Xiaomi is a Chinese electronics company known for its affordable smartphones but also sells hundreds of other consumer products. While it has grown rapidly internationally, it still relies heavily on China for revenue. Xiaomi aims to diversify revenues through internet services like advertising, but sustaining high growth in users and revenues per user will be challenging outside of China against established competitors. The smartphone market is also maturing, which may slow Xiaomi's hardware sales growth over the long run.

1. Xiaomi – IPO Valuation
Market and Competitive Assessment
Cheenu Seshadri
June 2018
The analyses included here are the author’s own based on publicly available information and expresses his own opinions. He’s not
receiving compensation for it and neither does he have a business relationship with any company mentioned in this article.

2. June 2018 2©2018 by Three Horizon Advisors, Inc. All rights reserved.
Xiaomi is a sprawling company centered on smartphones, but also sells hundreds of
other products ranging from in-ear headphones to electric scooters
o Xiaomi currently has limited appeal, distribution and market share outside of China, India and Russia
Xiaomi: More Than a Hardware Company?
• 190M MIUI monthly active users as of March 2018
• 18 apps with 50M+ MAUs as of March 2018 including Mi App Store, Mi Browser, Mi Music and Mi Video
• Advertising services contributed 57% of service revenues in 2017
• Online gaming revenue via sale of virtual currency contributed an additional 25% of service revenues
• $1.52B of service revenues in 2017 equate to approx. $9 per monthly active user
• 100 million connected devices excluding smartphones and laptops as of March 2018
• IoT and lifestyle products contributed 20% of total revenues in 2017
• Laptops, smart TVs, AI speakers and smart routers designed in-house
• Other product categories (air purifiers, fitness band, robot vacuum cleaner etc.) produced in collaboration
with ~90 ecosystem partners
• High quality, affordable phones sporting proprietary MIUI OS built on Android kernel
• Contributed 70% of company revenues in 2017 at an average ASP of $135
• Majority of volumes shipped are entry level Redmi phones
• Phones designed in-house with Qualcomm chipsets
• Introduced Mi 5C in Q1 2017 with eight core SoC designed in-house; one of 4 smartphone vendors with
expertise to design proprietary smartphone SoCs
Sources: Xiaomi, GSMArena, x-rates.com, 3HA Research & Analysis

3. June 2018 3©2018 by Three Horizon Advisors, Inc. All rights reserved.
Investment bankers will employ multiple methods to triangulate to a rational value
o Xiaomi has chosen Morgan Stanley, Goldman Sachs and CLSA to lead IPO process
IPO Valuation: Methodologies
Notes: WACC is Weighted Average Cost of Capital
Sources: CFI, FT, Bloomberg
IPO valuation is more of an art than science - Despite extensive valuation work
performed by bankers, the issuer and bankers have a vested interest in underpricing it
Determine the present value of future cash flows, discounted using WACC*
Requires numerous assumptions, allows for scenario and sensitivity analysis
Sum of the parts of different businesses – E.g. hardware, IoT platform, services
Compare to similar businesses using various multiples - P/E, EV/EBITDA
Widely used, easy to calculate and update
Need to normalize for variations in maturity, geo focus, business mix etc.
Compare to other transacted businesses in the same part of the value chain
Including takeover premium makes this more comparable to stand-alone entity
However, hard to find multiple recent transactions that are truly comparable
Financial
Modeling
Comparable
Analysis
Precedent
Transaction
Analysis

4. June 2018 4©2018 by Three Horizon Advisors, Inc. All rights reserved.
Evaluate disparate business models with a sum-of-the-parts approach, identify
comparables for each business unit and normalize for key identifiable differences
Xiaomi Valuation Key Questions and Approach
• Identify key market segments and
determine medium-long term outlook for
these markets
• Find comparable companies and drivers of
valuation for each of the segments and/or
overall business
• Index Xiaomi’s business segments to
comparable businesses (e.g. revenue,
margin, growth rate, geographic exposure
etc.) to determine corresponding valuation
• Model valuation based on most likely
scenario, but also identify key sensitivity
levers and impact on valuation
High-level ApproachKey Questions
• What is the medium to long-term outlook for
the smartphone market?
• How is Xiaomi positioned in this market and
how defensible is their position?
• What is Xiaomi’s opportunity for smart
hardware?
• Is Xiaomi likely to succeed in offering an IoT
platform and how likely are they to create
significant revenue streams?
• What is the revenue and margin potential
for the services businesses?

