China start-up vows to limit profits

Xiaomi is close to filing for its $100b IPO in Hong Kong and also plans to issue Chinese depositary receipts

Chinese smartphone maker Xiaomi Corp is making unusual preparations for what may be the world’s biggest initial public offering this year.

The Beijing-based company, led by serial entrepreneur Lei Jun, is promising to limit the net profit margin in its hardware business “forever” to no more than 5 per cent, according to an emailed statement. The policy will apply to smartphones — its biggest revenue source — as well as other gadgets it makes. It pledged to distribute the excess amount to its users if the margin exceeds the cap in coming years.

The unlikely proposal comes as Xiaomi is planning an IPO that could value the company at as much as $100 billion (Dh367 billion). The profit cap signals that Xiaomi believes it can generate healthy profits from the services it provides alongside its hardware, including video streaming, online financing and advertising.

“It is a very aggressive target and commitment,” said Nicole Peng, senior director at the research firm Canalys. “It means Xiaomi is not only confident about recurring service revenue, but also optimistic about Chinese consumers’ consumption of digital services.”

Xiaomi is close to filing for its IPO in Hong Kong and also plans to issue Chinese depositary receipts for mainland investors. Depending on its valuation and the amount of equity it sells, Xiaomi could have the biggest IPO since Alibaba Group Holding’s $25 billion debut in 2014.

It’s one of several Chinese start-ups that are gearing up to sell shares to investors in multi-billion-dollar IPOs. Meituan Dianping, a Chinese food review and delivery giant, has begun discussions about a Hong Kong offering at a valuation of at least $60 billion. Meilishuo, an online fashion retailer backed by Tencent Holdings Ltd, is in talks with several investment banks about a US IPO that could value the start-up at about $4 billion. The world’s fifth-largest smartphone vendor is aiming to take on Apple Inc and Samsung Electronics Co. with devices packed with top-tier components at lower prices than its competitors.