitions and focus on its core business: the ecosystem.
  • LeEco has recently raised $2.2bn (see here) which I calculated would leave $622m free to support the fledgling ecosystem of products and services.
  • However, the sale of the 48 acres it purchased from Yahoo to Genzon Group, the Chinese real estate developer this increases my estimate of free cash for investment to $1.132bn.
  • This is because to reach the $622, I took off $250 for purchasing the land but this outflow is now an inflow of $260m, improving cash flow by $510m.
  • This will give the company time to develop its offering but I remain concerned that its automotive ambitions remain a major problem.
  • LeEco’s automotive strategy is centred on an electric vehicle start-up called Faraday Future in which its founder is the major backer.
  • It broke ground on a huge 3m square-foot factory in Nevada in April 2016 but because contractors have not been paid, work has since ground to a halt.
  • Furthermore, Faraday Future has now reduced the size of the planned factory by 80% to 600,000 square-feet, cut the number of models from seven to two and delayed the factory opening by at least 1 year.
  • Faraday Future’s problems do not end there as senior management turnover has been high in the last 9 months and there could be as much as $300m in unpaid bills.
  • As Apple (see here) and even Tesla have found, building cars is a difficult business that requires a lot of time and very deep pockets.
  • I am pretty certain that Faraday Future has none of these things making its chances of long-term solvency very slim.
  • This is why I think that LeEco’s best interests will be served by not having this millstone hanging around its neck.
  • Faraday Future clearly needs hundreds of millions of dollars of new investment which LeEco simply cannot afford if it is to have any chance at delivering on its ecosystem ambitions.
  • These ambitions begin with a media consumption strategy that needs both heavy investment in terms of content and attention to detail when it comes to software and the user experience.
  • Furthermore, management needs to be focused on delivering on these ambitions rather than being distracted by building self-driving cars.
  • RFM research has found that currently, the user experience in the automobile has no effect on the user’s decision on where to live his Digital Life and therefore building a car to deliver one’s ecosystem makes no sense at all.
  • This combined with the difficulties, cost and poor profitability of automobiles, is why I think that Apple backed off (see here).
  • Hence, I think that for LeEco to have the best chance of succeeding, it needs to extract itself from Faraday Future and forget about self-driving cars.
  • Building a thriving ecosystem is difficult enough and throwing in cash constraints and management distractions can only make it next to impossible.

 

Alibaba – Five guns east

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Alibaba is going guns blazing for offline. 

  • Alibaba appears to be moving into offline retail much more quickly than I had anticipated as it is complimenting its $2.6bn bid for Intime Retail Group with a partnership with Shanghai Bailian Group which owns 4,700 stores in 200 cities in China.
  • This is a huge step forward from its bid to acquire Intime retail group which operates 29 department stores and 17 malls predominantly in the eastern province of Zhejiang where Alibaba’s home town of Hangzhou is to be found.
  • The idea of this partnership is to bring Alibaba much further into the physical world where $4.5tn of sales are still transacted every year as well as improve the offline experience that users have in Bailian stores.
  • Chinese retail is a fragmented and frustrating experience where decent service and information with regards to inventory, product lines and so on is routinely not available.
  • Consequently, when an online offering appears where this information is clear and one is able to easily purchase goods and know when they will be delivered, shoppers quickly adapt.
  • It is the terrible offline experience with regards to almost everything that has allowed so many other goods, services and activities in China to rapidly migrate from offline to mobile.
  • It these problems that Bailian hopes to fix via its partnership with Alibaba which will provide its technology, its understanding of logistics and its processing systems to modernise Bailian.
  • In return Alibaba will get a large physical presence, access to shopper data and the first big launch for Alipay into the physical world.
  • There are two large mobile payment systems in China.
  • One is Alipay which utterly dominates B2C e-commerce and the other is WeChat Pay which dominates peer to peer as well as payments to shops, restaurants and service providers.
  • This move will bring Alipay into direct competition with WeChat Pay for the first time.
  • I think this partnership will be similar to the potential deal with Intime but on a much larger scale.
  • I have previously viewed (see here) the potential deal with Intime as an experiment in retail which would then be rolled out more widely once it had been proven to work but it looks like Alibaba is going national regardless.
  • Fortunately, as this is a partnership, there will not be much downside risk if it goes wrong which leads me to believe that for Alibaba, this is really about data and pushing Alipay into a new domain.
  • If Alibaba can have a deeper understanding of, and relationship with Chinese shoppers then it will be able to more accurately predict their shopping patterns resulting in better purchasing rates and the ability to charge a higher percentage of GMV to its merchants.
  • This will translate into better revenue and profit growth as was the case in 2016 where increasing monetisation underpinned a large part of the company’s outperformance.
  • I think this expansion will be much slower in 2017, and so I remain cautious on Alibaba preferring Tencent or Baidu in China.

