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Xiaomi makes debut in Hong Kong IPO amid US-China trade tensions

posted onJuly 9, 2018
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As markets have been roiled by the escalating trade tensions between the United States and China, pushing Hong Kong’s benchmark index to a nine-month low last week,  Xiaomi, the world’s fourth-largest smartphone maker, made a debut on the Hong Kong Stock Exchange today.

Media reports suggested that the Beijing-based company was hoping for a valuation of as much as $100 billion when the listing was announced earlier this year. In the end, Xiaomi had to settle for a market capitalization of about US$50 billion as it raised $4.7 billion from the IPO.

The stock opened down at HK$16.60,($2.12) according to Dow Jones,  lower than the HK$17 the public offer was priced at prior to listing, it quickly fell to HK$16 before closing at $16.80.

In a speech on Monday Xiaomi CEO and co-founder Lei Jun acknowledged the troubled market conditions. 

"At this critical moment in Sino-US trade relations, the global capital markets are in constant flux," he said at the Hong Kong stock exchange. "Although the macroeconomic conditions are far from ideal, we believe a great company can still rise to the challenge and distinguish itself," Lei added.

When Hong Kong stock exchange CEO Charles Li was asked if the low pricing of Xiaomi will weigh on upcoming IPOs, he said it was not up to the exchange to have a view: “The market is always open. It’s open to everybody...If you don’t like the price, you can stay away” Reuters quoted him as saying.

xiaomi's first day of trading

Hong Kong's new listing rules

In Hong Kong, a city where China’s investment restrictions do not apply to investors around the world wanting to buy shares there, so far this year, 137 companies have filed to list on the exchange, with 37 applications pending, according to Bloomberg data.

Xiaomi’s listing was the first under the city’s new rules allowing firms with controversial dual-class share structures (DCS) to list, as part of efforts to attract more hot tech initial public offerings. 

A DCS structure, favoured by technology stocks and high-valued tech startups known as unicorns, permits the issuing of different classes of shares with differential voting rights and dividend payment arrangements by the same company.

Such a structure allows entrepreneurs to maintain control of their companies even after successive rounds of financing. It is often considered by academics as an anti-takeover device. On the other hand, opponents say it breaches the "one share, one vote" principle and leaves minority shareholders (with less voting power) vulnerable.  

“Without the innovation of the Hong Kong capital markets, it would be difficult for us to have a chance to list publicly in Hong Kong,” Lei said,“I believe that in the future, there will be more high-quality internet companies coming to Hong Kong.” 

xiaomi's first day of trading

Analysts concerns: Over-valuation

Apart from the current market volatility affecting new IPO listings, analysts said Xiaomi's weak debut was due to valuation concerns.

“The core reason for Xiaomi’s stock price falls on its first day of trading was the over-valuation,” Shen Meng, director of investment bank Chanson & Co. told The Financial Times. “But the immediate stimulus was the stock exchange allowing short selling” he added.

"The share was priced at a very high valuation multiple, substantially higher than its global peers. Even though Xiaomi remained to be a very good story, I think the market is at a stage where you have to prove yourself first before the market can give you a good valuation," Hao Hong, head of research at BOCOM International, told CNBC. 

“I think it is hard for investors to buy the valuation. The company has to transform to justify the valuation and there is too much uncertainty about whether it can do that,” Paul Gillis, who teaches accounting at Peking University in Beijing, told Quartz. 

Still, Xiaomi's IPO was the largest for a Chinese company since Alibaba's, which occurred in 2014.

An internet company with IoT at its core

Founded in 2010, Xiaomi is an internet company with smartphones and smart hardware connected by an Internet of Things platform at its core. Most of its sales are in China but the company overtook Samsung to become the number one smartphone seller in India earlier this year, according to research firm IDC.

In 2014, it actually managed to break the Guinness world record by selling 2.1 million smartphones in just one day. In 2015, Xiaomi was ranked number 2 on the list of 50 Smartest Companies by MIT Technology Review.

Xiaomi has 15,000 employees in China, India, Malaysia, Singapore and is expanding to other countries such as Indonesia, the Philippines, and South Africa. It is also pushing into European markets including Spain and Russia.

The company had revenues of US$18 billion (2017) while Lei Jun has an estimated net worth of US$6.8 billion and was China's 24th richest person in 2017.

UPDATE 10/07/2018 18:09

Xiaomi shares surged over 13 percent on the company's second day of trade after its initial public offering.The share price rise came after news that the Beijing-based company will be included in the Hang Seng Index which includes Tencent and China Mobile.