Apple of Mi eye

How Xiaomi can live up to its $45-billion valuation

Can Xiaomi live up to its $45-billion valuation? Though becoming China's top smartphone maker is impressive, the upstart will also have to make inroads into fast-growing markets like India. Even then, justifying its price tag will be a stretch.

In just one year, Xiaomi has tripled its market share to overtake Samsung as the leader in the world's largest smartphone market. Meanwhile, the company's valuation has soared more than fourfold: a 2013 funding round priced the group at $10 billion. Sales doubled to $12 billion in 2014, but the privately-owned group does not disclose its bottom line.

One way to look at Xiaomi's valuation is to think of it as a future rival to Apple. The Cupertino giant's shares trade at around 17 times its fiscal 2014 earnings. To achieve a similar multiple, the Beijing-based group will need to generate at least $2.6 billion of net profit.

That's not impossible. China's smartphone market will expand to just over 514 million units by 2018, IDC forecasts. At an average selling price of $193, a 20 per cent market share - which Samsung had at its peak - will bring in revenue of almost $20 billion. More promising are opportunities elsewhere: IDC expects handset shipments for six emerging Asian markets to grow 22 per cent a year for the next three years, compared with 4 per cent in China. Though prices will be lower, a 10 per cent share of those markets would boost Xiaomi's total handset revenue to $24.6 billion by 2018. And that's before factoring in revenue from software and other products like air purifiers. A net profit margin of around 11 per cent would allow it to hit the earnings target.

That level of profitability may be feasible in China: Xiaomi's model of selling to loyal fans online has kept a lid on marketing and distribution costs. But it will be harder to replicate in other countries, where internet penetration is lower and competition for $100 smartphones is intense. Patent disputes like the one Xiaomi is facing in India will also push up costs. And though its phones are popular right now, it's a long way from winning Apple-style loyalty from customers. Xiaomi's valuation leaves little room for error.