Xiaomi seals jumbo IPO amid stormy markets

Unfazed by a massive retreat in global equities, Chinese smartphone maker prices the world’s largest IPO in nearly two years. Attention is now shifting to its debut next month.

Xiaomi, the world’s third largest unicorn, is set to become one of the highest-valued listed companies in Hong Kong after it raised HK$37 billion ($4.7 billion) from its highly-anticipated initial public offering on Friday.

The Chinese smartphone manufacturer is officially valued at $53 billion after it priced its 2.18 billion-share deal at HK$17, the lowest end of its HK$17 to HK$22 indicative price range.

At $53 billion, Xiaomi will be Hong Kong’s sixth-largest public company behind Tencent, China Mobile, AIA, Postal Savings Bank of China and CNOOC.

Beijing-based Xiaomi was able to collect sufficient demand for its mega IPO despite deteriorating market sentiment. Hong Kong’s benchmark Hang Seng Index lost 4% since Xiaomi’s IPO launch on June 21 and fell to its lowest point in nine months as fears of a China-US trade war continues to weigh on the market.

Still, in one sense, Xiaomi’s successful listing is a joy to behold for Hong Kong’s equity capital markets. In particular, the company admitted only $548 million worth of cornerstone investment (11.6% of total IPO size), a very rare case for cornerstone-heavy Hong Kong IPOs and suggests Xiaomi’s IPO has largely gone through an effective price discovery process.

Xiaomi’s decision to call off its mainland listing through issuing China Depositary Receipts (CDR) is a good news for the Hong Kong Stock Exchange since it will be the sole exchange for Xiaomi shares to be traded.

All eyes are now trained on how Xiaomi shares will perform on its debut on July 9.

For Xiaomi, a strong debut is needed to boost its valuation before it returns to China for the CDR issue. Many equity analysts believe the plan was postponed because Xiaomi was keen to ensure its CDRs trade well after a solid Hong Kong IPO.

For investors that have subscribed to Xiaomi’s IPO, the low-end pricing should provide some comfort since the chance of a big drop in value is considerably lower.

Still, some equity analysts argue that even at the low-end Xiaomi’s valuation is hugely inflated against its core business of smartphone manufacturing and sales, which has limited room for growth both in terms of volume and margin.

Throughout the IPO marketing process Xiaomi has repeatedly stressed its vision to become a leading internet company while shrugging off the image of a pure hardware manufacturer. It is diversifying its products into home appliances and hopes to generate more income from internet-of-things (IoT) applications in the future.

Investors that consider Xiaomi as an internet company would find the valuation less stretched than many believe. The company, while still making a loss last year, has priced its shares at 39 times estimated earnings this year and 23 times next year's figures, which are fairly in line with some of China's fastest-growing tech companies.

Xiaomi’s post-listing performance may also offer hints as to how public investors value companies with different voting rights. It is set to be the first company to list under Hong Kong Stock Exchange’s weighted voting right structure.

Another point of discussion is whether Xiaomi will be included as a constituent of Hong Kong’s Hang Seng Index in the future.

Despite being the sixth-largest listed company, Xiaomi will not be included in the blue-chip benchmark index as the index compiler said it will need more time to evaluate companies with different voting rights. Still, Xiaomi is eligible for the broader Hang Seng Composite Index.

Joint sponsors of Xiaomi’s IPO are Goldman Sachs, Morgan Stanley and CLSA.

Joint global coordinators are JP Morgan, Credit Suisse, Deutsche Bank, CICC, ABC International, BOC International, CCB International, CMB International and ICBC International.

Joint bookrunners are AMTD, Bank of America Merrill Lynch, BNP Paribas, China Galaxy International, China Merchants Securities, Citi, Futus Securities, Guotai Junan, HSBC, UBS and Zhongtai International.

¬ Haymarket Media Limited. All rights reserved.
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