Internet & Tech

Double or quits?

China’s most famous bet gets renewed by Gree’s Dong and Xiaomi’s Lei


Lin: sold some of his Xiaomi stock

When senior executives are selling down stakes in their firm, it’s often a signal for stockmarket investors to consider their exit strategy: particularly if the person in question is one of the company’s founders.

And sure enough, Xiaomi came under selling pressure in August after co-founder Lin Bin insisted on his complete faith in the company as he divested 1.48% of his stake.

Lin’s subsequent declaration that he had to generate the funds so that he could set up a charitable institute didn’t really cut much ice with investors (the stock fell about 5%) and the share price only recovered after Xiaomi announced a share buyback programme.

The problem that investors have is that they still do not know what to make of Xiaomi. Many have also been wrongfooted by a company which has lost 50% of its market value since it listed at HK$17 per share last June too.

At the time of its listing it carried a $53 billion market capitalisation – which was half the level that its founders had told bankers they deemed fair value prior to the IPO.

As we wrote in WiC415, investors are still divided over whether Xiaomi should be classed as a hardware company that makes (cheap) smartphones or a software firm that is set to dominate the market for Internet-of-Things (IoT) products.

Xiaomi considers itself the latter and one of the standouts of its recent first half results was the impressive growth in the number of devices connected to its network – 196 million, up 69.5% year-on-year.

Xiaomi is trying to change investor perceptions at a tumultuous time in the tech sector. Admittedly, Huawei is bearing the brunt of trade and technology tensions between Beijing and Washington. But its struggles with the Trump administration are having a direct impact on Xiaomi too. Recent data shows that Xiaomi is reporting lower sales in the Chinese smartphone market, for instance, where Huawei has refocused its attention. But it has been gaining ground in Western Europe. Canalys research points out that Huawei’s shipments slipped 16% from January to June, whereas Xiaomi’s rose 40%.

Over the last year, Xiaomi co-founder Lei Jun has acknowledged the tougher market conditions – with many consumers also waiting for a fuller advent of the 5G era before changing handsets. But he thinks this upgrade new cycle will kick in from the second quarter of 2020 and that it will help him to win a second wager he’s struck with Gree chairwoman, Dong Mingzhu.

In 2013, the two famously made a bet as to which company would have the higher revenues at the end of 2018. At the time, it seemed like a no-brainer: Gree’s sales were 10 times higher than Xiaomi’s. In the interim period, Xiaomi went on to become the youngest company to get into the Fortune 500. But Gree still won the bet: although only just (see WiC445).

Dong and Lei have now extended their wager, with a challenge on who will report the highest sales in five years time (the gracious Dong opted not to take from Lei the Rmb1 billion at stake in the first bet). And while this looks like another marketing gimmick to keep both companies in the public eye, Gree won’t be as confident of winning this time around, especially in light of how quickly Xiaomi has closed much of the existing revenue gap.

Of course, Dong is still hoping to diversify Gree further from its core air-conditioning business, although her efforts so far haven’t proven particularly successful. But Gree is about to gain a new strategic investor after its big government shareholder, Zhuhai Sasac, decided to offload its 15% stake. This week it was announced that the final two companies in the running were both private equity groups – Zhang Lei’s Hillhouse Capital (see WiC393) and Fang Fenglei’s Hopu (see WiC25). When Gree was floated in 1996, Sasac owned 60%, but very soon the air-con group will look a lot more like a Western multinational, with no controlling shareholder.

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