Huawei & Baidu – Bodies and time.

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I think Huawei would be better off doing a deal with Baidu.  

  • It looks like Huawei has decided to build its own Chinese language digital assistant to cement its recent gains at home but no matter how many bodies it throws at this task, its lack of the core raw materials (data and history) is going to cause problems.
  • The digital assistant is the first real Digital Life service that is entirely dependent on artificial intelligence for its functionality which creates a huge challenge.
  • Furthermore, in order to evolve, all digital assistants need to generate usage data which can then be used to improve the algorithms that power the user experience.
  • Even the best assistants out there today are hugely limited in terms of what they can understand and what they can achieve.
  • For example, to accurately answer questions around exchange rates, the assistant has to be taught what these are, how they work and in what form the questions are likely to be asked.
  • For example, asking Amazon Alexa how many US Dollars there are to the GB Pound provides the correct answer but ask for UAE Dirhams to the Pound or Dollar and Alexa falls silent.
  • Only Google Assistant was able to provide the right answer due to the combination of the best search system and the best AI available.
  • In effect RFM research has found that Alexa, Cortana and Siri have been programmed with a fairly narrow set of capabilities and the AI and data set is simply not there to support the service when something unexpected is requested.
  • Fortunately for Huawei, Google is not present in China but at home it will be facing an opponent that is almost as good: Baidu.
  • Baidu dominates the search market in China and has been working on its AI algorithms for nearly 20 years.
  • Furthermore, Baidu has already launched its own digital assistant called Duer which I suspect will be significantly better than anything that Huawei is likely to produce in the medium term.
  • However in China, none of the ecosystems are preinstalled devices meaning that Baidu will be unable to install Duer on the device and set it as default.
  • RFM research (see here) has found that this could confer a substantial advantage to any ecosystem as strategy is virtually absent in the Chinese market outside of the app stores.
  • Huawei as a handset maker will have this advantage and so I can see a scenario where users try its digital assistant but unless it is superb they will quickly switch to Duer.
  • This is where I think Huawei will have difficulties as even though it has 100 engineers working on this product, it is starting from scratch and building decent AI takes years and requires vast quantities of data.
  • Hence, I think it unlikely that Huawei will ever come up with a product as good as Baidu’s.
  • This is where I think Huawei and Baidu could help each other as Baidu has the product and Huawei a mechanism for distributing it.
  • A deal where Huawei installs Duer at the factory and sets it by default in return for being paid TAC (traffic acquisition cost) makes more sense to me than paying 100 engineers to come up with an inferior product.
  • This will not help Huawei’s ambitions to develop an ecosystem and generate better profitability, but TAC revenue from Baidu would certainly help improve margins.
  • Given its recent market share gains at home, the time to negotiate this deal is now rather than when its own assistant has tried and failed.
  • Although Baidu looks like it may be backing out of its ecosystem, the short-term improvement in its financials that cost cuts could generate could give the shares a lift (see here).
  • This is why it is still on my preferred list along with Tencent and Microsoft.

Baidu – One trick pony?

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Baidu may be giving up on its ecosystem.

