Kingsoft leverages close ties to Xiaomi

Entrepreneur Lei Jun rekindled Kingsoft's start-up culture and brought in smartphone powerhouse Xiaomi to further build up the software company's business.
Francis Ng, Kingsoft CFO
Francis Ng, Kingsoft CFO

Internet and software company Kingsoft isn't as well known as smartphone giant Xiaomi, but both Chinese companies count entrepreneur Lei Jun as their controlling shareholder and enjoy close relations as a result. 

Lei spent much of his early career at Kingsoft, where he started working as an engineer in 1992. He relinquished his role as the comapny's CEO in 2007 after taking the company public on the Hong Kong Stock Exchange.

Having achieved financial freedom, Lei left Kingsoft and went on to start Xiaomi in 2010. 

Today, he is the chairman and single largest shareholder of Kingsoft.

The close ties between the two companies have been a boon for Kingsoft, which derives enormous benefit from being part of Xiaomi's massive eco-system, which Lei is building up.

“There is a very strong relationship between Xiaomi and Kingsoft because Mr Lei controls both companies,” Francis Ng, CFO of Kingsoft told FinanceAsia in an interview.

For example, Xiaomi is an anchor customer for Kingsoft's cloud business, which gives Kingsoft the scale it needs. Kingsoft's cloud services have the largest daily data upload rates in China, according to Ng.

Ng is optimistic about the prospects for Kingsoft's cloud business and anticipates more companies will outsource their IT needs to third party providers. Large scale independent cloud service providers such as Amazon AWS have emerged globally and China is expected to follow the trend.

The relationship between Xiaomi and Kingsoft grew closer in January when Xiaomi acquired nearly 3% of Kingsoft from Tencent. The Chinese internet giant continues to hold a 9.9% stake in Xiaomi, making it the second largest shareholder after Lei, who owns 29.9% of Kingsoft.

Returning to Kingsoft as chairman in 2011, Lei sought to breathe new life into the company by recapturing the energy of start-up culture - which had become a casualty of growth.

He shut down non-core businesses and handpicked four key divisions to focus on; anti-virus software company Cheetah Mobile, spun off in a 2014 US listing, remained, as did the online games unit, cloud computing services division, and WPS, Kingsoft's version of Microsoft Office.

Crucially, he gave core management some ownership of the remaining divisions.

“What Mr Lei did was to try to bring in the startup company mode by restructuring the company to form four separate legal entities and make the core management team owners of the business,” said Ng.

Tech fever

Not surprisingly, Kingsoft and Xiaomi have a history of co-investing. In December last year, they teamed up with Singapore sovereign wealth fund Temasek Holdings to invest $296 million in Chinese data company 21Vianet.

Kingsoft holds roughly 11.6% of 21Vianet, which equates to a fifth of the voting power.

Following that transaction Kingsoft continues to eye acquisitions.

"We look for way to grow our business faster apart from organic growth," Ng told FinanceAsia.

The tech sector has been a hotbed of private capital-raising activity and Ng expects valuations to become pricier as money pours into the sector.

"TMT [Technology, media and telecommunications] is the hotest sector at the moment," said Ng. "Capital will go into the hot segment [and] the start-up or Series A/B fund raising [rounds] will become more expensive," he added. 

Late last year Xiaomi raised pre-IPO funding in the neighbourhood of $1 billion, valuing the company at roughly $46 billion and triggering speculation about the smartphone company's listing timetable.

Regarding a listing, Ng said Lei has indicated it is not an immediate goal for the company: "Mr Lei said that they are not in a hurry, but all of us expect it will be listed sooner or later."

Investor fervour over China's internet sector has prompted comparisons to the dotcom boom and bust of 2000. However, Ng is quick to differentiate the rallying spirit of the present with the dotcom blasts from the past.

"[The companies] are much more mature, you cannot compare [them] to the dotcom bubble, they are more solid.... They are revenue-generating not just ideas," said Ng.

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