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COMMENTARY

Xiaomi's maiden results provide some redemption for founder Lei Jun

Hong Kong

CHINA'S Xiaomi passed its first public market test. After a bumpy initial public offering, the newly listed handset maker delivered better-than-expected maiden results. If the company can keep up the growth, investors may cut Xiaomi some slack on its slow progress in Internet services.

Sales at the US$65 billion company increased at a blistering 68 per cent to 45 billion yuan (S$9 billion) in the second quarter. Smartphones powered most of that growth: Xiaomi sold an impressive 32 million units in the three months through June, up from 22 million a year earlier. A push abroad, particularly in emerging markets such as India, is also yielding results.

International sales more than doubled and now account for over a third of Xiaomi's total.

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That provides some redemption for boss Lei Jun. After valuation prospects kept tumbling ahead of its IPO, Xiaomi made a lacklustre Hong Kong market debut in July.

Since then, its shares have fallen by almost a fifth from their peak after mainland regulators banned investors in Shanghai and Shenzhen from buying them. And at a punchy valuation of 29 times expected earnings over the next year, pressure built for Xiaomi to deliver strong growth.

Not everything made the grade, though. Gross profit margins for smartphones tumbled to 6.7 per cent in the quarter, from 8.7 per cent last year. Lavish employee awards, including 9.9 billion yuan worth of stock given to Mr Lei, resulted in an operating loss of 7.6 billion yuan.

And despite Mr Lei's promotion of his company being a "new species" that integrates hardware and software services, the latter's share of total sales shrank in the second quarter, to below 9 per cent.

Even so, after a string of disappointing results from tech peers including gaming titan Tencent and smartphone and beauty app maker Meitu, Xiaomi's stand out. So long as the company can maintain its momentum selling affordable handsets, investors may give Mr Lei more time to make his broader, bolder strategy work. REUTERS

  • The author is a Reuters Breakingviews columnist. The opinions expressed are her own.