HONG KONG (Nikkei Markets) -- Xiaomi investors hoping for a respite from the negative turn of events that has erased some 40% of the stock's value may be in for a long wait.
Weakening demand for smartphones could weigh on the Chinese company's earnings in the near term even if the selling pressure from existing shareholders subsides, analysts say.
Other risks such as the growing competition and the economic fallout from U.S.-China trade tensions have amplified concerns about Xiaomi, which has taken on giants such as Apple and Samsung with its affordable, feature-packed smartphones.
"It is hard to see any positive factors supporting Xiaomi's share price," Sinolink Securities wrote in a report Thursday.
The stock has lost more than 13% since January 4, the worst week in its short history, in a selloff driven by events preceding its HK$42.6-billion ($5.43 billion) initial public offering mid last year.
Between late 2010 and 2014, Xiaomi raised hundreds of millions of dollars through nine rounds of funding, some at a discount of more than 90% to its IPO price of HK$17 per share. The six-month lockup period that those early investors agreed to lapsed earlier this week.
Controlling shareholders led by Chairman Lei Jun have assured investors they would hold on to their shares for another year.
In an interview with Bloomberg TV, Lei shrugged off the slump in the stock, saying that next-generation wireless would boost demand for the company's smartphones and that the company would expand its presence in Europe while forgoing the U.S.
Still, concerns of further selling have lingered, pressuring the stock.
Xiaomi shares closed on Friday at HK$10.34, rising for the first time in four days.
The worries could not have come at a worse time for the Beijing-based company. Intense competition from homegrown peers such as Huawei and Oppo, expectations of consumers delaying purchases as they await 5G smartphones, and belt-tightening amid U.S.-China trade tensions have all cast a pall on its sales outlook.
Credit Suisse forecasts smartphone sales in China, a key market for the company, will likely decline by 7% to 50 million units this year. That, combined with a slowdown in the Chinese economy, is expected to cap Xiaomi's advertising business and limit users of its internet services.
While the company's internet-of-things business has been growing rapidly, the downside pressure in the economy could bring major challenges there, according to Sinolink Securities. The brokerage has slashed Xiaomi's price target to HK$9.82 from HK$15.49 and investment rating to neutral from overweight.
Several others have downgraded their forecasts for the company. This week, J.P. Morgan lowered its rating on Xiaomi to neutral from overweight and cut its price target to HK$10.50 from HK$18.00, citing the slowdown in China. Deutsche Bank has lowered the company's earnings estimates for the fourth quarter as well as 2019.
Jason Lee, vice president for stocks at Hong Kong consultancy Investment Strategy Institute, expects the stock to stabilize around HK$10 as some employees refrain from selling their shares after the recent correction.
Xiaomi this week also addressed strategy, saying it would promote its Redmi label of budget smartphones as an independent brand, strengthening its offerings across various price points.
The plan offers Xiaomi more flexibility, helping it to cater to various customers based on their needs and affordability, said Tony Cheung, an analyst at CASH Financial Services Group in Hong Kong.
"Xiaomi could lower its own risk when the economy is slowing down," he said.
--Carrie Chen and Amy Lam