How Xiaomi flop hangs over Asia's IPO market

Can China Tower Corp revive investors’ interest after Xiaomi disappoints?

Asia’s stock markets may be about to prove that it is not always good to throw out the old in favour of the new if China Tower Corp’s (CTC) initial public offering can gain the kind of investor traction that Xiaomi Corp’s did not.

The old economy company, which is roughly one third-owned by China’s three major telecom operators, began pre-marketing its Hong Kong flotation on Monday.

Investment bankers contacted by FinanceAsia say CTC is adopting a wait-and-see approach to volatile market conditions before deciding whether to formally launch. However, its highly visible cash flows make it the ideal listing candidate at a time when international investors are looking for a safe haven away from global trade wars and a slowing Chinese economy.

Xiaomi’s new economy flotation required a leap of faith about the growth potential of the company’s internet services business. By contrast, CTC’s revenues and operating margins are extremely predictable.

The group is also much easier to value since its controlling shareholders (and captive customers) have years of research produced by analysts behind them. One such analyst, Credit Suisse’s Colin McCallum, values CTC at Rmb321 billion ($48.49 billion), or 10.3 times 2019 forecast EV/Ebitda.

“CTC’s listing could create a valuation uplift for the out-of-favour China telco stocks, which trade at 2.2 times to 2.9 times 2019 EV/Ebitda,” he said.


Asian equity markets certainly need some kind of positive catalyst. Only two of the region’s 14 major country indices (ex-Japan) are still in positive territory so far this year – specifically, Taiwan’s TWSE and India’s Nifty. Foreign investors are net sellers year-to-date across every single country, with the exception of India, which is now teetering as well.

Until the beginning of June, Hong Kong’s stock market had still been holding out, but the US government’s June 15 announcement of 25% tariffs on $50 billion-worth of imports proved to be the final straw. Analysts say it is difficult to predict what will happen next.

UBS economist Tao Wang argues that it is impossible to second-guess when China and the US will reach any form of agreement since “there does not appear to be a clearly defied set of economic rationales or bottom line from the US side.”

It is particularly unfortunate that Hong Kong’s peak pipeline of equity capital market offerings started unfurling just as the Territory’s major stock market indices followed their Mainland peers downwards. As a result, Xiaomi’s IPO ended up being priced at the bottom end of its price range, raising HK$37 billion ($4.7 billion).

It not only represented a disappointing result for the issuer, which had originally hoped for a valuation double that, but was also a blow for the Hong Kong Stock Exchange given the deal was the first to take advantage of new rules covering technology and biotech companies.

Xiaomi is one of only a handful of Chinese companies including the BAT troika (Baidu, Alibaba and Tencent) with a track record seemingly matching the hype.

ECM bankers and investors had been anticipating the flotation for years, but in the end it was overshadowed by market conditions and Xiaomi’s botched attempt to become the first issuer of Chinese Depositary Receipts (CDRs). 

In short, it was a flop that does not reflect well on anyone involved.

So all eyes now turn to Xiaomi’s secondary market debut on July 9 with investors hoping for a better performance, given the precedent set by IPOs in June when only three out of the 10 largest deals traded up. Two of three worst performers were from the favoured biotech sector.


However, Chou Chong, head of Asia equities and portfolios at Ostrum Asset Management, remains positive about the potential for a turnaround in investor sentiment.

“The markets started the year in a really positive frame of mind about synchronised global growth,” he said. “As far as we’re concerned, a lot of the factors underpinning that are still in place.”

Chou acknowledges that it is anyone’s guess what will happen in the second half of the year, but he believes there is more “noise” than substance to trade tensions between China and the US.  “The tariffs haven’t actually been implemented yet, whereas the market is pricing in the worst outcome,” he told FinanceAsia.

The Singapore-based fund manager also notes that July will be a key month for Greater China since many Hong Kong-listed companies report interim rather than quarterly earnings. Ostrum is generally predicting about 10% to 15% earnings growth across Asia in 2018.

It is also looking for re-entry points particularly into some of last year’s new-economy IPOs, which have solid underlying businesses but whose share prices have fallen back over the past month or so.

Chou does not believe that equity markets have peaked. On the contrary, the global economy is entering the re-investment part of the business cycle.

“During the first quarter there were some supply chain hiccups across some industries,” he said. “So we’re now looking for signs that companies are re-investing.

“The first re-investment wave should come from the oil and gas industry given the recovery of the energy markets,” he continued. “This will then flow through into other industries, fuelling the next stage of the cycle."



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