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The Xiaomi IPO is a win for HK

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By John Loh
10 Jul 2018

Xiaomi Corp had an inauspicious start as a publicly-traded company when its shares sank on Monday. But the rapid rebound in its stock price showed that the critics were too quick to pass judgement.

It is not an exaggeration to say Xiaomi slumped out of the gate. The Chinese smartphone and appliances maker fell as much as 6% at the open on the Hong Kong Stock Exchange on Monday, even as Chinese markets bounced back from the exchange of tariff blows between China and the US. 

Xiaomi eventually closed down a disappointing 1.2% on its debut. Sweet dreams, and IPOs, were not made of this.

That first-day performance, as well as a clutch of unfavourable events during the IPO execution, gave those wanting reasons to be downbeat on Xiaomi a lot to play with.

Some ECM bankers said Xiaomi was too ambitious, having trumped up a $100bn valuation only a year ago. In addition, Xiaomi’s attempt to include a Chinese Depositary Share tranche also fell apart at the 11th hour due to disagreements with the regulator on valuations.

And those valuations, ranging from 22.7 to 29.3 times its forecast 2019 earnings, were certainly indulgent on the part of the issuer.

It was clear that not all investors could stomach the narrative that Xiaomi deserved a premium to Apple, or its identifying as an internet services firm rather than a hardware manufacturer, despite the latter making up the bulk of its sales. 

All those factors contributed to Xiaomi trimming its fundraising target to $6.1bn from $10bn, and then again to $4.7bn when its IPO was priced at the low end of the marketing range. Market volatility due to noise around the US-China trade war also did not help.

But the naysayers should take a cue from its 15% rally on the second day. That rebound was partly down to its inclusion in the Hang Seng Composite Index, and the passive money that follows. Xiaomi's inclusion was the fastest on record in Hong Kong and a move that will allow mainland investors to buy the shares later this month through the Stock Connect. 

With the daily Southbound trading quota increased to Rmb42bn in April, potential inflows of onshore money could boost Xiaomi's stock performance further.

Even without that bounce, there are a host of reasons why the IPO should be viewed as a triumph. For starters, the flotation, the world's biggest this year, was a landmark for the Hong Kong bourse.

But more importantly, Xiaomi is the first in a long line of weighted voting rights flotations that will enable a burgeoning generation of Chinese entrepreneurs to monetise their businesses in Hong Kong where they are better appreciated, instead of going to the US by default.

Xiaomi was also the right name to kick start the new listing regime that allows dual-class shareholding structures in the city. The stock exchange’s move is the biggest reform effort it has embarked on in decades, and as such should be inaugurated by a high profile issuer of Xiaomi’s ilk. It is now the biggest technology IPO globally in four years and the third most valuable listed smartphone maker behind Apple and Samsung.

Even if the issuer was not able to meet its initial $100bn valuation target, the listing still added $54bn to Hong Kong’s total market capitalisation — an impressive sum by any measure. Further, the umpteen conversations the company had to have around valuations, and the fact it had to temper its ambitions in the end, will ensure other issuers are more realistic.

As the recent boom in internet and biotechnology issuers lining up for Hong Kong IPOs indicates, the market has a lot to look forward to. But IPO-hopefuls should be thanking Xiaomi for paving the way.

By John Loh
10 Jul 2018