Xiaomi Buys 0.48% Stake in TCL
January 14, 2019
Xiaomi, whichrecently entered the TV market, purchased over 65million TCL shares in the open market, giving them a 0.48% stake in the company. This follows the signing of a ‘strategic cooperation agreement’ between the two that was signed at the end of last year. While the share purchase is a relatively small one given the vast number of TCL shares outstanding, it indicates that Xiaomi’s new TV endeavor in India is not just a test to see if it can duplicate the success it has had in the country with its smartphones (it took top share in 3Q 2018 from leader Samsung Electronics. TCL’s ownership of panel producer ChinaStar may also be a factor.
Xiaomi’s push into the Indian TV market with models that sell for far less than name brands follows its concept of limiting its net profit on such devices to 5% in order to build market share but it also uses the Android operating system for its TVs, as it does for its smartphones and is promoting the sharing of content between both Android platforms as a selling point for both. Xiaomi’s TVs also offer a considerable amount of free content through negotiated deals with a number of high profile content suppliers to further their attraction to customers and we expect TCL is also looking to more closely align its TCL TV brand to be able to share some of that content. TCL has stated that it wants to execute a complex reorganization that will essentially separate its home appliance and consumer electronics businesses from ChinaStar but has faced considerable pushback from both government agencies (particularly the Shenzhen Stock Exchange) that are trying to understand the reasoning behind the changes and whether the shift will burden on side with those assets that are losing money or are less profitable. The TCL Group had a shareholder meeting to discuss the details of the restructuring plan, for which management and the company’s founder are supporters.
The controlling shareholders of Xiaomi (1810.HK) have agreed to a new lock-up period of one year during which they will not sell any Xiaomi other than 639m Class B ‘award’ shares, which could be sold for charitable purposes. Further the company’s CFO also agreed to the one-year lock-up. As the initially agreed upon 6 month IPO lock-up expires today, which releases 3 billion shares (~19% of outstanding), the timing of the new agreement is obviously intended to avoid investor’s fears that significant numbers of controlling shareholder’s stock would be placed on the market. Mr. Lei Jun, the founder of Xiaomi, is the largest stock holder with 64.2% of class A shares and 14.4% of class B shares and is the beneficial owner of a number of other entities that also own shares.
Xiaomi, as a stock, has not done well since its IPO in July, falling from the initial HK$17 price to HK$10.34 today despite the new lock-up announcement, with fears of slowing smartphone markets, trade war issues, and poor results from other major smartphone brands weighing heavily on the shares, along with ~30m shares sold short. Despite investors like China Mobile and Qualcomm (QCOM), near-term investors see little reason to expect stellar results from almost any smartphone brand and given Xiaomi’s valuation, which is certainly on the high side, today’s announcement had little effect on the share price. While Xiaomi continues to face investor perception issues currently, they have been able to maintain a 9.3% share of the worldwide smartphone market for the first three quarters of 2018, putting them in 4th place behind Samsung Electronics, Apple, and Huawei. The 9.3% share is up from 5.6% for the same period in 2017.