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What Xiaomi revealed in its CDR filings: A slow shift to internet services

Xiaomi looks to issue CDR amidst losses.

| Image credit to 123rf.com.cn.

Beijing-based smartphone giant, Xiaomi has filed with the China Securities Regulatory Commission (CSRC), this Monday, a move that’d make it the first company to issue Chinese Depositary Receipts (CDR).

According to the filing, the all-around smart devices maker plans to issue Class B common stocks to the depositary that will be converted into CDRs and to be listed on the Shanghai Stock Exchange.

This latest filing would move Xiaomi one step closer to becoming the first Chinese dual-listed company both in Hong Kong and Shanghai. This comes right after CSRC announcement last week that overseas listed entities with a valuation of more than RMB 200 billion (about US$32 billion) can start applying for CDRs as early as Thursday.

However, there was no mention of the issuance price and expected listing dates.

 

LEI Jun remains control

With regards to voting rights for each stock, a Class A common stock will have 10 times more right than a Class B one. Specifically, the smartphone maker’s total issue of class B ordinary shares will only account for a mere 4.6% voting rights of the firm. This means Lei Jun, the founder of Xiaomi, will remain as the largest shareholder with 57.9% of total voting rights.

According to people close to the matter, Xiaomi is intending to raise up to $3 billion worth of CDR on China’s A-share market.

Unsurprisingly, some concerns over the company remained the same – the losses amidst growing revenue and the contradiction of Xiaomi branding itself as an internet company even with smartphones remaining as the core revenue driver of the company.

 

Xiaomi’s Profitability Analysis

Xiaomi’s Financial Performance from Xiaomi Prospectus.

 

Except for a profit-making 2016, Xiaomi has been on a loss-making spree. While its operating income has increased phenomenally by 67.5% to RMB 114.625 billion in 2017, it has also registered its largest loss of RMB 3.945 billion in the same year.

Q1 of 2018 reflects the same trend. Xiaomi’s losses incurred this quarter alone has already amounted to a whopping 92.1% of the total loss made in 2015, at slightly more than RMB 7 million. However, it has also achieved a remarkable operating revenue of RMB 34,412 million (30% of 2017 annual revenue) within a short 3 months.

While its high operating costs that hovered between approximately RMB 62 million to RMB 96 million annually over the past 3 years, accounting for a minimum of 84.2% of operating revenue, may result in the growing losses, there could be other factors that influence Xiaomi’s profitability.

For instance, Xiaomi’s losses in 2017 ballooned by approximately 6 times that of 2015 to close to RMB 43.889 million, despite a greater increase in operating revenue as opposed to operating costs.

 

A stride to internet

While traditionally a smartphone maker, Xiaomi prefers to be labelled as an internet company and has taken strides to offer more than just electronic gadgets.

According to its prospectus, Xiaomi’s core revenue drivers are from its smartphones, IoT and lifestyle products and internet services.

Xiaomi Revenue Drivers From Xiaomi Prospectus.

IoT & Lifestyle Services has been growing, accounting for 22% for this quarter’s revenue as compared with 13% back in 2015.

Internet Services, on the other hand, have grown only marginally to 9%.

In the financial year 2017, 90% of the company’s revenue were derived from its sales of hardware products, such as smartphones.

Smartphone sales remained as the key revenue driver for Xiaomi, even as it continues to claim to be an internet company.

However, the company is indeed trying to diversify its revenue sources.In fact, it has proven itself, by becoming a leader in the IoT sector globally.

 

World’s Largest IoT Network

As Xiaomi is heavily involved in hardware services, its hardware product system can complement the Xiaomi’s app and be offered to consumers at a affordable price.

According to iResearch as of March 31,2018, Xiaomi’s IoT platform has connected up to 100 million units of smart devices excluding smartphones and laptops. In the first quarter of 2018 alone, the company’s networked devices for IoT was ranked 1st in the industry, boasting a market share of 1.9%.

The biggest setback could be its slow transformation in the realm of internet services.

 

Slow shift to Internet Services

Xiaomi’s MIUI operating system was independently developed by the company based on Android system. Based on mobile terminals, this platform and various mobile internet application can offer a wide range of services such as Xiaomi App Store, Xiaomi Browser, Xiaomi Video and Xiaomi Music.

These services have expanded Xiaomi’s user community.

Internet services in general are driven mainly by advertising and mobile gaming revenues.

Despite all these, it only accounts for 9% of total revenue both for this quarter and last year.

In addition to this conundrum as to what Xiaomi really does, the company’s smartphone today has gone global, widening the gap between its smartphone revenue and internet services.

 

Global Smartphone Market Table

Xiaomi Global Smart Phone Shipment from Xiaomi Prospectus.

 

The company has performed well amidst a decline of 2.9% year-on-year in global smartphone market shipments.

Specifically, the company’s smartphone business segment has grown by 41.8% year-on- year and now accounts for 15.1% of China’s market.

This growth rate is reported to be higher than its competitors, per Xiaomi’s prospectus.

 

Overseas revenue on the rise

In the first season of 2018, Xiaomi has already overtaken Samsung, becoming number 1 in India’s smartphone market.

 

India’s Smartphone Market from Xiaomi Prospectus.

 

In line with its stellar performance, the company’s foreign revenue accounts for 36.2% of total sales this quarter, as compared with a mere 6% of total annual sales in 2015.

In the Indonesian market, Xiaomi has also raced to second place, growing a whopping 1455% over the past year.

The company has also stepped up its expansion plans in Europe, opening its stores in Paris and Italy in a week.

 

Conclusion

With the previous filing for IPO at the Hong Kong bourse, Xiaomi’s three pronged strategy remains the same. The objective for this CDR will be to expand into IoT-related lifestyle and internet services, venture internationally and continue to invest into research and development to improve its products.

It’s imperative to mention that Xiaomi is still a loss-making business and the shift towards becoming an internet company seems to be fraught with difficulties.

Editor: Ben Jiang

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