Caixin
Jun 05, 2019 08:32 AM
TECH TALK

Xiaomi Fails to Quiet Skeptics as Investors Flee

In the ever-changing world of Chinese smartphones, former highflyer Xiaomi Corp. has become a beacon of mixed signals. These seemed to reflect a state of panic this past month, as the company’s stock hemorrhaged value and found new lows with the approach of the first anniversary of its Hong Kong initial public offering.

This is the kind of thing that sometimes happens with a company like Xiaomi, which has many moving parts, often pointing in different directions. From the bigger perspective, a lot of the recent panic seems a bit overblown, as the company’s trends do seem broadly positive. More on that shortly.

First let’s zoom in on the past few weeks, which have been filled with mostly bad news followed by Xiaomi’s efforts to paint a smiley face on the situation. Investors don’t seem to be buying into these counter-signals, with the stock hitting new lows almost daily over the last few trading days. That includes breaking through the HK$9 ($1.15) level for the second time ever in intraday trade on Tuesday, meaning the stock has lost nearly half of its value since it began trading last July.

The bad news began at the end of April when preliminary data from market research firm IDC showed Xiaomi’s smartphone sales fell 10% in the first quarter of this year from a year earlier. Such declines are becoming increasingly common these days as the global smartphone market suffers from a case of indigestion after years of breakneck growth.

Xiaomi certainly wasn’t the only one to see sales fall, with four of the world’s top six brands, including Samsung and Apple, also posting declines. But that didn’t matter to investors. To counter the negative report, Xiaomi hastily issued its own announcement, saying its first-quarter smartphone shipments fell just slightly. Its first-quarter earnings released two weeks ago showed the final figure was nearly flat versus a year-ago, and IDC later revised its figures to be more in sync with Xiaomi’s.

That seemed to put out the first fire. But then the company disclosed last week that one of its nonexecutive directors, Tuck Lye Koh, also known as Xu Dalai, had sold down a major chunk, about 284 million, of his Xiaomi shares. That amounted to nearly half of his total holdings and would have raised about $350 million based on Xiaomi’s closing price on the date the sale occurred.

That news didn’t sit well with stock buyers, since it’s never good to see a company director selling down a big portion of his stake. Again, Xiaomi tried to deflect that bit of bad news by announcing the same day that co-founder and CEO Lei Jun had actually boosted his own holding in the company to the tune of a more modest 79 million shares.

As the free-fall continued for the share price, Xiaomi made its latest move to try to stabilize its ship with the announcement that it had purchased 11 million of its shares on Tuesday as part of a buyback program. But even after that announcement, the stock still continued to fall and ended Tuesday at a new closing low of HK$9.02.

China contraction

Tuck Lye Koh’s share sale wasn’t a great sign, though it’s not uncommon for such longtime early investors to cash out at some point to lock in profits. Similarly, flat quarterly sales — while not too exciting on the surface — could be seen as a relatively positive sign in such a fiercely competitive market. All of this raises the question of what exactly are investors fleeing with their Xiaomi sell-off?

The answer appears to be squarely based in Xiaomi’s own backyard, namely its home China market, which accounts for a big chunk of sales. Specifically, the company’s China sales plunged 20% in the first quarter of this year, with Xiaomi taking about 12% of the market, according to data from IDC.

Xiaomi’s own first-quarter earnings report released a couple of weeks ago again tried to paint a smiley face on this otherwise bad piece of news. It pointed out that, despite the poor smartphone performance at home, its share of the market increased continually on a monthly basis in the three months from January to March.

Outside of China, things were relatively upbeat in India, the company’s No. 2 market, where sales rose 8% as it consolidated its position as the biggest brand with about 30% of the market, according to IDC. On a global basis, the company did well in the many other markets where it operates and is expanding with its international business able to offset nearly all its declines in China.

I looked at Xiaomi’s first-quarter report more closely for clues to what may be behind the investor panic, and didn’t see anything else too major there. The company’s revenue for the quarter rose a relatively healthy 27% from a year earlier, though it was down slightly from the previous quarter. Its profit showed similar quarter-to-quarter trends, though again I wouldn’t worry too much about that due to the influence of seasonal factors.

What’s more, I’m relatively encouraged that Xiaomi seems to be moving away from its heavy reliance on cheap smartphones. Its average smartphone price rose by nearly 30% in China and 12% in its overseas markets year-on-year in the first quarter, according to its latest report. That’s an important shift, and follows a similar strategy to hometown rival Huawei, since such higher-end phones typically carry fatter profit margins and are also in a less competitive part of the market.

At the end of the day, I honestly don’t see what all the fuss is about. The weak China performance is certainly cause for concern since it is Xiaomi’s largest market, but the China market is also incredibly competitive due to the presence of so many homegrown copycats. So perhaps it’s not so bad if Xiaomi gives up some of the lower end to focus on better profits. Overall, the stock does seem to be a bit oversold at present and this could represent a good opportunity for buyers who aren’t afraid to stray from the herd.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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