Xiaomi Jumps After U.S. Trading Ban on Phone Maker Is Halted

Xiaomi Corp.’s shares jumped in Hong Kong after a U.S. court blocked the Defense Department from restricting American investment in the Chinese smartphone giant.

Shares of the consumer electronics maker surged as much as 12% on Monday, the biggest intraday gain in almost a month. Under the Trump administration, the Defense Department placed Xiaomi on a list of companies with alleged links to the Chinese military, triggering financial restrictions that were set to go into effect next week. U.S. District Judge Rudolph Contreras on Friday put a temporary halt to the ban, siding with Xiaomi in a lawsuit that argued that the move was “arbitrary and capricious” and deprived the company of its due process rights.

Contreras said Xiaomi was likely to win a full reversal of the ban as the litigation unfolds and issued an initial injunction to prevent the company from suffering “irreparable harm.” After the ban was announced, the smartphone manufacturer faced the prospect of being de-listed from U.S. exchanges and deleted from global benchmark indexes, wiping out as much as $44 billion from its market value.

What Bloomberg Intelligence Says

Xiaomi could reverse negative market sentiment on a temporary injunction against a U.S. investment ban, coupled with its announced HK$10 billion buyback plan. Despite improving fundamentals, the smartphone maker’s share price is down 22.5% since the ban was announced on January 15. Xiaomi remains well-positioned to keep capturing market share amid Huawei’s retrenchment and drive average prices and margins higher with the rollout of 5G devices.

-- Matthew Kanterman and Nathan Naidu, analysts

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Founded more than a decade ago by billionaire entrepreneur Lei Jun, Xiaomi is the third-largest smartphone manufacturer in the world by volume. In the third quarter, it surpassed Apple Inc. in smartphone sales, according to IDC. The company has attracted a suite of American investors from Qualcomm Inc. to Vanguard Group and BlackRock Inc., according to data compiled by Bloomberg.

Xiaomi plans to continue to request that the court declare the labeling of its connection to the military as unlawful, and to permanently remove the designation, according to a company statement.

In November, former President Donald Trump signed an order barring American investment in Chinese firms owned or controlled by the military in a bid to pressure Beijing over what the U.S. has described as abusive business practices. The U.S. has also pursued bans on popular Chinese-owned apps like WeChat and TikTok, invoking threats to national security.

Contreras brushed those concerns aside in his ruling Friday. “The court is somewhat skeptical that weighty national security interests are actually implicated here,” he wrote. The Defense Department didn’t immediately return a request for comment on Friday evening.

The Xiaomi ruling could pave the way for more more firms to challenge the Trump-era restrictions, with non-state-owned companies like including Huawei Technologies Co. and Semiconductor Manufacturing International Corp. standing a better chance of winning a similar lawsuit, according to Jefferies. Shares of SMIC gained as much as 3.3% in Hong Kong Monday.

“Xiaomi’s potential victory could challenge the Defense Secretary’s discretion in classifying non-SOEs in China as” Communist Chinese Military Companies, analysts including Edison Lee wrote in a note. “Xiaomi’s potential win would likely increase the chances that many of Trump’s sanctions on Chinese companies may have to be reversed.”

The case is Xiaomi v. Defense Department, 21-cv-280, U.S. District Court, District of Columbia (Washington).

©2021 Bloomberg L.P.

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