Why Xiaomi’s Offering May Not Spell Trouble for Other Chinese Unicorns

Xiaomi’s initial public offering was pitched as the first in a wave of stock market debuts by Chinese tech giants. It did not go well — but there are reasons to think that other companies following it could fare better.

Expectations for Xiaomi were high when it filed to go public in May. News reports said that the smartphone-and-gadget company was seeking a valuation of up to $100 billion. Yet that dream appeared to be a fantasy: When share trading ended Monday, its market capitalization was about $47.8 billion.

So, why did it miss the mark?

Xiaomi pitched itself to investors as more than a producer of commodity electronics. (Its hardware division achieved a margin of just 8.8 percent last year.) Instead, the company said it was pushing further into internet services, like online music and video, from which it generated a 60 percent margin in 2017.

But according to the company’s prospectus, those internet services accounted for just 8.6 percent of its revenue last year. Smartphones represented 70.3 percent of the total. Investors do not appear to believe that Xiaomi has yet made the leap from hardware company to internet giant. Analysts have speculated that this IPO may pose problems for other Chinese tech titans’ plans to go public. But that may not be the case. Here is DealBook’s look at why the forthcoming market debuts of other Chinese technology companies could play out more smoothly.

Once the financial arm of the Alibaba Group, the company is now a full-fledged behemoth in its own right. It operates Alipay, China’s most dominant mobile payment app, and Yu’e Bao, a giant money-market fund, cementing its centrality in its country’s internet ecosystem.

— Reasons to be confident: Ant Financial offers profitable internet services, but, unlike Xiaomi, they make up the vast majority of its business. Last month, it raised $14 billion in what was the biggest-ever fundraising round by a private company, drawing upon investors like the investment firm Warburg Pincus and the sovereign wealth fund Temasek.

— Reasons to be cautious: Ant Financial faces heavy regulatory scrutiny from Beijing, which has tightened its leash on the Chinese financial industry. And Tencent’s WeChat Pay is fighting hard to become a more competitive rival.

Tencent’s music arm is a significant part of its parent company’s empire. And it already has a lock on Chinese music listeners’ ears: The business controls more than 70 percent of that country’s market for music streaming, according to analysts at Citigroup Inc.

— Reasons to be cautious: By comparison, Spotify, its closest counterpart, has 170 million monthly users, but 75 million of whom pay. Tencent Music will need to convince investors that more people are willing to pay for its services.

The company, which was founded in 2010, offers food delivery, Groupon-like discounts and more. It is now one of China’s most valuable tech startups, with a valuation of roughly $30 billion.

— Reasons to be confident: Meituan-Dianping is still growing fast, having doubled its revenue last year to 33.9 billion yuan, or $5.1 billion. Tencent is one of its investors.

— Reasons to be cautious? It is worth noting that the company’s losses nearly tripled last year from the prior year, to $2.9 billion. And while it has a lead over rival offerings from Alibaba, it is unclear how long that will last.