Losing China Has Taken Wind Out of Xiaomi’s IPO Sails

Mainland investors starry-eyed about the listing of a homegrown tech company will be disappointed by Xiaomi Corp.’s decision to postpone the China half of its stock debut. You can expect moms and pops in Hong Kong to feel a bit deflated in turn. Without Chinese depositary receipts to stir interest, demand in the city will likely be more muted, too.

After nine rounds of pre-IPO funding, the Chinese smartphone maker is now the comeback kid, finally forging ahead with an initial share sale. Its Hong Kong IPO will
raise between
$4.7 billion and $6.1 billion before an over-allotment option is exercised, giving the company a possible valuation of $53.9 billion to $69.8 billion. With the
plan to sell
CDRs dropped for now, Xiaomi isn’t coming close to reaching that
once-mooted figure
of $100 billion.

Flying High

At $6.1 billion, Xiaomi stands to be the third-biggest IPO globally in the past three years

Source: Bloomberg

Xiaomi can’t be blamed for putting its CDR ambitions on hold.

The rules surrounding this novel way to list foreign-owned tech firms in China are new, and complex. Their advent at short notice threw a spanner in much of the work already done by bankers who were preparing for the float.

Xiaomi’s prospectus, months in the making, had a uniquely Hong Kong touch and couldn’t meet all the requirements of a Chinese regulator wary of giving retail investors access to an unprofitable tech giant. The China Securities Regulatory Commission had some 84 questions for Xiaomi, an indication of just how onerous its demands were.

Beijing also stipulates that listing candidates provide profit forecasts (while Hong Kong doesn’t), and bankers are legally liable for the veracity of any sales document.​​​

weak Chinese stock market
may also be making regulators hesitant about individuals cashing out of safer stocks to buy blue sky.

For Xiaomi, a $53.9 billion valuation may be enough. It certainly seems to be for the four co-founders who are selling down as part of the float, along with Morningside Group, an early venture capital investor. Those who participated in Xiaomi’s later rounds may not be so impressed, particularly since the company was last valued at $46 billion in 2014.

Round and Round and Round We Go

Xiaomi had nine funding rounds between 2010 and 2014

Source: Xiaomi IPO filing

Investors can at least rest assured this is a deal that’s garnered some state support, so while it may not soar, it won’t collapse either. Xiaomi has locked up firms including China Mobile Ltd. and China Poly Group Corp., as well as Qualcomm Inc., but the seven cornerstone investors, which will commit to holding their stock for 180 days, are only chipping in for about 10 percent of the total shares offered.

That’s a far cry from Postal Savings Bank of China Co., which in 2016 locked up 75 percent of its float.

Xiaomi co-founder and CEO Lei Jun, who will retain control via a weighted-voting rights structure, may take comfort in the
in Hong Kong dollar borrowing costs, a sign there’s investor appetite for margin loans to buy into the deal.

But would-be punters will also be
weighing misgivings
about Lei’s outsized sway over the company’s future, as well as the fact its internet services division still plays second fiddle to smartphones. They’ll also have to decide whether an IPO price range of 22.7 times to 29.3 times
2019 earnings — double Apple Inc.’s 14.9 times 12-month multiple — is worth it.

Of course, there is Xiaomi’s strong growth story in India, and the
that profit in 2019 will be almost triple 2017. Perhaps Lei can transform Xiaomi into an internet giant comparable to Alibaba Group Holding Ltd. or Tencent Holdings Ltd.

Whatever the case, it’s certain that losing Chinese investors has taken the wind out of Xiaomi’s IPO .

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:

Nisha Gopalan
at ngopalan3@bloomberg.net

To contact the editor responsible for this story:

Katrina Nicholas
at knicholas2@bloomberg.net

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