1810.HK

Huami Corp. announces it will rebrand outside China to Zepp Health, a Silicon Valley company it acquired two years ago

Key takeaways:

  • Huami’s name change to Zepp reflects its desire to wean itself from its core relationship with Xiaomi.
  • The company’s strategy of small, global acquisitions, investments and partnerships has potential to help it reach its goal, though also contains risks if such tie-ups aren’t focused and well researched.

By Doug Young

Six years after its founding, Chinese smart wearable device maker Huami Corp. (Nasdaq: HMI) appears intent on moving out of the shadow of its longtime patron Xiaomi Corp. (HKEx: 1810).

That’s the very unsubtle message coming from Huami’s latest announcement last week, in which it asserted its independence from the much larger smartphone giant Xiaomi by announcing it would change its name to Zepp Health Corp. At the same time, Huami announced it would also ditch its older ticker symbol for the zippier ZEPP.

Anyone who wants to know more about Zepp can check out Huami’s 2018 announcement when it acquired the company for undisclosed terms. Based in San Jose at the heart of Silicon Valley, Zepp was founded in 2010 and makes sensors for wearable sports devices. Huami pointed to Zepp’s relatively long experience and its connections with well-established sports brands including HEAD Tennis and Yonex Badminton as the main drivers of its decision.

Perhaps just as significant in that announcement was a smaller mention that Huami was acquiring the core assets of another company called Physical Enterprises Inc., a maker of wearable fitness technology that was previously controlled by German sports giant Adidas. Taken with a string of other similar acquisition, partnership and investment announcements over the last year, the broader message seemss clear: Huami is in search of a new identity as it attempts to move out of Xiaomi’s shadow.

Huami’s Xiaomi connection is well known to many, and was a major selling point for Huami, whose own brand is called Amazfit, at the time of its 2018 IPO on the Nasdaq. Xiaomi was one of Huami’s earliest investors, and currently owns 14.5% of the company, according to Huami’s latest annual report. Xiaomi has numerous such investments in partner companies making devices and other products that are part of its interconnected ecosystem centered on its core smartphones.

Benefits in Membership

Being a member of such an ecosystem certainly has its benefits, as Huami was well aware at the beginning. That partnership, reflected through the “mi” at the end of Huami’s own name, meant that Xiaomi would actively promote Huami’s products and services, and sell Huami’s products in its online and offline stores.

But such reliance also carriers some burden, especially as a young company matures. That burden is most evident in Huami’s gross margin, which skidded by nearly five percentage points to 20.6% in last year’s third quarter from 25.2% a year earlier. “Gross margin was predominantly driven by lower margins on Xiaomi products compared to the year-ago quarter,” Huami said, reflecting the pressure it is probably feeling from Xiaomi to squeeze prices to the lowest levels possible.

Margins aside, the rest of Huami’s latest earnings report from last year’s third quarter looks relatively ho-hum, led by a respectable but certainly not eye-popping 20% year-on-year rise in revenue to 2.2 billion yuan ($340 million). Xiaomi actually expects its fourth-quarter revenue to be flat to down slightly from 2019, which isn’t a great sign.

Its profit was even less impressive, falling by more than half to 82 million yuan as spending on both operations and marketing grew at significantly faster rates than its revenue growth. The company did say it plans to rein in such spending, so we can probably expect to see its margins and profit recover somewhat this year, especially as life returns to more normal conditions and people start exercising again with the easing of the global pandemic.

Huami went public in 2018 at a price of $11 per American depositary share (ADS). With the exception of a brief spike in early 2019 the stock didn’t do much until recently. But it has rallied nearly 50% since the start of last December, perhaps on high expectations for its program to rein in spending and make some targeted acquisitions aimed at separating itself from Xiaomi.

The company currently trades at a price-to-earnings ratio of about 25. Peer Garmin Ltd. trades at a similar level, and other most other peers are either not publicly traded or are losing money. One of the best known money-losers, Fitbit, is currently being acquired by Google, which should be a good signal that at least somebody has confidence in the future of this group.

While Huami is making moves to declare its independence from Xiaomi, it’s clearly not taking any major chances just yet. Its agreement that gave it “most preferred partner” status with the smartphone giant expired last October, at which time Huami announced the pair had signed a new three-year extension to the deal. At the time Huami said Xiaomi products accounted for about a quarter of its total shipments.

To subscribe to Bamboo Works weekly newsletter, click here

Recent Articles

Founded in 2009, CMGE is a global game operator that listed in Hong Kong in 2019.

FAST NEWS: CMGE’s loss narrows on cost controls

The latest: Game operator CMGE Technology Group Ltd. (0302.HK) reported Wednesday its net loss narrowed 90.2% last year to 20.08 million yuan ($2.78 million). Looking up: The company’s expenses decreased by 28% to…

NEWS WRAP: Nayuki pours up first annual profit

The premium tea chain aims to expand through franchising to boost its growth amid intense competition  By Teri Yu  Premium tea seller Nayuki Holdings Ltd. (2150.HK) on Wednesday reported its first annual profit since…
Buoyed by bumper earnings, the biotech has announced a share placement to raise HK$1.17 billion to invest in developing its portfolio of anti-cancer drugs.

Akeso marks profit milestone with swift rights issue

Buoyed by bumper earnings, the biotech has announced a share placement to raise HK$1.17 billion to invest in developing its portfolio of anti-cancer drugs Key Takeaways: Akeso swung to an…