5. June 2018 5©2018 by Three Horizon Advisors, Inc. All rights reserved.
Market Forces Vs. Flawless Execution
Xiaomi operates in a highly competitive market and most OEMs
including Xiaomi have stumbled if not outright exited the market
• The smartphone market is mature and for the first time ever,
declined in 2017. Increasing competitive intensity in a slow
growth market is likely to make sustained growth a challenge
• Despite relying on ecommerce, Xiaomi realizes weak margins
and will need to continue investing in new markets
• Consumer IoT is historically low margin, partly driven by excess
capacity and has minimal uptake of recurring revenue services
• The likelihood of creating a high ARPU services business in
International markets with well entrenched players is much lower
Xiaomi has had a dream run in 2017, breaking into new markets and
regaining it’s footing in the home market of China
• Flash sales and an ecommerce-centric model has allowed Xiaomi to
quickly enter new markets and gain mind and market share
• By adopting an open innovation model, Xiaomi has leveraged the
ecosystem around the high-tech hub of Shenzhen and launched
100’s of IoT / Lifestyle products that would ordinarily not be possible
• Restricted access or outright censorship of Google and Apple
services in China has enabled Xiaomi to develop a thriving app store
and mobile advertising business
While there are many unknowns with the IPO process, market maturity and middling
profitability makes it challenging to support a high valuation

6. June 2018 6©2018 by Three Horizon Advisors, Inc. All rights reserved.
After a disappointing 2016, Xiaomi roared back to life in 2017 and nearly doubled
smartphone unit shipments and grew overall revenues by 67%
o Marked shift from historical dependence on online flash sales to offline sales and international expansion drove 2017 performance
Xiaomi Historical Performance
Notes: Operating margin adjusted for reported non-operating (e.g. investment) gains and losses
Revenue conversion done using EOY exchange rates, Service revenue per MAU calculated using annual revenues and year-end MAU counts
Sources: Xiaomi, x-rates.com, 3HA Research & Analysis
• International expansion
contributed to 50% of 2017
revenue growth
• 2017 unit and revenue growth
aided by:
o Retail expansion – 5.5x growth
in Mi Home retail stores in China
(331 at YE 2017 vs. 51 at YE
2016)
o Distribution to support offline
expansion with distributor count
growing 270% YoY to 1,100+
• Smartphone, IoT and lifestyle
products had poor gross margins
of 8-9%, while services had
60% gross margins in 2017
• Investment gains contributed
approx. $1B in 2017 reported
operating profits
Key Observations
China
(% of Total)
94% 87% 72%
Gross
Margin
4.0% 10.6% 13.2%
Operating
Margin*
-2.3% 1.7% 4.8%
Smartphone
ASP
$124 $127 $135
Service Rev.
/ MAU**
$4.5 $7.0 $8.9
Xiaomi Revenue and Growth Rates ($B, %)
$10.29 B $9.85 B
$17.62 B
2015 2016 2017
Smartphones IoT & Lifestyle Products Internet Services
CAGR
(’15 – ’17)
31%
75%
64%
22%

7. June 2018 7©2018 by Three Horizon Advisors, Inc. All rights reserved.
Xiaomi has raised approx. $1.5B in equity and $2B in debt financing, the latest of which
was in July 2017
Xiaomi Valuation History
Source: Xiaomi, Crunchbase, Venturebeat
-10
0
10
20
30
40
50
60
70
Apr-10 Aug-11 Dec-12 May-14 Sep-15 Feb-17 Jun-18
Valuation($B)
2010 2012 20182014 2016
Dec 2010
$41M equity at $1B
valuation; 8 months
after founding
Dec 2011
$90M equity at $2B
valuation
Jun 2012
$216M equity at
$4B valuation
$1B 2012 revenue
Aug 2013
Equity at $10B
valuation
Oct 2014
$1B Debt financing
Dec 2014
$1.1B equity at
$43.9B valuation
$10B 2014 revenue
Jul 2017
$1B Debt financing
?
$1B Financing
Xiaomi Equity Raises and Corresponding Valuations ($B)

