Xiaomi’s $6.1b stock sale 8.5 times oversubscribed despite mixed investor sentiments

Xiaomi’s lackluster debut IPO stocks sale.

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In spite of all the previous hype, Chinese smartphone maker Xiaomi’s debut IPO stocks sale fails to impress.

Investors only oversubscribed its US$6.1 billion stock sales by a mere 8.5 times, according to the South China Morning Post, even as the company inches past the last hurdle before its official listing at the Hong Kong bourse in July this year.

Earlier on, there were widespread mixed sentiments among investors.

Hong Kong retail investors, who were commonly known as ‘punters’ expecting to make a quick buck over IPOs, registered cold responses in Xiaomi’s ‘order-taking’. They were increasingly skeptical over the lofty valuations of the Chinese smartphone maker that claims to be an internet company.

Edmond Huk, the chief executive of Bright Smart Securities, commented that ‘The initial reception by retail investors was ‘worse than for Ping An Good Doctor, not to mention the record-breaking rush for China Literature.’

At his firm, only 3% of its reserved quota was subscribed as of Monday evening, a sharp contrast with the oversubscription of shares with the likes of ZhongAn Online Property & Casualty Insurance and China Literature.

Specifically, the former had an oversubscription rate of 309 times, with the latter having a whopping rate of 625 times as opposed to the one-of-the-lowest 8.5 times that Xiaomi received.

China’s rich, on the other hand, were quick to bet on Xiaomi. For example, both Chinese business magnate and investor, Jack Ma, and Tencent Chairman Pony Ma consented to take stakes in Xiaomi, according to people familiar with the matter.

Contrary to the dismal reception in Hong Kong, Hong Kong’s prominent Li Ka-shing also supported Xiaomi via the Li Ka Shing Foundation – which might turn the tides to Xiaomi’s favor on the official listing day.

This grim outlook for Xiaomi in the public markets seemed to persist, especially with this negative report coming right after the already ‘lowered’ valuation of Xiaomi in its updated prospectus that we reported last week.

Moreover, the company’s abrupt decision to stall its CDR listing in the middle kingdom last Tuesday might have already sounded alarming bells over the company’s sky-high valuations.

The mixed views among investors over Xiaomi’s main business and the appropriate ‘right value’ for such a company – was probably triggered by an apparent contradiction.

LEI Jun, the founder and CEO of Xiaomi, once claimed that Xiaomi was an Internet services company that makes money via online games and advertisements.

Xiaomi’s financials, however, tell a different story.

Xiaomi’s internet service revenue only grew insignificantly from 5% of total revenue to a mere 9% in Q1 2018, while its smartphone sales account for close to an eye-popping 70% of its revenue in the same quarter – demonstrating the company’s feeble attempt at transforming into an internet service company.

This conundrum was further enhanced during a roadshow when institutional investors actually grew skeptical of the sky-high valuations, forcing Xiaomi to rely on its largest business partners – Xiaomi’s chip supplier, Qualcomm and Xiaomi’s network provider, China Mobile.

In addition to the skeptics, the push to get listed this year might not be that ‘timely’ after all mainly due to two possible reasons.

First, the persistent ‘dry spell’ among Chinese tech unicorns rush to the public markets have been going on for awhile – with two-thirds of Chinese tech unicorns experiencing a drop in their share price after their IPO, according to Bloomberg.

Second, with rising interbank interest rates, the Hong Kong market is effectively drying up – not ‘optimal’ for massive IPOs. Furthermore, retail investors in the British colony are known to be ‘punters’, hence the ‘short-term negativity’ might be magnified instead.

In any case, Xiaomi has already booked its place to list on Hong Kong, as we speak.

Nevertheless, Xiaomi’s opening and closing share price on its first official listing day would remain pivotal –not just for investors- but also for both the Hong Kong bourse and the global capital markets, especially with Singapore Exchange hopping onto the dual-listing bandwagon to compete with other bourses.

Editor: Ben Jiang