How to Bet on Xiaomi, China’s Growing Smartphone Maker

There ways to get in on Xiaomi's growth even as it remains privately held

Back in 2012, the entrepreneur-investor credited with the rapid success of Chinese smartphone maker Xiaomi said the company would wait at least five years before raising money through an IPO.

smartphone market share, xiaomi
Source: Xiaomi
Today, Xiaomi chief Lei Jun apparently hasn’t changed his mind. Why should he? The company is flush with private cash from Chinese, Russian and Singaporean equity funds and individuals.

And business is extremely good, as shipments of Xiaomi’s budget-priced handsets jumped 211% to more than 17 million units in the third quarter from the same period 2013, according to industry tracker IDC. The company’s home market of China accounted for most of the growth.

Despite Lei’s reluctance to go public, stock investors don’t have to sit on their hands while Xiaomi, now the world’s third-largest smartphone supplier by volume, tries to challenge No. 1 Samsung Electronics Ltd (SSNLF) and No. 2 Apple Inc. (AAPL). There are several ways to cultivate opportunities tied to the success of Xiaomi, whose name means “millet.”

Investors who are Chinese citizens can buy stock Janus (Dongguan) Precision Components Co. Ltd., a smartphone components supplier and assembler that does a lot of work for Xiaomi.

Janus shares have gained nearly 45% so far this year on the Shenzhen Stock Exchange, which is closed to non-Chinese retail investors. The company operates labor-intensive plants near Hong Kong that do business with Samsung, Huawei Technology Co Ltd and other smartphone makers.

A western investor-accessible electronics supplier to Xiaomi is Qualcomm Inc. (QCOM), which makes processors for its smartphones and whose venture-capital affiliate has invested in the Chinese company. A note of caution — the Chinese government is currently investigating Qualcomm for alleged anti-trust law violations.

Xiaomi also buys parts from Japan’s Sony Corp (SNE) and Sharp Corporation (ADR) (SHCAY).

Another way to back the smartphone maker is by holding New York-listed shares in Chinese Internet companies with which it has recently signed content-supply agreements. These include online video provider Youku Tudou Inc (ADR) (YOKU) and a video division of search engine Baidu Inc (ADR) (BIDU).

Xiaomi recently announced major investments in these content suppliers. Xiaomi needs video and other content providers because its phones rely on custom software and apps unique to China, where the Chinese government blocks a variety of western content providers include Youtube, LLC, Facebook Inc (FB) and Instagram.

The company is also getting into online banking and financing via a tie-up announced in February with the Bank of Beijing Co., Ltd. The bank is listed on the Shanghai exchange and its shares are accessible to non-Chinese retail investors with broker accounts in Hong Kong through the Shanghai-Hong Kong Stock Connect program, which began November 17.

While growing overseas is clearly a goal for Xiaomi, the company for now relies heavily on the Chinese market. But that’s certainly not a drawback: On the Nov. 11 shopping holiday in China known as Single’s Day, the company reportedly sold 1.16 million phones worth $250 million.

Also working in the company’s favor is Lei’s close relationship to the Chinese government and the Communist Party. A resident of Beijing, he was appointed in 2012 to serve with the Beijing People’s Congress. Last year, he was promoted to the National People’s Congress.

Lei said two years ago that a stock market listing was off the table just after announcing that he’d obtained $216 million from private sources, raising the company’s value at that time to $4 billion. He has yet to update the company’s value, but it’s surely worth more and likely headed higher.

As of this writing, Eric Johnson did not hold a position in any of the aforementioned securities.

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