  • There is little doubt that Baidu’s investments outside of its core search offering have proven expensive, but it appears that Baidu may be losing the stomach to endure the heavy losses required to build an ecosystem.
  • The three assets in particular are Nuomi, its e-commerce offering, iQiyi, its video streaming service and its on-demand food delivery service.
  • Nuomi and iQiyi have been the real areas of investment and in recent quarters have between them consumed over 50% of the operating profit generated by the core businesses.
  • This combined with its problems with low quality advertising and its higher tax rate, have put it under much greater pressure to deliver better profitability.
  • This has been further exacerbated by the fact that of the three BATmen, Baidu is by far the weakest both in terms of cash flow generated each quarter and cash reserves on the balance sheet.
  • This is why I suspect that Baidu has been forced to look at these investments to find ways of reducing their drain on the financial performance of the Baidu Group.
  • I understand that outside investment as well as trade sales have been considered but it looks like the most likely outcome will be heavy cost cuts.
  • This will limit both Nuomi and iQiyi’s ability to compete against Alibaba’s T-Mall, JD.com and Alibaba’s Youku Tudou leaving them as niche services rather than national leaders.
  • On the Chinese Digital Life pie (see here) Media Consumption and Shopping make up 29% of the total meaning that if Baidu was to abandon or sell these activities its coverage would drop to 24% (Search, Browsing and Mapping).
  • Consequently, I think that it would spell the end of Baidu’s ambitions to become a leading ecosystem in the Chinese market leaving it as a dominant player in just a few segments.
  • Search, Mapping and Artificial Intelligence are extremely important segments and I think that Baidu will be able to make a good living from them, but its real long-term upside will have been curtailed by this retrenchment.
  • The net result in the short-term will be a substantial improvement in its financials making the current valuation look cheap and so I suspect that news of this move will have a quite positive, but short-term, impact on the shares.
  • This is why I am happy to keep Baidu on my preferred list along with Tencent and Microsoft despite the possibility that its long-term upside may now evaporate.

Xiaomi & Huawei – Different strokes

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Xiaomi and Huawei go in different directions.

  • While commentators are absorbed with Apple’s (almost certainly temporary) No. 1 position in the smartphone market and Oppo’s ascendency in China, no-one seems to have noticed a good recovery at Huawei and that things are looking increasingly dicey at Xiaomi.
  • IDC has released its figures for the smartphone market in Q4 16 both globally and in China.
  • The market has shown some growth with 7% growth YoY globally and 9% YoY in China with the Chinese makers increasingly dominating the market both at home and overseas.
  • Apple has gained the No. 1 slot but is almost certain to lose this back to Samsung in Q1 17, due to the heavy seasonality of its handset business.
  • Both Oppo and Vivo make an entrance in the global top 5 with 7.3% and 5.8% share respectively, but I think that the real winner of the quarter was Huawei.
  • By the same token all does not appear to be well at Xiaomi which has fallen to No. 5 at home and is well out of the global top 5.
  • I have discussed these two in a bit more detail below.

Huawei

  • Huawei has had a torrid 2016 after spending big at Mobile World Congress and failing to make the market share gains that it badly needed to begin to fulfil its ambition to become the global No. 1.
  • I am pretty certain that the increase in spending in 2016 has pushed the handset business into loss making territory for the year.
  • Furthermore, I suspect that the business will be on a much tighter leash in 2017 which will mean that investments have to be very carefully targeted.
  • The good news is that it had a much better Q4 2016 gaining 1.8% points of global share to reach 10.6%, giving it a platform upon which to build in 2017.
  • I remain convinced that to really become No. 1, Huawei must become an adept of software and the user experience which is something with which it continues to struggle (see here).
  • I see 2017 as a year of focusing on profitability and steady gains rather than all-out assault upon the market.

Xiaomi

  • Everything seems to have gone wrong at Xiaomi during Q4 16 with a heavy market share loss and the departure of its international captain and tireless cheerleader, Hugo Barra.
  • Following its explosion into the market with a cool user experience and innovative sales channel in 2015, during Q4 16, Xiaomi fell to an ignominious No. 5 in the Chinese market with just 7.4% share down from the 15% it managed during 2015.
  • I suspect that overseas it has also struggled as RFM estimates that its global share has fallen to 3.1% down from 4.1% in Q3 16 and its peak of 5.1% in Q2 15.
  • The departure of Hugo Barra is a sign that all is not well with its international business where its Chinese ecosystem has no relevance leaving it stuck selling Google.
  • I think that this leaves Xiaomi struggling for relevance both at home at overseas, putting its ecosystem strategy at great risk.
  • Xiaomi has comfortably more than the 100m it needs for critical mass, but I am becoming increasing concerned that the engagement that it is able to generate is not nearly enough.
  • This is because on the Chinese Digital Life pie, not one of its services is the dominant offering in any segment, leaving it playing catch up with the much stronger and more aggressive BATmen. (see here).
  • I am sticking with my $5.0bn valuation for now but unless Xiaomi shows a new lease of life in 2017, this will be going south again.

GoPro vs. Shenzhen – Forlorn hope

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GoPro needs something special to fend off Shenzhen.

