Xiaomi's Real IPO Killer Just Arrived From Beijing

(Bloomberg) -- Xiaomi Corp.’s IPO killer just arrived on the scene.

China Tower Corp., a telecommunications construction firm that’s owned by the country’s three state operators, is following in the smartphone seller’s footsteps, applying to go public in Hong Kong. The Beijing-based group may raise as much as $10 billion, putting it in the same league as Xiaomi, which is seeking a valuation anywhere between $60 billion and $100 billion.

China Tower is worth at least $50 billion, based on the book value of its assets. However considering India’s Bharti Infratel Ltd. is trading at a 16 times EV/Ebitda ratio, China Tower could be up around the $102 billion mark.

But China Tower and Xiaomi couldn’t look more different.

China Tower has a monopoly. It manages almost 2 million sites, giving it 96 percent of the market at a time Beijing is aggressively investing in next-generation technology.

Xiaomi, by comparison, operates in a highly competitive industry where growth is slowing. It’s the No. 4 player in China, behind Huawei Technologies Co., Oppo and Vivo. Even in India, where it’s the biggest seller of smartphones, its share is just 27 percent.

It’s not surprising China Tower is more profitable. Its Ebitda margin – a metric favored by sell-side analysts because of the industry’s high capital spending – was 58.8 percent last year. Using operating profit, China Tower still managed a decent 11.2 percent.

Xiaomi, on the other hand, has vowed that net profit margins at its hardware business won’t exceed 5 percent a year.

Last year, Xiaomi generated about 91 percent of its sales from phones and other lifestyle products. The company can at most generate an overall operating profit margin of about 10 percent, using generous assumptions for its internet services division.  It’s also worth noting that Xiaomi hasn’t moved into internet services as fast as it would like.

Locking up some investors is essential in a sizzling share-sale market where companies are asking for sky-high valuations. Being state-owned, most of China Tower’s stock will be held as domestic shares. In other words, post IPO, China Mobile Ltd., China Unicom Hong Kong Ltd. and China Telecom Corp. won’t be able to sell any more of their interests without regulatory approval.

Xiaomi, meanwhile, is busting at the seams to list, having gone through nine rounds of pre-IPO funding already. Those investors, many of them long-time employees, will want to sell as soon as their escrow periods expire.

To be sure, one big thing in Xiaomi’s favor is that it’s a private entity. In China, cash-cow, government-backed firms are often called upon for national service.

Regardless, China Tower’s IPO is a nuisance Xiaomi could do without. It raises serious questions about how much the smartphone maker is really worth.

  1. Xiaomi doesn't disclose operating margins for its various business segments. This is assuming that the internet services division doesn'tincur anyoperating expenses, and that its operating margin is its percent gross margin.

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