SMARTPHONES: Xiaomi, LeTV Stars Fade Further

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Bottom line: Xiaomi’s newest product launch focused on cheap smartphones and LeTV’s scrapping of an IPO for its film-making unit reflect fading prospects for these former superstars due to stiff competition.

Xiaomi rolls out more bargain phones

Former Chinese superstars Xiaomi and LeTV (Shenzhen: 300104) are in the headlines with new setbacks, reflecting the meteoric rises and equally fast falls that China is producing in its own version of the dot-com bubble. But this bubble has distinctly Chinese characteristics, and is coming in a more mature Internet where rampant competition and copycatting make it very difficult to make profits.

The first headline has Xiaomi rolling out 3 of its newest smartphones that are decidedly low-end, representing a big setback for the company’s drive to produce higher-end models that have fatter profit margins. The second headline has LeTV scrapping a plan to make a separate listing for its filmed entertainment unit, a year after hyping a new IPO that it hoped could mimic the meteoric rise in its own stock earlier this year.

In terms of trajectory, Xiaomi is moving distinctly downward after a meteoric rise that saw sales for its hip and trendy smartphones grow by triple-digit amounts in 2013 and 2014, before hitting a brick wall this year. Historians will probably say the company peaked at the start of this year, when it conducted a then eye-popping $1.1 billion fund raising that valued it at $45 billion just 5 years after its founding.

Since reaching that pinnacle, the company has been dogged by a steady string of bad news, including disappointing sales, abandonment of an online-only sales model responsible for its trendy image, and a series of scandals as it substituted low-cost parts in its smartphones to save money. Now the company seems to be cementing its place as a maker of cheap, low-end smartphones and tablet PCs with its latest launch of 3 models all costing less than 1,000 yuan, or about $160.  (English article; Chinese article)

Besides the low prices, the only noteworthy thing about these latest models is that one will be optimized for gamers through a new tie-up with The9 (Nasdaq: NCTY). I’ve been following China game companies for a while now, and can firmly say that The9 is hardly a first-tier company, and instead is more a has-been whose star faded long ago.

It’s obviously still too early to say if the same fate is in store for Xiaomi. But that kind of partner choice certainly doesn’t reflect a powerful company that can choose from among top Chinese game firms like NetEase (Nasdaq: NTES) or even solid second-tier players like Perfect World, as its product partners.

Fading Star at LeTV

Next there’s LeTV, whose fortunes have soared over the last year due to its first-comer status in an online video sector that is posting explosive growth and quickly challenging traditional TV. LeTV’s stock soared 6-fold between the end of last year and May of this year on excitement about its prospects, before crashing back to earth during a Chinese market correction that began in June.

When its star was rising the company announced a plan last December to separately list its filmed entertainment unit, as part of its bigger plans to create a broad-based entertainment ecosystem covering everything from hardware like TVs, smartphones and smart cars, to video content and its original services for delivering that content.

But apparently the market wasn’t ready for so many “baby LeTVs”, and now reports are saying the company will suspend its shares soon and inject the filmed entertainment unit into the current listed company. (Chinese article) Timing for the move is being driven by a one-year deadline for the separate IPO in the original announcement. But the bigger message is that LeTV probably did some marketing and got a chilly reception for the plan. That’s not too surprising, since investors are probably startiing to worry about LeTV’s future prospects due to competition from well-funded rivals like Baidu’s (Nasdaq: BIDU) iQiyi and aggressive TV operators like Shanghai Media Group (SMG).

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