April 25, 2018 / 7:43 AM / a month ago

China's Xiaomi promises to cap hardware income margin ahead of IPO

BEIJING (Reuters) - Chinese smartphone and smart device maker Xiaomi will cap income from its hardware business at 5 percent of after-tax profits starting 2018, as it looks to position itself as an internet services provider ahead of a highly anticipated IPO.

FILE PHOTO: The logo of Xiaomi is seen inside the company's office in Bengaluru, India January 18, 2018. Picture taken January 18, 2018. REUTERS/Abhishek N. Chinnappa/File photo

Xiaomi - which makes dozens of internet-connected products including scooters, water purifiers and televisions - said in a statement on Wednesday that any profits from hardware exceeding the 5 percent quota will be distributed among users, without giving specific details.

The promise comes as the company is looking to market its internet services business to investors ahead of an IPO that could potentially value the smartphone maker at $100 billion.

“We have always viewed our hardware as the gateway to providing our users with Internet services,” said founder and Chief Executive Lei Jun.

Customers enter a Xiaomi shop in a shpping mall in Barcelona, Spain February 28, 2018. Picture taken February 28, 2018. REUTERS/Yves Herman

Xiaomi has enlisted CLSA, Morgan Stanley and Goldman Sachs as joint sponsors for its proposed listing, sources with direct knowledge of the matter have said.

The company says its revenue between January and October 2017 was 100 billion yuan ($15.84 billion). Its non-hardware revenue streams are linked to its user interface, “MIUI”, and include entertainment subscriptions and financial services.

A man checks a Virtual Reality device inside Xiaomi booth at the Mobile World Congress in Barcelona, Spain, February 28, 2018. REUTERS/Sergio Perez

The five percent cap only applies to the company’s consumer hardware products, it said.

Xiaomi has also invested in making its own chipsets and microprocessors, which will not fall under the cap.

Xiaomi rose rapidly to become the world’s largest startup in 2014 by selling its smartphones with thin margins, cutting costs by using online retail channels and doing minimal marketing.

After a slump in sales in 2016, the company has since undergone a strategic shift, opening hundreds of offline stores to sell its growing collection of smart devices and reclaiming a large part of its previous market share.

It has also expanded heavily into foreign markets, including India, where it is now the top smartphone vendor, according to research firm Canalys.

($1 = 6.3112 Chinese yuan)

(This version of the story corrects to say cap applies to after-tax profits, not total profits)

Reporting by Cate Cadell; Editing by Himani Sarkar

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