  • GoPro released another set of awful results highlighting how much damage its failure in execution and software has done to its long-term prospects.
  • The problem essentially is Shenzhen, which makes much cheaper cameras that are just as good and drones that are better.
  • Q4 16 revenues / Adj-EPS were $540m / $0.29 compared to consensus at $573m / $0.22 but guidance for Q1 17 was very disappointing.
  • Q1 17 revenues are expected to be in the range of $190m – $210m some 25% adrift of consensus at $268m.
  • The company tried to explain this away citing inventory overhangs and seasonality but I think underneath lies a weak market and vicious competition.
  • Competition is really hurting in two areas:
    • First: Cameras.
    • GoPro has by the strongest brand when it comes to small high quality cameras but competitors like Yi Technology make great, well rated products at half the price.
    • This is why it has been imperative for GoPro to develop software around its products that users love to prevent them moving away to cheaper, just as good alternatives.
    • It has made some progress here but user numbers of its Quik App and its Capture App are not nearly big enough to hit critical mass.
    • The fact that the numbers are growing very quickly but GoPro declined to the actual figures indicates that the numbers remain very small.
    • This means that the vast majority of GoPro owners are not really engaging with its software making them prime targets for cheaper alternatives.
    • This has to be GoPro’s number one priority this year as failure will leave it commoditised and fighting a losing battle with companies with a much lower cost base.
    • Second: Drones.
    • Here GoPro is already on the back foot and there is only one way that I can see it making an impact.
    • Its competitor DJI is based in Shenzhen, giving it a lower cost base for manufacturing and it is also making the best product.
    • The holy grail of drones is autonomy necessitating good software, something with which almost all Chinese companies have struggled with.
    • DJI is unique in that is a Chinese company that produces drones that have the best operating software available.
    • Consequently, in a head to head comparison of the Karma drone against the DJI Mavic Pro, I think there is no contest.
    • The Mavic Pro has some simple, fun and useful autonomous features that the Karma lacks, making it a better overall product although it is a little more expensive.
    • Combine this with the embarrassing recall due to a faulty battery compartment, leaves GoPro fighting for relevance in this space.
    • Its’ one hope is its modularity where the Karma Grip and the Hero 5 work together with the drone to produce a compete video capture package.
    • Consequently, anyone who already owns the Hero 5, has a strong incentive to purchase the Karma as opposed to anything else.
  • The net result is that GoPro really has its work cut out for it and I remain unconvinced that it is going to survive on its own.
  • I still think that both GoPro and Fitbit (see here) will make reasonable tuck in acquisitions (see here) for the larger ecosystems looking to extend their services or market position into new digital devices.
  • Hence, I think that there is further to fall before acquirers are flushed out into the open and I am not tempted to go bargain hunting.

Qualcomm – Tooth and nail.

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This time around, Qualcomm should fight.

  • I think Qualcomm will best serve its shareholders by fighting tooth and nail to halt the fall of royalty rates that has been going on for the last 9 years.
  • The fight between Apple and Qualcomm is a sure indicator that life in the smartphone market is getting tougher which came to light in Qualcomm’s latest earnings release.
  • FQ1 17A revenues / Adj-EPS were $6.0bn / $1.19 compared to consensus estimates of $6.11bn / $1.18.
  • Guidance was very slightly weak with FQ2 17E revenues / Adj-EPS of $5.5bn – $6.3bn / $1.15 – $1.25 compared to consensus of $5.9bn / $1.19.
  • Apple’s dispute with Qualcomm is nothing new and in fact from a brief examination of Apple’s complaint and Qualcomm’s response, it is clear that while times have changed, the arguments remain broadly the same.
  • Between 2006 and 2008, Qualcomm was embroiled in a bloody and bitter fight with Nokia which at the time was in the same position that Apple finds itself today.
  • At that time, Nokia made almost all of the mobile phone industry’s profits and so it was the largest payer of royalties to Qualcomm.
  • When its contract expired, it sought to lower the rate it was paying to Qualcomm and when negotiation did not work it resorted to the courts.
  • At the time, I believed that Qualcomm had the advantage and would eventually win but Qualcomm decided to settle with Nokia in 2008.
  • Although the real details were not disclosed, I calculated at the time that this resulted in a new royalty rate of around 2.3% down from the old rate of 4.1% (of the wholesale price of the device).
  • The problem with this is that everyone else was paying 4.1% and then went on to demand the same deal as Nokia.
  • More recently, Qualcomm has done a deal with China where the effective rate appears to be around 1% which could very well a further decline in the overall global royalty rate that Qualcomm receives for its IP.
  • This is the heart of the problem with patents as there is no real way to determine what should be paid to for them.
  • I have long believed that patents are worth either:
    • First: what an entity is prepared to pay for them or
    • Second: the present value of the cash flows that the patent generates.
  • This is why historical precedent is so important when it comes to patent licencing and here Qualcomm has a huge advantage.
  • Qualcomm has hundreds of agreements and more than 20 years of history as evidence that its agreements have not damaged the mobile industry, in fact quite the reverse.
  • The issue of course is that Apple simply wants a lower royalty rate and even the terms of the deal in China appear not to be low enough.
  • Qualcomm claims Apple has rejected terms that are consistent with the deal it did in China and upon which it has struck most of its Chinese licences.
  • The problem as I see it is that if Qualcomm gives Apple a discount then the rate paid by everyone will go down yet again and where it will end is impossible to tell.
  • By fighting against Apple, it has a chance to arrest the general fall of royalty rates across the industry and stabilise them at what I would estimate will end up at around 1%.
  • This is why Qualcomm must fight as I think that the future of its IP licensing business depends on it winning the second time around.
  • It will be painful and expensive but I can’t see how Qualcomm has much choice.

