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China’s Xiaomi risks wasting its good luck

Reuters HONG KONG | Updated on March 25, 2021

Xiaomi had a lucky 2020. The $81 billion smartphone maker grew its adjusted quarterly earnings 37 per cent from a year earlier, and 13 per cent for the full year. Suspension of a US investment ban earlier this month has been a welcome reprieve for the Chinese company, while the White House’s suppression of rival Huawei’s smartphone business also helped. Though Xiaomi has long yearned to focus more on high-margin software services and less on low-margin hardware, that project made little progress last year.

Overall sales in 2020 rose 19 per cent year-on-year to 246 billion yuan ($38 billion), while its smartphone division, which accounted for over 60 per cent of the top line, increased 25 per cent. Xiaomi shipped 42 million handsets globally in the fourth quarter. It has become the world’s third largest smartphone maker, according to industry tracker Canalys.

Diplomatic clouds hanging over the company parted too. In January, former US President Donald Trump’s administration added Xiaomi to a blacklist which would have forced American investors to divest their holdings. A US federal court suspended the ban earlier this month, provoking a 24 per cent share rally that peaked on Tuesday. Trading at 27 times forecast earnings, per Refinitiv data, Hong Kong-listed Xiaomi shares fetch a higher valuation than Apple’s.

Founder Lei Jun can be neither blamed nor credited forchanges in the US-China relationship. What he hasn’t delivered is much transformation. Xiaomi’s internet services unit, which includes advertising, video games and financial technology services, eked out growth of just 8% in the fourth quarter. It accounts for barely one-tenth of total revenue, similar to where it stood in 2019.

At the same time, the company continues to serially invest,with stakes in more than 310 companies as of December. In March, Xiaomi’s digital arm took a 50 per cent stake in a subsidiary of HongKong-based AMTD, with which it already runs a virtual bank,despite Beijing’s ongoing fin-tech crackdown. There are also worrying media reports that it might wander into electric vehicles.

Xiaomi has cause to celebrate weathering a tough year so well, but shareholders hoping to see signs of business metamorphosis might have to wait a little – or a lot – longer.

Published on March 25, 2021

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