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Xiaomi was founded by Lei Jun, who is seen holding a new virtual reality headset during a product launch in Shenzhen on May 31. Photo: Handout

Huge blow for Beijing’s plan to lure tech giants to list in China after Xiaomi pulls back

Smartphone maker’s cornerstone investors for Hong Kong IPO close to being finalised

Xiaomi

Beijing’s pet plan to lure back the country’s best tech firms to list in China faced its first major setback as Xiaomi, the company hand-picked to test the project, postponed its plans to raise funds from the mainland.

“We will list in Hong Kong first, and later look for an opportunity to list the shares via Chinese depositary receipts (CDRs) in China,” the world’s fourth-largest smartphone maker said in the announcement dated June 18, without stating how long it plans to delay the listing of CDRs.

The CDR is a financial instrument introduced by Beijing in March to bring back overseas incorporated tech leaders.

Branded as a counterpart of the American depositary receipts, CDRs will enable mainland investors, who are barred from freely moving their money offshore, to directly trade receipts underlying the basic securities issued overseas by China’s tech firms.

Xiaomi was expected to be the first Chinese technology firm to float CDRs in early July, eyeing US$5 billion in proceeds closely followed by a similar amount from an initial public offering in Hong Kong.

It was expected that the smartphone maker would get the green light for the listing of its CDRs on Shanghai Stock Exchange on Wednesday.

But the events took a sudden turn on Monday as the company announced the decision to postpone the CDR issuance.

Analysts have said that the CDR scheme had been rushed through, and questions such as convertibility, trading channels and accounting standards remain unanswered, even as negotiations between tech firms and the regulator continue.

“It is unlikely that Xiaomi would kill the offering on the mainland,” said Brock Silvers, managing director at the Shanghai-based Kaiyuan Capital. “It is more of a rebalancing and re-evaluation, while it bargains with the regulators.

“It is an interesting company warranting further attention. But this IPO appears to be bristling with red flags. Investors have got to be careful.”

“Xiaomi’s case is the latest example of how the old way of regulation can be a big stumbling block to the implementation of reforms,” said Ding Haifeng, a consultant with Integrity Financial Consulting. “The regulators are giving priority to market stability, rather than new measures to further liberalise the market.”

Xiaomi remains the top candidate to spearhead CDR issuance, according to a source close to the Shanghai Stock Exchange.

The regulators will allow Xiaomi to float CDR shares when they are convinced the revised offering price is reasonable, the source added.

Some analysts pointed out that Xiaomi took the decision to postpone the CDR issuance after the company received 84 questions from the Chinese Securities Regulatory Commission last week, asking the firm to justify its high valuation as an internet company when 90 per cent of its current profit comes from hardware sales

A source close to CSRC also felt the decision was probably taken because of questions over Xiaomi’s high valuation, adding that the regulator wants the company to test the waters in Hong Kong to determine a reasonable price for Xiaomi’s CDRs for retail investors.

“It does not make much economic sense to float the CDRs ahead of the basic share issue. It is more of a political concern, as Beijing wants the scheme to be a success,” he said.

The CSRC said the review hearing for Xiaomi to issue the CDRs, scheduled for Tuesday, has been cancelled, out of “respect for the company’s decision” to postpone the plan.

“Xiaomi will float its shares in Hong Kong first, and then find a proper timing to float CDRs,” a statement published on CSRC’s official website said on Tuesday.

Meanwhile, cornerstone investors for Xiaomi’s IPO in Hong Kong, including chip maker Qualcomm, Chinese delivery service provider SF Express and state-owned corporation China Merchants Group, are close to being finalised, according to a person familiar with the matter.

This article appeared in the South China Morning Post print edition as: Xiaomi CDR delay upsets mainland plan for tech plays
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