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Here’s How You Can Be A Part Of Xiaomi’s Growth Story

I recently bought a new Xiaomi smartphone and I have to say, I am impressed. And it seems I am not the only one. Xiaomi Inc is a new smartphone brand owner and manufacturer that just opened shop four years ago in 2010. And within a few short years, Xiaomi is now the fifth largest global smartphone manufacturer and the second largest in China.

The chart below plots the global sales of Xiaomi’s smartphones over the past few years. I don’t think I’m too far off the mark to say that it would be a dream for most investors to be able to invest in such a fast growing company. Unfortunately, Xiaomi is privately owned, though there are still ways for investors to ride on the coat-tails of this explosive growth company without actually investing in it directly.

xiaomi growth

Source: Business Insider

That coat-tail comes in the form of turnkey contract manufacturer Hi-P International Ltd  (SGX: H17), which supplies components to Xiaomi. Given this relationship between the two firms, it seems that the contracts that Hi-P will receive would grow along with demand for Xiaomi’s smartphones. Excitement about Hi-P International’s potential can already be felt in the company’s share price to some extent; the firm’s shares have gained 18.8% year-to-date as compared to the 5% return achieved by Singapore’s market barometer, the Straits Times Index (SGX: ^ST).

The risks

But just because Hi-P International has links to the fast-growing Xiaomi does not mean that it comes without risks. For Hi-P International, achieving higher revenue does not necessarily lead to higher profits. In fact, the company has seen its net profit margin decline from 7% in 2010 to just 0.5% in 2013 despite seeing its revenue grow from S$958 million to S$1.26 billion. The margin situation has continued to deteriorate with Hi-P International clocking losses for the first nine months of 2014.

Another risk investors must be aware of is that the smartphone market is highly competitive and tastes can change in an instant. After all, Blackberry smartphones, which were all the range in the late 2000’s, had seen its popularity disintegrate in recent years. Hi-P International used to be a supplier for Blackberry too.

Foolish Summary

I think it’s great for Hi-P International that the company is a key supplier to Xiaomi due to the growth the latter has been experiencing. Investors in Singapore wanting to gain exposure to the Chinese smartphone manufacturer might also want to dig further into Hi-P International. But at the same time, there are also important risks investors have to be aware of, such as the company’s falling profit margins.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any companies mentioned above