Zepp or Huami? Wearable Device Maker in China-U.S. Identity Crisis

Company’s latest announcement of moving its user data to AWS reflects drive to separate itself from smartphone patron Xiaomi

Key points:

  • Zepp is taking further steps to distance itself from China and Xiaomi by announcing the movement of its data to Amazon Web Services
  • The company’s valuation is quite low following a recent selloff, possibly over concerns about the chances for success in its drive to diversify from Xiaomi

By Doug Young

As the clock ticks down on China and the U.S. to resolve their differences over the auditing of Chinese companies listed in New York, some of those companies may not be waiting for a bilateral solution.

That’s one interpretation of the latest move by smart wearable device maker Zepp Health Corp. (NYSE: ZEPP), which until recently was better known by its more Chinese-sounding name Huami.

Zepp, which derives a majority of its revenue from devices branded under the name of its smartphone partner Xiaomi (1810.HK), has just announced it has completed moving “the vast majority of its IT infrastructure” to Amazon Web Services (AWS). The data was previously housed on Xiaomi’s cloud servers, which were probably mostly in China.

The move to AWS is just the latest in a steady string of messages coming from this company trying to downplay its Chinese roots and assert its independence. A look at one of the company’s first announcements this year, dated Jan. 22, shows it was still calling itself by its old Huami name and using a Beijing dateline at that time.

Fast forward a month to Feb. 22 when the company announced it was dropping its very Chinese- sounding name for the more foreign-sounding Zepp Health, following an acquisition of the much smaller Zepp brand. Significantly, that announcement carried a double-dateline of Beijing and Cupertino California, which is where Zepp is based.

Fast forward again to the latest announcement, dated April 19, which is simply datelined Cupertino, without any mention of Beijing. The latest Zepp/Huami announcement also emphasizes AWS’ global reach, pointing out the Amazon unit can help to support Zepp’s own “business strategy in more than 70 countries.”

“Zepp Health continues to enter new markets and expand its global business,” said Zepp COO Mike Yeung. “Protecting the security and privacy of our users’ personal data is our top priority.”

Here it’s useful to step back and look at the bigger picture, which is what was referenced at the start of this latest look at Zepp. The U.S. and China are currently at loggerheads over the refusal by New York-listed Chinese companies to provide their audit working papers to the U.S. securities regulator when it suspects irregularities.

China forbids such sharing of information on the grounds that it might contain state secrets. The U.S. requires such sharing by all companies listed on its markets, both U.S.- and foreign-based. But for reasons that were never really made clear, it decided to make an exception to that rule for Chinese companies when they began seeking New York listings about two decades ago.

Now the U.S. is saying “enough,” especially after a massive accounting scandal involving Chinese coffee chain Luckin a year ago. The U.S. passed a law at the end of last year requiring New York-listed Chinese companies to follow the same rules as everyone else, or risk being de-listed. A three-year transition period was built into the law, meaning the U.S. and China have three years to reach an agreement on how information should be shared.

Breaking Away From Xiaomi

Perhaps anticipating a future where Chinese companies might not be so welcome on Wall Street, Zepp is seeking to distance itself from its home market and perhaps even taking steps to eventually change itself to a non-Chinese company completely.

Regardless of what it says, at least for the moment, it’s still quite Chinese. Most of its operations are in China, and the company has derived roughly 70% of its revenue from the China market for the last three years. The company also counts Xiaomi as its second largest shareholder with 14.2% of the company’s stock and 27.4% of its voting rights. 

Besides potentially being caught in the middle of the U.S.-China accounting clash, the other major issue for Zepp is information security, which was referenced in the AWS announcement. The company collects huge volumes of potentially sensitive information on its users, such as their vital signs and perhaps other information such as their locations and other daily habits.

The U.S. and other western countries increasingly worry that such information on their citizens could be handed over by Chinese companies to Beijing if Beijing requested that information. Storing such information outside China, and also making yourself a non-Chinese company, would provide a legal basis for such companies to say “no” to such requests.

Last week we looked at another company, autonomous truck technology firm TuSimple (NYSE: TSP), which made a New York IPO and appeared to be taking even bolder steps to position itself as a U.S. company for similar reasons. Two companies doing similar things doesn’t yet constitute a trend. But it could certainly indicate how things could move if Washington and Beijing don’t do more to show they are trying to resolve their differences.

Zepp clearly isn’t an international company just yet due to its heavy reliance on Xiaomi and the China market. But it does make a point of emphasizing its plans to diversify, saying in its latest annual report issued last week that it plans “to make the sale of self-branded products account for significant portion of our revenue in the future.” Its latest annual report mentions North America, Europe, Russia, Japan, South Korea and Southeast Asia as specific markets where it intends to try expansion.

Concerns about the company’s direction appear to be weighing on its valuation, which has plunged by about half from a brief peak in February just before it announced it was taking on the Zepp name. It currently trades at a very depressed price-to-earnings (PE) ratio of about 10, based on forecasts for this year. That’s just a third of the PE of 27 for Garmin, one of its few listed rivals.

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