On Tuesday, the Chinese smartphone maker Xiaomi Corp declared 12 billion Hong Kong dollars or $1.53 billion worth of share on its buyback plan. This is in a reversal of its cash-management strategy that is meant on increasing its floundering stock.
Xiaomi shares replied to the news of the buyback. This has been the biggest increase by nearly 7%.
Just last week, the company dismissed an already delayed plan. It is to offer equity in China, a move intended at attracting mainland investors hungry to buy into global companies.
The company also indicated it had enough money and would focus on business development.
Meanwhile, shares of Xiaomi, which listed in Hong Kong last year, have declined nearly a third of their value this year. Now, they are at half of their initial public offering price.
The prices were affected by the company’s abruptly slowing growth and increased competition.
Moreover, the stock has also been hit by losses at the stock market of Hong Kong. It has dropped after the June massive anti-government protests started in the city.
Companies on the city’s exchange have mutually drained $152 billion in value since June.
An analyst Dan Baker, Morningstar said, “I think it should give investors more confidence to buy the stock because it shows how confident management is in the sustainable cash-generating capabilities of the company,” as referring to the buyback.
In addition, Baker indicated that the plan to offer shares in the mainland was expected at getting a higher valuation in the Chinese market than it was about raising funds.
He also noted that the buyback declaration shows the company has enough cash.
Positive Cashflows of Xiaomi
As of June 30, 2019, Xiaomi had cash and cash equivalents of 34.9 billion yuan ($4.92 billion). Meanwhile, total borrowings were at 13.8 billion yuan.
The company produced a positive cash flow of roughly 11 billion yuan in the June quarter.
In a stock exchange filing, Xiaomi stated, “The board believes that a share repurchase in the present conditions will demonstrate the company’s confidence in its business outlook and prospects.”
The current financial resources of Xiaomi will enable to implement the repurchase while maintaining a stable financial position.
Growth at the Beijing-based company has decelerated sharply. This is after the global smartphone market has fallen off, and local competition has improved.
In the April-June quarter, Xiaomi’s market share in China weakened by a fifth. On the flip side, the smartphone giant Huawei Technologies grew by 31% according to a research firm.
Xiaomi’s efforts to push into higher-margin internet services and to balance razor-thin margins on its smartphones also have disappointed investors. This is after it has resisted squeezing more money out of its growing number of users.
Meanwhile, its cheap smartphones have stayed popular among Indian consumer. These people are the ones who are buying more phones. It is to the reason for wanting to have easier access to data.
The company is also set to promote a consumer lending business in the country soon. But now, it faces data privacy concerns and competition from U.S. tech giants.
On Tuesday, Xiaomi shares soared as much as 6.8% to HK$8.92.