The Hong Kong IPO of China’s success story Xiaomi disappointed greatly. Beida accounting professor Paul Gillis explains at Quartz why the investors did not buy the company’s valuation. “I think it is hard for investors to buy the valuation.”
What accounts for the listing’s tepid response? One read is that retail investors didn’t buy Xiaomi’s pre-IPO narrative any more than early subscribers did.
In the run-up to the IPO, found Lei Jun described the company’s business model as a “new species” and a “triathlon model” with three components—smartphone sales, third-party hardware sales, and “internet service” sales, namely ads and media. While smartphones drive most of the revenue, the company hopes that internet services will eventually drive most of the profit (currently at about 40%)…
It’s an unprecedented structure with many uncertainties. The Android smartphone business is notoriously unstable and has turned giants like Sony, HTC, and Nokia into casualties. Meanwhile, there has never been a tech company to successfully sell undifferentiated, commodity hardware as a means to boost an internet business unit—which might account for investor skepticism.
“I think it is hard for investors to buy the valuation. The company has to transform to justify the valuation and there is too much uncertainty about whether it can do that,” says Paul Gillis, who teaches accounting at Peking University in Beijing.
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