8. June 2018 8©2018 by Three Horizon Advisors, Inc. All rights reserved.
Smartphone Market Outlook
Note: Developed markets included US, W Europe, Japan, Korea, Canada and Australia
Sources: IDC, Statista, Pew Research, Kantar Worldpanel ComTech, 3HA Research & Analysis
With high smartphone penetration across developed markets and China, worldwide
shipments expected to grow sub 3% through 2022 driven by emerging markets
o Steadily declining ASPs driven by affordable phone sales in emerging markets will continue to pressure revenues going forward
CAGR
(’15 – ’17)
2.8%
6.0%
-0.4%
0.6%
Worldwide Smartphone Shipment Projection (Millions)
1,462 1,493 1,540
1,591
1,640 1,679
2017 2018 2019 2020 2021 2022
Developed Markets Mainland China Other Emerging Markets
Most major markets have high smartphone penetration
(2017)
Replacement cycles are lengthening
Smartphone ASPs continue to decline steadily
68
22
77
27
54 59 59
China India USA Indonesia Brazil Japan Russia
Top-7 markets in declining shipment volumes
$200
$250
$300
$350
2011 2012 2013 2014 2015 2016 2017
-28%
15
20
25
2013 2014 2015 2016 2017
USA China EU5
Xiaomi’s international opportunity lies mostly in emerging
markets of India, Indonesia and sub-Saharan Africa where
smartphone penetration is low and iOS and Google
services have not gained significant traction and loyalty

9. June 2018 9©2018 by Three Horizon Advisors, Inc. All rights reserved.
Smartphone Market Profit Pools
Source: IDC, Strategy Analytics, Canaccord Genuity, 3HA Research & Analysis
Primarily due to 3X+ industry ASP, Apple dominates revenue and profit pools
o Historically, no vendor other than Apple and Samsung have consistently generated profits from smartphones
14.7%
39.0%
79.0%
Unit Share Rev Share Profit Pool Share
However, due to ASP premium vs. other vendors, Apple
consistently garners ~40% share of revenues and 75%+
share of operating margins
2015 2016 2017
iPhone
Shipments (M)
231.5 215.4 215.8
Market Share 16.1% 14.6% 14.7%
iPhone ASP $672 $647 $688
iPhone
Revenues ($B)
155.5 139.4 148.5
Apple’s share of global unit shipments has remained steady
at approx. 15%
105% 105% 106%
99%
97%
2013 2014 2015 2016 2017
Apple and Samsung dominate the global smartphone profit
pool and often exceed the industry’s profit pool implying
every other smartphone company has been losing money or
operating at a breakeven level
Longer-term Xiaomi is unlikely to derive significant
margins from device sales alone
2017 Calendar Year

10. June 2018 10©2018 by Three Horizon Advisors, Inc. All rights reserved.
IoT market expected to dwarf smartphone industry revenues, but most use cases are
industry focused and other than China, do not play to Xiaomi’s geographic strengths
IoT Market Evolution
Source: IDC, iResearch, 3HA Research & Analysis
Manufacturing
Transportation
Utility
Consumer
Cross-Industry
Other
Hardware
Services
Software
Connectivity
China
Japan
Other Asia-Pac
N America
EMEA
Industry Spend Category Region
772.5 772.5 772.5
Worldwide 2018 IoT Revenues ($B)
• Consumer IoT is 4th largest
industry segment and
expected to grow fastest at
21% CAGR through 2021
• Key consumer use cases
include home automation,
security, and smart
appliances
• Hardware is largest segment
with key spends on modules
and sensors as well as
infrastructure and security
• Service is 2nd largest and is
expected to grow faster and
rival hardware in total spend
• Application software,
analytics software, IoT
platforms, and security
software to grow fastest
• China is single largest country
but spend driven by
manufacturing, utilities, and
government
• U.S expected to have largest
consumer segment in the
near-term
• Consumer IoT revenues till date largely
driven by hardware
o Minimal uptake of recurring revenue
services within consumer segment
o Key sub-segments include smart home
devices and wearables
• Hardware market is highly fragmented
o 1000’s of SKUs and product categories
drive extreme operational complexity
o Top-5 vendors combined have less
than 5% installed base share globally
• Xiaomi offers 100’s of products
primarily designed by ecosystem
partners
o Key segments include information and
entertainment, health and fitness, home
automation, home security and safety
Consumer IoT Takeaways

