Chinese smartphone giant Xiaomi’s Hong Kong IPO will launch in July

The world’s No 4 smartphone maker will go on the road by end-June to persuade US and European institutional investors to value Xiaomi at no less than US$70 billion

PUBLISHED : Friday, 25 May, 2018, 12:25pm
UPDATED : Friday, 25 May, 2018, 11:48pm

Xiaomi, the world’s fourth-largest smartphone maker, is putting the finishing touches on a plan to make its US$10 billion initial public offer available to investors by early-to-mid July, presenting the biggest global stock offer of 2018 as a birthday present of sorts to Hong Kong’s stock market.

The Beijing-based company will go on a roadshow by the end of June to persuade institutional investors in the United States and Europe to value its business at no less than US$70 billion, according to a person familiar with Xiaomi’s plans.

The valuation of Xiaomi’s business, which went from a start-up to surpass 100 billion yuan (US$16 billion) in seven years, is based on the projection that its annual profit growth will top 50 per cent in the next three years through 2020, the person said.

“Investors should evaluate tech companies by the size of their market, the current market position, projected growth in the next five to 10 years, and where their founders or management teams can lead them to in the future,” said Chen Xiaohong, founder of China-focused venture fund H Capital, who doesn’t own any stakes in Xiaomi.

A US$10 billion IPO, the biggest in the global pipeline for 2018, would hurtle Hong Kong to the pole position in the race to be the destination of choice for global companies seeking to raise capital. Hong Kong, which marks the 21st anniversary of the city’s return to Chinese sovereignty on July 1, fell to fourth position in the worldwide IPO stakes last year, overtaken by Shanghai and Shenzhen for the first time.

To catch up, Hong Kong’s securities regulator and market operator together pushed through a controversial reform of the city’s listing rules, opening the doors for pre-revenue biotechnology researchers and technology companies with multiple classes of stocks to sell equity.

A successful listing by Xiaomi in Hong Kong would vindicate the local bourse operator’s efforts, paving the way for more blockbuster fundraising exercises in the city. Shares of Hong Kong Exchanges & Clearing Limited, which operates the bourse, have risen 32 per cent in the past 12 months.

China Tower, jointly owned by three Chinese phone networks that have nearly 1.2 billion customers between them, has applied to raise US$10 billion in Hong Kong, in an IPO of a quarter of its total shares, valuing the world’s biggest operator of telecommunications towers at US$40 billion.

And there’s more. Didi Chuxing, the dominant Chinese ride-hailing company used 25 million times every day, is exploring the possibility of a US$10 billion offer in Hong Kong, according to bankers.

Sina Corp, the Nasdaq-listed operator of China’s largest microblog platform Weibo with 100 million users, is seeking a secondary listing in the city.

Citic-CLSA, Goldman Sachs and Morgan Stanley had been appointed to arrange Xiaomi’s stock offer.

The first among tech companies to apply under Hong Kong’s new listing rules, Xiaomi has had to push back its IPO to align with the schedule of mainland China’s securities regulators, who are trying to persuade the nation’s offshore-listed companies – including Xiaomi and this newspaper’s owner Alibaba Group Holdings – to issue Chinese depository receipts (CDRs) by July for local Chinese investors to invest in.

The top question for investors would be how they ought to value Xiaomi. Up to 70 per cent of the company’s 2017 sales of 114.6 billion yuan came from smartphones, of which Xiaomi is the world’s No. 4 brand by shipments, occupying the biggest market share in India.

But Xiaomi’s founder Lei Jun is committed to selling his phones at budget prices - with a profit of US$2 per handset, compared with Apple’s margin of between US$151 and US$250 on each iPhone - so much so that he capped the margin at 5 per cent and wrote it into the company’s charter to “prevent people from messing with the vision,” he said during an April interview with the South China Morning Post.

“A thin profit margin isn’t a minus or a negative,” said H Capital’s Chen, who’s known Lei for 15 years. “Just as US retail giant Costco owes its success to high quality products at competitive prices and low margins, we should see Xiaomi as a combined Costco-Amazon-Apple business model because of its high efficiency in supply chain, operations and distribution channels.”

Another 20 per cent of 2017 revenue came from smart devices including wearables - it surpassed Fitbit last year as the world’s largest supplier - and as many as 300 products from air purifiers to ballpoint pens and neck pillows. A sliver of 10 per cent of sales came from internet services, where Xiaomi’s investment in an ecosystem of content providers can sell entertainment, children’s education and other services to the company’s Mi devices.

Rise of Xiaomi: the Chinese start-up poised to become world’s biggest IPO of 2018

The company would have investors focus on its expected long-term development, its cash flow and its earnings growth, said bankers familiar with Xiaomi’s pitch.

Adjusted 2017 profit almost tripled to 5.4 billion yuan, after excluding non-recurrent items. Operating profit of Xiaomi, the Chinese word for millet, tripled to 12.2 billion yuan, driven mainly by internet services with 60.2 per cent in gross margins.

The global market is where Xiaomi’s ambitions lie. Overseas shipments more than doubled to 27 million handsets last year, boosting its offshore revenue threefold to 32.1 billion yuan.

Xiaomi this week opened its first European sales outlet in Paris, two blocks from the Pompidou Centre, and plans to open additional Mi stores in France, Spain and Italy later this year.

The brand, whose Mi Mix model was designed by Philippe Starck, was ranked fourth globally in the first quarter, with 7.5 per cent of the global market behind Samsung, Apple and Huawei, according to Counterpoint’s May 1 report.

Xiaomi’s potential is in the interconnections between smart devices, known in the technology industry as the Internet of Things (IoT). Industry revenue may balloon every year at a 13.3 per cent compounded growth rate to US$6.2 billion by 2021, according to IDC.

“Investors should understand that Xiaomi is not just a cellphone company,” said Chen, who has 15 Xiaomi products at home, the latest of which is a HK$549 (US$69) smart rice cooker with more than 3,000 ways for cooking different grain varieties, accessible through a smartphone. “Its consumer electronic products will make a tremendous change in every industry.”