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After Alibaba’s success, is Xiaomi going to IPO?

Lei Jun, CEO of China's mobile company Xiaomi, checks Xiaomi mobile phone ahead of interview during Fortune Global Forum in Chengdu

Lei Jun contemplates his options

While attending the APEC summit in Beijing this week, BlackBerry’s chief executive John Chen met with Lei Jun and Yang Yuanqing, the chief executives of Xiaomi and Lenovo, respectively. Though few details emerged from the meetings, Chen later denied that he was looking for a buyer for the once-dominant Canadian firm.

“What I’m doing is to explore what is the right approach to the market given what we do well and I’m not shutting any doors,” Chen said. “This market (China) is not an easy one to get deals done quickly. It’s going to take a while, but I’m interested.”

Chen picked a good time to network as both Chinese firms are in a celebratory mood. Lenovo has finally completed the takeover of Motorola Mobility from Google for $2.9 billion. The deal gives the Chinese computer giant not only a coveted brand name, but also some 2,000 Motorola patents. It also bumps Lenovo into third place in world smartphone rankings (behind Samsung and Apple) in shipment terms.

Xiaomi is also riding high after strong sales on Singles’ Day ­– China’s largest online shopping event – on November 11. The company announced Rmb1 billion ($165 million) in revenues for the day, selling 720,000 handsets by midday on its Tmall virtual store.

Xiaomi is also deciding whether to go public, with an IPO possible as early as next year, says the South China Morning Post. Company founder Lei Jun has denied plans for an imminent initial public offering, but speculation has been rife that he has been encouraged by the strong reception for Alibaba Group’s jumbo IPO in New York in September.

The smartphone maker also fetched a $40 billion valuation (up from $10 billion a year ago) after completing its latest round of fundraising recently.

Xiaomi also seems to be positioning itself for an IPO with some of its media activity. For example, there have been questions about whether it can deliver giant profits as well as rapid growth. To that end, it offered the Wall Street Journal a glimpse of its financial strength, suggesting that its business is already very profitable. Net profit in 2013 rose 84% to Rmb3.5 billion from Rmb1.9 billion a year ago. Xiaomi is also said to be forecasting a 75% increase in net profit for this year.

Still, others worry that Xiaomi won’t be able to sustain its growth trajectory as it continues to expand abroad. Industry observers say the smartphone maker, which now exports to 10 Asian countries, will face numerous legal hurdles in its expansion efforts. One of those is that it’s critical to have solid intellectual property to defend against patent lawsuits in markets like the US and Europe (one example is Apple and Motorola, which only recently settled their disputes over patents after four years of legal struggle).

At the moment, the number of patents Xiaomi holds is “pathetically low,” says Tencent Technology. Unless it finds ways to boost its patent portfolio, Xiaomi will likely face licencing litigation or be forced to pay significant royalties as it expands overseas.

“Google, Samsung, HTC, Microsoft and Apple all hold a large number of technology patents and they will pursue relentlessly the companies they think are infringing their intellectual property,” warns Kevin Wang from IHS iSuppli.

Lenovo, meanwhile, believes that this is an area where it now has the upper hand. In addition to Motorola’s patents, it has also spent $100 million for a portfolio of patents from Unwired Planet, an intellectual property provider focused exclusively on the mobile industry. In April, Lenovo also purchased more than 3,800 patents from NEC for mobile technologies for an undisclosed amount.

In an interview with Sina Technology, Lenovo boss Yang said that access to patents will be critical for the company as it pushes for more market share in the US and Europe. He also warns that without them, it is almost impossible for handset makers to make much profit.

“Patents are very important, especially for mature markets like the US, Europe and Japan. If you don’t have any patents, your feet are bound,” says Yang.

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