11. June 2018 11©2018 by Three Horizon Advisors, Inc. All rights reserved.
Internet Services Opportunity
Internet services is a $1.5T sector globally and expected to grow at 11% YoY through
2022 to $2.6T
o Apple and Google app store and services are well entrenched in developed markets
o Revenue per active user beyond mobile connectivity in large emerging markets of India and Indonesia is likely very small
Note: mi.com, miui.com and xiaomi.cn rank 55, 70 and 242 in internet traffic in China during May 2018 per iResearch
Source: iResearch, 3HA Research & Analysis
1,541
1,823
2,012
2,209
2,408
2,601
2017 2018 2019 2020 2021 2022
Internet Retail Online Advertising Online Gaming Internet Finance App Store Other
CAGR
(’17 – ’22)
11.0%
16.5%
17.1%
12.4%
18.5%
7.7%
8.4%
Worldwide 2018 Internet Services Revenues ($B)
Prospect Rationale
Alibaba (Taobao, Tmall and
Alibaba.com) and JD.com
dominate C2C, B2C and B2B
retail online and on mobile in
China; other major markets
also have dominant
eCommerce players
Online advertising indexed to
traffic; Xiaomi not a top-50*
website; in-app, home-screen
ad opportunities
Primarily rev share
China mobile payment leader,
Alipay and Wechat dominate
Rev share indexed to MAUs

12. June 2018 12©2018 by Three Horizon Advisors, Inc. All rights reserved.
Sustaining rapid MAU growth and simultaneous expansion of ARPU / MAU not likely
Internet Service Revenue Drivers
Sources: Apple, Xiaomi, China Telecom, Vedemosti, Telkom Indonesia, TIM Brazil, Facebook, 3HA Research & Analysis
112 23
135 36
171
33
55
2015 YE MAUs 2016
Smartphones
Sold
2016 YE MAUs 2017
Smartphones
Sold
2017 YE MAUs
41% Yield
39% Yield
$26.74
$8.78
$2.49 $1.84
40% 40%
26%
30%
4%
7%
24%
17%
$-
$10
$20
$30
$40
0%
10%
20%
30%
40%
50%
US & Canada Europe Asia-Pac RoW
Q4 '17 ARPU ARPU Growth ('15 - '17) MAU Growth ('15 - '17)
Country Monthly ARPU
China $9.1
India $2.8
USA $42.9
Indonesia $3.1
Brazil $6.4
Japan $28.3
Russia $4.8
• Xiaomi’s key international
markets include India,
Russia and Indonesia –
markets with 50-70% lower
mobile ARPU vs. China
• India, Indonesia and to an
extent Russia all have well
entrenched Western mobile
internet service providers
• Accelerated unit growth in
these emerging markets will
likely pressure service
revenue / MAU
International growth, esp. in emerging markets will
likely depress service revenue growth / MAU
For Facebook, despite low ARPUs in emerging markets,
high MAU growth has come with moderate ARPU growth
Xiaomi realizes significantly lower MAU yield on
device shipments vs. Apple
1,000 300
1,300255.10
2015 YE Active Base 2016-2017 Units
Shipped
2017 YE Active Base
54% Yield
[iPhone, iPad, Mac]
Likely shorter device
lifecycle & greater
share being sold into
existing base of users