Alibaba FQ3 17 – Crossed swords.

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Where Alibaba crosses swords with its peers, life is much tougher. 

  • Alibaba reported excellent FQ3 17 results as growth in the other areas of its business augmented the Chinese retail juggernaut.
  • FQ3 16 revenues / Adj-EPS was RMB53.2bn (US$7.7bn) / RMB9.02 compared to consensus estimates of RMB50.1bn / RMB7.70.
  • Alibaba also raised its revenue forecast for FY17E from 48% YoY growth to 53% YoY as wholsale and international e-commerce, AliCloud, Digital Media and its ecosystem businesses are all growing much faster than the corporate average.
  • Where Alibaba is effectively, unopposed things are going extremely well with both revenue and margin growth.
  • This was the source of the better than expected profitability during the quarter just ended.
  • However, where there is competition, Alibaba is having to fight hard to establish its position.
  • This is particularly the case in Digital Media where it is fighting tooth and nail with both Baidu and Tencent.
  • In FQ3 17, Digital Media revenues grew by 14% QoQ (273% YoY) but losses increased to 60% of sales from 39% in FQ2 17.
  • This indicates that where Alibaba crosses swords with the other two BATmen (see here) things get tough.
  • At the moment, everything is good as the areas where Alibaba is dominant are still growing nicely but when these slow it will have to begin competing much more aggressively with its Chinese peers.
  • Consequently, the medium term outlook is for slower revenue growth and much stiffer competition.
  • I see Alibaba as the most advanced of the three BATmen when it comes to expanding overseas but this is a long term strategy and unlikely to produce real revenues before things get tougher at home.
  • When it comes to the ecosystem, I see Alibaba as the weakest player as:
    • First: Tencent is by far the strongest when it comes to Digital Life coverage and dominance.
    • Second: Baidu has by far the best understanding of what it takes to create a thriving ecosystem and is also streets ahead when it comes to artificial intelligence.
  • This, and valuation is why I continue to prefer both Baidu and Tencent over Alibaba in the medium term from an investment perspective.

LeEco – Le life line

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Small war chest means laser sharp strategy and execution needed. 

