February 27, 2021

Indian & World Live Breaking News Coverage And Updates

Indian & World Live Breaking News Coverage And Updates

, Xiaomi just sold a pricey $4 billion narrative. Again., Indian & World Live Breaking News Coverage And Updates

Xiaomi just sold a pricey $4 billion narrative. Again.

Share This :

Xiaomi just sold a pricey $4 billion narrative. Again.

2020-12-02 15:11:00

Corp. has once again shown impeccable timing in raising funds, backed by a narrative that entices people into believing they got hold of a hot stock. Investors ought to remember what happened the last time China’s second-largest smartphone maker sold them on a tale of growth and wealth.

Two years ago, (and its bankers) weaved a narrative about a company that produced devices for no profit in order to make money from a raft of services, including advertising. There were those who thought that this innovative business model warranted a $100 billion valuation. Instead, it listed in Hong Kong at half that, with early investors convinced that the internet business would soon prove a blockbuster. After some initial euphoria, the stock tanked.

Now the company, which also sells rice cookers and watches, has just unloaded 1 billion shares, worth $3.1 billion. Investors seem none too impressed. The stock had a record 12% intraday decline when trading resumed in the afternoon session in Hong Kong, and closed down 7.1%.

That reception reflected the terms of the deal: It priced at the bottom of an indicated range and a 9.4% discount to the stock’s previous close, as Bloomberg News reported, a sign that demand may not have quite matched hopes.

In fact, the discount is among the widest in the past 12 months when measured against both additional offerings in Hong Kong, and Chinese tech stocks listed in the city or in the U.S. A smaller $1 billion offering in September went for a 4.3% discount. A concurrent sale this week of $855 million in seven-year, zero-coupon convertible bonds at a 55% premium indicates that investors expect the stock to continue its strong rise.

This equity sale, its most expensive to date, is needed. While is sitting on $7 billion in cash and equivalents, plus another $3.3 billion in short-term investments, it also faces $11 billion in payables and accruals with $1.7 billion in short-term debt. The company generated positive cash flow from operations in the past two quarters, so it looks like it should be able to service those debts. Yet its payables, at 4.7 times receivables, is something to keep an eye on.

But Xiaomi may not look this pretty for long. Its 34% jump in third-quarter revenue was driven mostly by troubles at its compatriot Technologies Co., which has been hit by U.S. sanctions that crimp its ability to build and sell smartphones. That’s helped Xiaomi continue to make gains in overseas markets like India and parts of Europe. Yet more than half its operating profit for the period came from investment gains, not sales of devices or internet services.

Meanwhile, the internet business that Xiaomi pitched as the core of its 2018 initial public offering yarn remains lackluster. Revenue there increased a mere 8.7% in the third quarter, despite monthly active users of its MIUI platform climbing 26%, while profit margins are shrinking.

It was this internet business — built around the notion that Xiaomi could use its phones as a vehicle to sell ads and services — that at one point made the company the world’s biggest unicorn. Xiaomi wanted you to think it’s not really a smartphone maker at heart, and thus deserved a higher valuation. The post-listing plunge proved investors thought otherwise: The following year, its shares had fallen to less than half their IPO price.

Today, smartphone strength, including a 45% jump in third-quarter shipments, is the only story Xiaomi has left to tell. With competition set to rise and Huawei’s toughest days likely behind it, now is the best time for the Xiaomi to sell to those investors willing to believe.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Share This :