13. June 2018 13©2018 by Three Horizon Advisors, Inc. All rights reserved.
Xiaomi’s business model most closely resembles Apple’s
o Both sell smartphones, offer a range of connected devices (tablets, laptops, wearables) and derive meaningful revenues from services
Xiaomi Vs. Apple (2017 Comparison)
OverallFinancials
Revenue ($B)
‘16 – ’17 Revenue Growth
Gross Margin
Operating Margin*
Smartphones
Units Shipped (M)
ASP
Other
H/W
Revenue ($B)
Services
Revenue ($B)
Active Base – MAU (M)
Service Revenue / MAU**
2017 MAU Conversion***
Apple metrics for CY 2017, Operating margin adjusted for reported non-operating gains and losses, Service Revenue / MAU calculated using full year service revenue and end of year MAU count
MAU conversion is increase in MAU count per smartphone unit, Scale not uniform or comparable across metrics
Sources: Apple, Xiaomi, 3HA Research & Analysis
$17.6
67%
13.2%
4.8%
91
$135
$3.6
$1.5
171
$8.9
39%
$239.2
10%
36.9%
25.6%
216
$688
$59.4
$31.3
1,300
$24.1
58%
~14x
~2.5x
~5x
~8x
~3x
~21x
~16x
~5.5x
~3x
0.15x
Apple has 15-20x greater revenue scale and 3 – 5.5x greater profitability; Xiaomi expected to grow significantly faster,
but business model and regional skew likely to keep profits relatively depressed

14. June 2018 14©2018 by Three Horizon Advisors, Inc. All rights reserved.
Fewer units combined with weaker ASP and margins lead to lower Xiaomi valuation
o Smartphone unit share gains and margin expansion, accelerated IoT product revenue growth and MAU expansion in turn driving
services revenue growth lead to base case enterprise value of $25B
Enterprise Value Build-up (Based on 2019 Projections)
Xiaomi operating margin adjusted for reported non-operating gains and losses
Sources: Apple, Xiaomi, IDC, iResearch, Stock Analysis on Net, 3HA Research and Analysis
Smartphone 2019 Units: Base case – 123M; High – 174M
IoT Revenue Growth CAGR (‘17-’19): Base – 25%; High – 64%
Internet Services MAU (2019 YE): Base – 263M; High – 308M
$948.0B
878.2
56.7
13.1 2.0
0.6
9.4
25.0
3.5 3.5
3.5 3.5
1.2
1.2 1.2
3.6 3.6
Apple Enterprise
Value (6/26/18)
Revenue Marginality Equivalent
Xiaomi
Enterprise Value
Smartphone IoT and Lifestyle
Products
Internet Services Xiaomi
Enterprise Value
Base Case
High Case
$33.3B
Regional mix differences
included in smartphone
growth rate and service
rev / MAU assumptions

15. June 2018 15©2018 by Three Horizon Advisors, Inc. All rights reserved.
Author Bio
Cheenu Seshadri, Managing Director
Cheenu advises PE and corporate clients in the tech and telecom sectors. He draws on 18+ years of
consulting and industry experience, helping organizations achieve sustained revenue and market
share gains and top-quartile profitability. Cheenu focuses on new product development, market entry,
operations strategy, corporate turnarounds and strategic planning.
Cheenu’s experience includes Director & Partner at Altman Vilandrie & Co, a leading TMT focused
strategy consulting firm; Chief Strategy Officer and later COO at MTS, a greenfield wireless company
in India; VP of Strategy & Planning for Motorola's Mobility business; Case Team Leader with Bain &
Co., helping Fortune-500 clients with growth strategy and restructuring and Acterna (now Viavi
Solutions) in multiple roles including Manufacturing Manager.
Cheenu graduated with Honors from the University of Chicago, Booth School of Business and is a
member of the Beta Gamma Sigma Honor Society. He received a MS in Industrial Engineering from
Binghamton University and a Bachelor’s degree in Mechanical Engineering from the Indian Institute of
Technology, Madras.