Chinese phone giant Xiaomi could be twice as expensive as Apple

Chinese serial entrepreneur Lei Jun has been compared with Steve Jobs. Now, analysts are saying the smartphone giant he built could be twice as expensive as Apple.

Xiaomi deserves to trade at a premium to global phone brands due to its market-share gains and faster growth trajectory, according to research from Morgan Stanley, one of banks leading its Hong Kong IPO.

The Beijing-based company has a fair value of about $65bn to $85bn, translating into around 27 times to 34 times forecasts for its 2019 adjusted earnings, Morgan Stanley wrote in a report this week.

That’s roughly double Apple’s valuation of 14.5 times estimated 2019 adjusted earnings, data compiled by Bloomberg show.

Xiaomi should also fetch richer multiples than rival smart hardware makers like Fitbit and GoPro, as well as some major Chinese internet firms including Alibaba and Baidu, according to Morgan Stanley.

While such pre-deal research is prepared by a bank’s equity analysts, not their investment bankers, it may provide a clue into how Xiaomi plans to sell its growth story.

Xiaomi, which has been planning to seek about $10bn, is considering raising about half that from its Hong Kong IPO and the other half from an offering in mainland China, people with knowledge of the matter have said.

Xiaomi could be valued at as much as $92bn given the strong growth in its cash flows beyond 2020, JPMorgan Chase & Co analysts wrote in a separate report. Its success is based on offering "world-class products" at low prices while selling high-margin services, according to CLSA.

The Chinese company could boost smartphone shipments 42% this year to 130 million units, CLSA estimates. They may rise further to 179 million shipments in 2019 and 218.6 million units in 2020, analysts at CLSA wrote in a research report. That’s in the neighbourhood of the 216.8 million iPhones shipped by Apple in its latest financial year.

Xiaomi has emerged as the gateway to about 100 million users in China, who are monetised via a suite of online services, Goldman Sachs analysts wrote in their own report.

Analysts at the bank, one of Xiaomi’s IPO sponsors, gave Xiaomi a forward equity valuation range of $70bn to $86bn. That translates into 26 times to 32 times its forecast adjusted 2019 net income, according to Goldman Sachs.

Services revenue

"Xiaomi integrates the internet user experience with hardware to offer an unrivalled user experience," Goldman Sachs wrote in the report. "The company’s hardware aggregates traffic, its software builds platforms, and its internet services generate revenue and profit."

The Chinese company is coming to market as the smartphone industry plateaus: replacement cycles are lengthening, even as more mature markets approach saturation. Xiaomi is trying to increase higher-margin services as a proportion of revenue.

CLSA, Goldman Sachs and Morgan Stanley are leading Xiaomi’s Hong Kong IPO as joint sponsors, according to an exchange filing last month. Credit Suisse, Deutsche Bank, JPMorgan and six Chinese banks are also helping arrange the share sale, people with knowledge of the matter have said.

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