(Bloomberg) – The shares of Xiaomi Corp. rose in Hong Kong after a U.S. court prevented the Department of Defense from restricting American investment in the Chinese smartphone giant.
Consumer electronics maker shares rose up to 12% on Monday, the biggest intraday gain in almost a month. Under the Trump administration, the Department of Defense placed Xiaomi on a list of companies with alleged ties to the Chinese military, triggering financial restrictions that were due to take effect next week. American district judge Rudolph Contreras temporarily lifted the ban, supporting Xiaomi in a lawsuit that argued the measure was “arbitrary and capricious” and deprived the company of its rights to due process.
Contreras said Xiaomi would likely win a complete reversal of the ban as the dispute unfolded and issued an initial injunction to prevent the company from suffering “irreparable damage”. After the ban was announced, the smartphone maker faced the prospect of being removed from the list of U.S. stock exchanges and excluded from global benchmarks, eliminating up to $ 44 billion from its market value.
Read more: Xiaomi shares soar in Hong Kong after $ 1.3 billion buyback plan
What Bloomberg Intelligence says
Xiaomi could reverse the negative market sentiment with a temporary injunction against the US investment ban, along with its announced HK $ 10 billion repurchase plan. Despite improving fundamentals, the smartphone maker’s stock price has dropped 22.5% since the ban was announced on January 15. Xiaomi remains well positioned to continue capturing market share amid Huawei’s downturn and boost average prices and higher margins with the launch of 5G devices.
– Matthew Kanterman and Nathan Naidu, analysts
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Founded more than a decade ago by billionaire businessman Lei Jun, Xiaomi is the world’s third largest smartphone maker by volume. In the third quarter, it surpassed Apple Inc. in smartphone sales, according to IDC. The company attracted a number of American investors from Qualcomm Inc. to Vanguard Group and BlackRock Inc., according to data compiled by Bloomberg.
Xiaomi plans to continue to request that the court declare the labeling of its connection to the military illegal and permanently remove the designation, according to a company statement.
In November, former President Donald Trump signed an order preventing American investment in Chinese military-owned or controlled firms in an attempt to put pressure on Beijing over what the United States described as abusive business practices. The United States has also sought bans on popular Chinese-owned apps, such as WeChat and TikTok, citing national security threats.
Contreras dismissed those concerns in his decision on Friday. “The court is somewhat skeptical that important national security interests are really involved here,” he wrote. The Defense Department did not immediately return a request for comment Friday night.
Xiaomi’s decision could pave the way for more companies to challenge the restrictions of the Trump era, with non-state companies like Huawei Technologies Co. and Semiconductor Manufacturing International Corp. having a better chance of winning a similar process, according to Jefferies. SMIC’s shares rose up to 3.3% in Hong Kong on Monday.
“Xiaomi’s potential victory may challenge the Secretary of Defense’s discretion in classifying non-state companies in China as” Chinese Communist Military Companies, analysts including Edison Lee wrote in a note. “Xiaomi’s potential victory would likely increase the chances that many of Trump’s sanctions on Chinese companies will have to be reversed.”
The case is Xiaomi v. Department of Defense, 21-cv-280, US District Court, District of Columbia (Washington).
(Updates with analyst comments in the fourth and ninth paragraphs)
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