Xiaomi applies to raise funds in Hong Kong, giving city the pole position in 2018 global IPO race

Xiaomi’s 2017 sales jumped by two-thirds to 114.6 billion yuan, while operating profit tripled and adjusted net profit soared from a year earlier

PUBLISHED : Thursday, 03 May, 2018, 8:29am
UPDATED : Thursday, 03 May, 2018, 11:32pm

Xiaomi has applied to sell shares in Hong Kong, giving the city what’s probably the world’s biggest initial public offering (IPO) of 2018 and the pole position in a race with New York and Shanghai to be the global capital for raising funds.

The company, the world’s fourth-largest smartphone maker ranked by shipment, has submitted an IPO application to the Hong Kong Exchanges & Clearing Limited under new listing regulations for technology start-ups. 

While the application omitted financial terms, bankers familiar with the plan said the Beijing-based company is seeking to raise US$10 billion, in a sale that values the eight-year-old firm at US$100 billion.

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That would catapult Xiaomi, founded in 2010 by serial entrepreneur Lei Jun, past Baidu and to become the third-biggest Chinese technology company by value, after Tencent Holdings and Alibaba Group Holding. At US$10 billion, Xiaomi’s IPO would also be the 15th biggest of all time, or the fourth-largest in Hong Kong.

Xiaomi’s listing application appears to be an early vindication for Hong Kong’s securities regulator and exchange operator, which together pushed through the biggest reforms in the city’s listing regulations in decades. 

The city, overtaken by Shanghai last year for the first time in the global IPO stakes, was anxious to reclaim its crown to sustain jobs in the financial industry and maintain revenue from stock listings.  

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It’s also a vital shot in the arm for a city that’s been floundering in its claim to be mainland China’s gateway to the financial world, ever since Alibaba chose New York over Hong Kong for its US$25 billion IPO in 2014, which still holds the record as the world’s biggest stock sale. 

Alibaba, the largest e-commerce operator on earth, also owns the South China Morning Post. Yunfeng Capital Management, the private equity fund of Alibaba’s co-founder Jack Ma Yun, is an investor in Xiaomi. 

Exchange officials of Shanghai and Shenzhen had been particularly aggressive in wooing Xiaomi and other Chinese technology companies to raise capital onshore, promising fast-tracked approvals, easier regulations and additional incentives. 

To compete with regional bourses, Hong Kong pushed through rules to let pre-revenue biotechnology firms and technology firms with multiple classes of stocks sell equity. The new rules, which were controversial from the outset, appear to have paid off. 

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Besides Xiaomi, at least a dozen tech firms and biotech start-ups have made active inquiries about listing in Hong Kong, the exchange’s chief executive Charles Li Xiaojia said last week. Two Chinese biotech companies said they would switch their New York IPOs to Hong Kong to raise US$800 million, Reuters reported last week.

Xiaomi, which transformed from a start-up to a 100-billion-yuan (US$16 billion) revenue tech giant in seven years, had a good start to 2018, even while the worldwide smartphone industry experienced declining sales. 

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First-quarter shipments more than doubled to 27 million units, giving Xiaomi 7.5 per cent share of the global market, according to Counterpoint Research data. That puts it in fourth spot globally behind Samsung, Apple and Huawei, both by market share and by actual shipment. 

The company, which Lei described as “the triathlete” of technology companies, gets 70 per cent of its revenue from selling smartphones at a razor thin profit margin. Smart devices and a range of appliances contribute to 20 per cent of sales, while internet services make up the remainder. 

Xiaomi’s 2017 sales jumped by two-thirds to 114.6 billion yuan, with overseas revenue more than tripling to 32.1 billion yuan, its filings show. Operating profit tripled to 12.2 billion yuan, driven mainly by internet services with 60.2 per cent in gross margins.

The company posted a net loss of 43.9 billion yuan, mainly from issuing preferred shares to investors, and 54 billion yuan in fair value gains on investments that had to be accounted for, according to filings. 

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This is a common pre-IPO financing option practised by many technology companies, a non-operating expense that’s reflected in the balance sheet. 

Excluding preferred stocks and other items, Xiaomi’s adjusted net profit almost tripled to 5.4 billion yuan, from 1.9 billion yuan in 2016. 

Xiaomi, which means millet in Chinese, will use 30 per cent of its IPO proceeds to develop the ecosystem of its technology business, especially in artificial intelligence and in IOT, where devices and appliances are connected to each other via the internet.

Another 30 per cent of the funds will be used for research and development, while 30 per cent will be used on global expansion, according to Xiaomi’s filing. The remaining 10 per cent of the capital raised will go towards working capital.