Can Xiaomi’s share price succeed where Huawei’s faltered?

Xiaomi’s [1810.HK] share price has seen plenty of volatility in 2021 so far, reflecting the maelstrom of events that has been buffeting the wider China tech investment theme recently.

Case in point: Xiaomi may have overtaken the beleaguered Huawei [002502.SZ] to become China’s leading smartphone manufacturer, but it is now at risk of scrutiny from authorities in both China and the US — including a potential investment ban. Investors don’t have to look too far back to see that Huawei’s fall from grace was largely down to US sanctions.

More turbulence for the investment theme came on 26 March as a fire sale of China tech stocks broke out, as reported by the FT. Speculation is that a hedge fund had “blown up” and was looking to unwind positions worth almost $19bn.

Against that background, we look at Xiaomi's recent performance and ask whether it can avoid the same fate as Huawei.

 

How is Xiaomi’s share price performing?

Xiaomi’s share price is down 0.8% over the past month, on par with the SSE Composite Index’s 2.67% drop over the same time frame (as of 29 March’s close). The stock saw an intraday high of HK$35.90 on 6 January and began a steady trend downwards to bottom out at HK$21.85 on 11 March — a few days after the US barred American investors from investing in Xiaomi.

Since that point, Xiaomi’s share price has gained 14.65% to close at HK$25.05 on 29 March, although it did see some volatile trading following separate plans from US and Chinese regulators for greater oversight — something that has affected the wider China tech investment theme.

 

What happened in Xiaomi’s recent earnings?

In the fourth quarter, Xiaomi reported a net profit of RMB3.2bn, a 37% jump from the RMB2.3bn reported in the same period last year. Revenue for the quarter came in at RMB70.5bn, a 25% increase on the RMB56.5bn seen last year. Total revenue for the year came in at RMB245.9bn, a 19.4% increase on the previous year. Net profit was RMB13bn, up 12.8% year-on-year.

Xiaomi increased smartphone shipments by 32% in the three months to the end of 2020, as reported by Bloomberg. This was enough to consolidate its lead as it took market share from Huawei, which has seen shipments slump 40% thanks to US sanctions.

 

For the quarter, Xiaomi ranked number one for smartphone shipments in Central and Eastern Europe, and India, according to Canalys. It also retained a top three position in Western Europe, along with being the fourth in Latin America, Africa and the Middle East.

In mainland China, smartphone shipments increased 51.9%, the highest growth rate of the top five smartphone companies according to data from Canalys. Revenue from overseas markets came in at RMB122.4bn, a 34.1% increase on the previous year and representing 49.8% of total revenue.

 

Is Xiaomi’s share price capped by the US-China spat?

While Xiaomi may have stolen market share from Huawei, investors will be hoping it can escape its rival’s fate. The big alarm bell is the US Defence Department putting Xiaomi on a list of companies with alleged ties to the Chinese military. Xiaomi is working to reverse the decision, but it’s a concern as both US and Chinese regulators ratchet up the pressure on China tech companies.

Last week, US regulatory changes hit Chinese tech giants. Alibaba [BABA], Baidu [BIDU] and Tencent [TCHEY] cratered on concerns over the possibility of delisting from US exchanges, the Financial Times reports. On 24 March, the Securities and Exchange Commission (SEC) stated that it was considering forcing foreign US-listed companies to provide audit information or risk delisting after repeated non-compliance. Chinese tech companies are unlikely to hand over their books anytime soon.

“China doesn’t want [companies] to disclose anything for national security reasons,” Louis Tse, MD at brokerage Wealthy Securities, told the FT. “That is a very big question that has to be answered by the Chinese side,” he said.

“China doesn’t want [companies] to disclose anything for national security reasons. That is a very big question that has to be answered by the Chinese side” - Louis Tse, MD at brokerage Wealthy Securities

 

In China, the anti-trust crackdown is only increasing as Beijing’s plans to take control of user data have also hit investor sentiment. Under the plans, the Chinese government would oversee all user data harvested by Chinese tech companies. This would mark an escalation in state oversight for these companies, which the government believes have amassed too much power. Since Xiaomi is now the country’s biggest smartphone manufacturer, it’s likely to come under greater scrutiny. 

 

Where next?

Fallout from this political and regulatory dispute is writ large on our thematic ETF screener. The China tech investment theme was down 9.26% last week, and 18.68% over the past month (as of Friday 26 March’s close).

China tech companies, along with their investors, look like they are getting caught up in a tussle between the two remaining superpowers. Anyone hoping for a thawing in US-China relations with Joe Biden in the Oval Office will likely be disappointed, especially with the tense confrontation between the two countries during talks in Alaska.

If the diplomatic dispute settles down, then the current prices on China tech stocks could represent good value — especially if Xiaomi can get off the Defence Department’s list. However, it’s worth remembering that, unlike Huawei, Xiaomi hasn’t even entered the huge US market.