As early as April 2018, LEI Jun, the founder and CEO of Xiaomi, had already made plain his support for Beijing’s Chinese Depository Receipts (CDR) policy to the media, calling it ‘’an excellent idea and a great policy innovation’’.
Expectedly, just a week after the China Securities Regulatory Commission (CSRC) announced the nine new regulations concerning CDR and its plan to open CDR applications as early as the 7th of June 2018, Xiaomi filed its first prospectus to launch CDR in the middle kingdom by the second week of June.
An updated prospectus later that week also revealed Xiaomi’s intention to raise approximately $5.3 – $6 billion (7% of the enlarged share capital) via the issue of CDR.
However, in the wee hours of this Tuesday morning, Xiaomi suddenly announced on its official account on Weibo to put its CDR fundraising on hold, until at least after its listing at HKEX.
CSRC responded by canceling the scheduled appointment and has shelved Xiaomi’s earlier CDR application.
No specific reason or timeline for a possible reschedule was given by CSRC.
This abrupt announcement effectively stalls the momentum that Beijing hopes to create with the swift finalization of its first CDR issue – a new financial product aimed at allowing Chinese investors access to China’s technology giants.
Interestingly, people close to the matter did comment that the dispute between Xiaomi and the regulators over Xiaomi’s CDR valuation probably led to the unexpected delay.
The valuation dilemma
Following the announcement of delaying its CDR issuance, Reuters reported that Xiaomi cut its valuation to between US$ 55 billion and $70 billion, significantly lower than the previously hyped up to 100 billion.
Xiaomi’s valuation was in the spotlight ever since the company’s plan to go public was revealed, it was first bloated to a whopping 100 billion, making its IPO potentially the largest since Alibaba’s public offering in 2014.
However, there was never an accurate valuation for the world’s fourth largest smartphone maker by shipments.
Based on different valuation methods, the Beijing-based company has varied valuation.
For instance, there is an unspoken rule of valuing a new listed company at 23 times of its P/E, in English, market cap for a new listee usually stands at 23 times of its net income from a year earlier. In Xiaomi’s case, the company recorded adjusted net income of RMB 3.945 billion in 2017, pegging its CDR IPO valuation at RMB 90.7 billion yuan, or US$ 14 billion.
While previous media reports all expect its CDR valuation to be between US$ 5.3 and $ 6 billion in accordance with the CDR portion accounting for no less than 7% of enlarged share capital principle.
And a valuation dilemma is not Xiaomi’s only concern on its journey to mainland listing.
What is Xiaomi exactly?
Xiaomi claims to be an internet services provider.
Yet, as of now, Xiaomi’s key driver of revenue is still from the sale of its smartphones, accounting for 70% of total revenue in 2017.
Internet services in contrast only add up to 9% of total revenue last year.
CSRC also challenged Xiaomi’s self portrait in the regulator’s comments on Xiaomi’s application.
The other pertinent issue will be Xiaomi’s ‘ecological chain’. One example can be the smart home brand, Mijia, that was launched by Xiaomi back in March 2016. There needs to be more concrete understanding of the relationship they have with Xiaomi, especially when other Chinese tech giants are also involved in such collaborations.
Most importantly, as this is China’s pilot project, there is a huge responsibility to ensure that investors are protected, while startups like Xiaomi get access to public funds to grow further.
Also, having a marred history where China stop raising A-shares as huge losses were borne by small and medium investors in the past, the regulators will be more cautious this time. Furthermore, this implies too that China’s old valuation method is not applicable to present day modern economies. There is no past precedence case to follow as Xiaomi is the first.
Nonetheless, Xiaomi is likely to continue with its IPO plan with the Hong Kong Exchange.
Editor: Ben Jiang