  • Chinese real estate developer Sunac has pumped $2.2bn into LeEco to get the fledgling Chinese ecsosystem back on track, but I still think it will need to dump autos to have a chance.
  • Sunac is buying a 8.6% stake in Leishi (the parent company) for RMB6.04bn, a 15% stake in Le Vision Pictures (movies) for RMB1.05bn and a 33% stake in Leishi Zhixin (TVs) RMB7.95bn.
  • This all adds up to RMB15.04 or $2.2bn which should help keep the wolf from the door but it looks to me like much of the money is already committed.
  • I suspect that the RMB7.95 going into Leishi Zhixin will help finance the acquisition of Vizio as well as the very reasonably priced TVs that the company launched a few months ago (see here).
  • This leaves RMB6.04 ($872m) to finance the development of everything else of which around $250m will already be tied up in the real estate transaction LeEco has with Yahoo.
  • This leaves $622m to keep the rest of the ecosystem strategy alive until it begins to generate cash.
  • Given Xiaomi’s experience in developing an ecosystem via hardware, this could take a while and even then, a high level of cash return on sales is far from guaranteed.
  • Now that the immediate pressure has been released, LeEco has come out of its corner fighting stating that it will now take on and far surpass Baidu, Alibaba and Tencent (BATmen) in their home market.
  • This will take some doing as these three all already have at least 2 dominant Digital Life services in the Chinese market (see here), far more than 500m users each as well as billions of dollars of organic cash generation every quarter.
  • By comparison, LeEco is starting from almost nothing and has around $622m to invest putting it behind even Xiaomi.
  • This is why the company is seeking a separate line of financing for the automotive offering and I think it is clear that the Faraday Future factory in Nevada, USA will remain on ice until this issue is fixed.
  • This also means that the LeSee electric vehicle will also be delayed for the same reasons.
  • There is still huge scepticism that LeEco can make it given that the investors in Sunac sent its shares down more than 6% in Hong Kong when the deal was announced on Monday 16th
  • I still think that LeEco has to really focus on the areas where it can thinks it can make a difference and even if automotive is separately funded, it is a distraction management can not afford.
  • Strategy and investments have to be laser sharp to make the most of the relatively small war chest that the company now has to see it through to generating cash of its own.
  • What the company does now is likely to determine its eventual fate and I am not beyond thinking that it could make an acquisition target.
  • I see China becoming more vertically integrated and into this LeEco might fit for one of the BATmen (see here).

 

Xiaomi – State of the nation

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Valuation lifted to $5bn but still 89% below last raise. 

  • Xiaomi has supplied some details of its performance for 2016 but reading between the lines implies that it is pinning all of its hopes for 2017 on its ecosystem devices outside of phones.
  • There is no doubt that things were tough in 2016 as Counterpoint Research and RFM estimate that Xiaomi handset shipments fell by 16% to 60.8m units globally.
  • If I assume an ASP of around $175, this gives handset revenues of $10.6bn.
  • Xiaomi has also said that its network of ecosystem partners produced (other ecosystem products) revenues (TVs, smart routers, wearables, smart home) for Xiaomi of RMB15bn or $2.2bn.
  • If I assume Internet service revenues (3rd business line) of $100m, this gives a 2016 grand total of $12.9bn or RMB89bn.
  • This is down some 2% from what I think it earned in revenues in 2015 with other ecosystem products revenue largely offsetting the fall in handset sales.
  • This makes the revenue goal of RMB100bn ($14.4bn) look achievable as Xiaomi is calling for 10% growth.
  • I suspect that none of this is going to come from mobile phones as in the tightening environment, I think Xiaomi will hold share and revenues flat in the best instance.
  • Consequently, I think that Xiaomi is looking for revenues from its other ecosystem products to grow by around 64% and Internet service revenues to treble to $300m.
  • Given that the other ecosystem products segment more than trebled its revenues in 2016, this is not too much of a stretch to reach.
  • Therefore, I am comfortable with the revenue target.
  • However, despite whatever Xiaomi says, a viable business needs to make money and it is here where the problems remain.
  • I think that Xiaomi will make EBIT margins of 2-4% on its RMB 100bn of revenues in the best instance in 2017 giving EBIT of US$434m or RMB3bn.
  • I see no reason to change my valuation methodology (see here) and I continue to use Apple as a comparison.
  • I still believe that using the EV/Sales multiple is fundamentally flawed and so I continue to use EV/EBIT.
  • Apple’s forward EV/EBIT is now around 7.7x but because Xiaomi has a good chance of growth in 2017 whereas Apple may not, I will give Xiaomi a 50% premium to Apple.
  • I cannot give Xiaomi a higher premium simply because it is not going to grow fast enough.
  • Applying this premium gives a fair enterprise value for Xiaomi of $5bn, 40% better than the last time I valued the company, but still 89% below its last raise.
  • I think that Xiaomi can survive without raising more money but its ability to really invest and compete against the BATmen in China will be very limited putting it on the backfoot.
  • This valuation is unlikely to change until Xiaomi gets serious about making money for its investors rather than growing its user base.
  • I still see Xiaomi as an acquisition target where it would fit well into Baidu or Tencent.