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 (3^rd 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.