Xiaomi debut IPO shares trade below its offer price of HK$17

Xiaomi IPO debut fails to impress.

Image Credit To Xiaomi.

Chinese technology major Xiaomi, a manufacturer of smartphones and consumer electronics, saw its share price fall by 6% on its debut on the Hong Kong Exchange (HKEx), reflecting predictions that preferred stock could impact share price performance, before rebounding marginally to close at HK$16.80, still short of its HK$17 offer price on its first trading date, while the broader Hang Seng Index rose 1.32 per cent.

US-China trade tensions have seen Chinese investors become more cautious on equities markets, with the Shanghai Composite declining sharply while the Hang Seng Index, Hong Kong’s benchmark, saw a 5.8% decline this year.  

Xiaomi, which makes hardware and devices and is ranked as the fourth-largest smartphone manufacturer globally, sells its products through e-commerce and physical channels and offers services on the internet and has raised close to HK$23.97 billion ($3.05 billion), after accounting for its IPO fees and expenses, at a valuation of $54 billion. This falls short of the estimated $100 billion valuation it was seeking earlier this year.

While Xiaomi’s weak support from retail investors could be due to the conflicts over whether the firm should be valued as an Internet services or hardware firm, doubts have also been raised about its profitability, given it primarily sells hardware devices at razor-thin margins.

Its debut on public capital markets coincides with the U.S. slapping tariffs on Chinese goods last Friday. On another note, the company also needs to adopt a defensive position despite posting rapid smartphone shipment growth – It has emerged as the largest smartphone vendor in India and is now expanding into markets such as Russia and Spain – but has lost market share in China s to lower-cost rivals. And the global trend for smartphone shipment is sliding down.

With growing revenue and widening losses, the technology firm is now making more money from it portfolio investments – the firm arguably excels at corporate venturing, an effort to build up its hardware ecosystem – and it has seen gross margins expand due to economies of scale in its hardware business, while investment gains have boosted operating profitability.

Prior to its public float, Xiaomi had raised upwards of $3.4 billion in private funding, with its last investment being a $1 billion debt financing deal closed in July 2017 backed by Wing Lung Bank, NGP Capital, Morgan Stanley, Deutsche Bank and the Bank of China (Hong Kong).

Xiaomi is the first Chinese technology enterprise to list in Hong Kong following the implementation of dual-listing rules there. The poor performance of its day one may negatively impact the planned public floats of Chinese tech firms such as O2O major Meituan-Dianping and Ctrip-backed Tongcheng ELong, a large player in China’s OTA market. However, its IPO represents the largest technology share sale since the public float of the Alibaba Group in New York in 2014 which raised $25 billion.

Tensions rooted in the escalating US-China trade war have seen Chinese stocks declining, with the share prices of Chinese tech firms listed over the past year seeing a mean reduction of 20%; close to two-thirds of the 21 Chinese tech IPOs have seen their share prices fall below their offer price, despite better oversubscription rates compared to Xiaomi.

For instance, ZhongAn Online was 392 times subscribed at its IPO and has also seen a fall in its share price. Xiaomi, with millions of unprofitable shares at the start, incurs a greater concern amidst an already volatile market.

Hong Kong’s tech listing frenzy in Hong Kong has been on a downtrend since September 2017, with four of the five largest tech IPOs trading below their offer prices, with Yixin Group and Razer shares trading at more than 50% below their offer price.

Meanwhile, Bloomberg data indicates that of the 87 companies that have listed on the Hong Kong bourse this year, 53% traded below their offer prices in their first month of trading, while  according to Blo20 companies saw their shares fall below offer prices during their debut trade.

Mid-June saw Xiaomi delay plans to issue Chinese Depositary Receipts (CDRs) in Shanghai following demands from Chinese regulators to justify its positioning as an Internet services firm.

In an interview with the SCMP earlier this year, Xiaomi’s CEO Lei Jun explained: “I started Xiaomi after turning 40, and had figured out 90 per cent of the business model before starting the project. We created this business model that we call “tipping”, which is to sell our hardware at zero or low profit margin, but monetise our complementary services.”

Editor: Ben Jiang & Shiwen Yap