Xiaomi’s profitability called into question – Mobile World Live

Xiaomi’s profitability called into question

16 DEC 2014

Chinese smartphone maker Xiaomi isn’t nearly as profitable as previously estimated. A regulatory filing yesterday in China showed the privately-held company had a net profit last year of just CNY347 million ($56 million) – ten times less than media expectations.

In early November, the Wall Street Journal (WSJ), citing confidential documents from the company, reported that Xiaomi’s 2013 profit increased 84 per cent to CNY3.46 billion ($563 million) with revenue of CNY27 billion ($4.3 million).

The four-year-old firm reported CNY26.6 billion in revenue last year (in line with the WSJ report) and an operating margin of 1.3 per cent. The results were released to the Shenzhen Stock Exchange after the company acquired about a 1.3 per cent interest in Midea Group for CNY1.27 billion, the China Daily reported.

A Xiaomi representative told Reuters that the filing did not cover its entire business.

The release of the results comes just days after the company was hit by an injunction in India that bans the sale of some of its smartphones for infringing on essential patents.

Ericsson filed a complaint with the Delhi High Courts after Xiaomi reportedly failed to respond to six requests for royalties.

If the company is forced to pay standard essential patents on all products it exports out of China, its costs would increase by 5-7 per cent, Richard Windsor wrote in his Radio Free Mobile blog last week.

With such tight margins compared to Apple (nearly 30 per cent) and Samsung (high teens), Windsor said paying royalties would “meaningfully compound Xiaomi’s difficulties when it comes to profitably selling devices outside” of China.

He estimated the company’s margins outside its home market would be 2-4 per cent in the best case.

Windsor said in his blog today that based on the lower profit expected for the next two years, and assuming it hasn’t skimped on R&D, he calculates a valuation of $16.7 billion. He uses a similar formula as he used for Apple, but applied a 300 per cent premium to account for Xiaomi’s much faster growth.

But, he warned, if the firm has under-invested in R&D, which is the “life blood of growth”, then the premium would be far too optimistic.

The company reportedly held discussions in November with a number of firms to raise $1.5 billion in funding, which at the time would value the company at an estimated $40-50 billion.

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Joseph Waring

Joseph Waring joins Mobile World Live as the Asia editor for its new Asia channel. Before joining the GSMA, Joseph was group editor for Telecom Asia for more than ten years. In addition to writing features, news and blogs, he...

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