Xiaomi's IPO Filing Shows It's a Busy VC Investor

(Bloomberg) -- Remember last week when Xiaomi Corp. founder Lei Jun announced he was going to cap profits on the Chinese smartphone maker’s hardware business and distribute the excess to users?

Well, expect more of that kind of spin if Xiaomi’s IPO filing is anything to go by.

As I suspected, Xiaomi’s post-tax net income margin on hardware last year was nowhere near the 5 percent cap the company so generously submitted to.

Its gross margin on hardware, before you consider operating costs, was 8.7 percent. By comparison, Apple Inc.’s corporate gross margin was 38 percent in 2017, and ZTE Corp.’s was 30 percent. Walk down the P&L past operating costs and taxes, and Apple’s net margin was 21 percent while ZTE’s came in at 4.7 percent.

There’s no way Xiaomi was approaching its self-imposed cap. But it made for a good story.

Which brings me to another point. More than 52 percent of Xiaomi’s operating profit came from fair value changes on investments. Strip those out, and its operating margin was 5.1 percent.

But this isn’t a bug in Xiaomi’s business model, it’s a feature.

Xiaomi has its investment fingers in many pies, including majority and minority stakes in an assortment of hardware and services companies, many of which develop products that bear the Xiaomi name.

These include a 10 percent stake in a coffee machine manufacturer, a 29.6 percent interest in a games maker, a 21 percent holding in a news aggregation company, and a 10 percent share of a leather goods producer. That makes venture capital-backed Xiaomi a lot like an incubator.

Its main business remains mobile phones. But expect to hear a lot more about the virtues of this other business model as IPO bankers hit the road.

©2018 Bloomberg L.P.

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