Xiaomi has chance to justify lofty valuation after 23% slide

[SHANGHAI] Xiaomi Corp trades at valuation multiples similar to internet giants Tencent Holdings Ltd. and Alibaba Group Holding Ltd. Whether that's justified could become clearer when the smartphone maker reports results.

Come Monday evening, investors will be able to see if its internet services business grew and how much revenue contribution came from hardware. Founder Lei Jun describes Xiaomi as an innovation-driven internet company, yet that's only accounted for an average 9.2 per cent of total revenue in the past two quarters. Smartphones -- where Lei has pledged to keep margins below 5 per cent -- contributed over 70 percent.

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Skepticism over this vision has sent Xiaomi down 23 per cent since its listing in Hong Kong in early July. That's despite 18 of 24 analysts tracked by Bloomberg having buy or equivalent ratings on the Beijing-based company, and the average price target implying a nearly 50 per cent gain for the stock over the next 12 months. Xiaomi rose 0.8 percent to HK$13.04 as of 9:32 a.m. Monday.

It's still not a good entry point for investors, according to Kaiyuan Capital Ltd.

"The stock may still be overvalued, but more worrisome is the disconnect between management's public comments and the company's performance," Kaiyuan managing director Brock Silvers said. "Management at times has been less than fully convincing in its explanation of Xiaomi's strategy, and the market is still looking for results to support those views."

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Some bulls believe Xiaomi's valuation is at an attractive level and investor concerns about the company are misplaced. The stock last traded at 21 times 12-month forward earnings, compared with a multiple of just 14 for Apple Inc. and 26 for both Tencent and Alibaba.

Citigroup Inc., which last week initiated coverage of Xiaomi with a buy rating, said its valuation belies the company's strengths. Those include overseas opportunities and its ability to attract customers with cheap prices, which then provides a large and ready user base for the internet services business, analysts William Yang and Andre Lin wrote in a note.

They did, however, say the stock is high risk due to its short trading history.

BLOOMBERG