With Xiaomi’s deflated IPO, can Hong Kong live up to the hype of a market for new economy listings?
Amid the US-China trade war and current market sell-off, Chinese unicorns are rethinking their valuations and holding off listings till later this year, say analysts
When shares of Xiaomi, the world’s fourth-largest smartphone maker, trade on Monday, will they deliver a performance strong enough to wipe off the blemish of a disappointing subscription demand and weak pricing for the initial public offering?
The slash in valuation to US$54 billion, just more than half the US$100 billion that was originally sought, was painful for the eight-year old company founded by Lei Jun, and throws into question for China’s other unicorns the draw of Hong Kong as an IPO market.
The listing is, in various ways, notable: it is the world’s biggest tech listing in four years and the first deal using the new dual-class share structure with different voting rights after exchange officials overhauled listing rules in April to attract new economy firms to float.
Xiaomi was also forced to cut the fundraising amount to US$4.72 billion from the intended size of about US$10 billion, after pricing its stock at HK$17 per share, at the bottom end of the indicative range. Worse still, the company shelved its issue of Chinese depositary receipts after failing to reach an agreement with mainland Chinese regulators over a number of issues, one reportedly being the high valuation.
The Xiaomi IPO story to this point could be an ominous sign for Hong Kong’s fundraising ambition from new listings.
Chinese unicorns were unlikely to rush into the Hong Kong IPO market, analysts said, but would now tread carefully to ensure that the size and maturity of their businesses are acceptable to investors. Some may cut valuation and fundraising targets, or delay the timing to go public to avoid offering excessive price discounts, especially if the stock market turnover shrinks further, they said.
“The current market volatility is affecting new IPO listings and making companies readjust to more reasonable levels. Pricings have been too aggressive,” said Raymond Chan, AllianzGI’s Asia-Pacific chief investment officer for equity.
Global financial markets from stocks to currencies have roiled in recent months amid the long-threatened trade war between the world’s two biggest economies, which got under way on Friday. By launching the first shot of tariffs on US$34 billion worth of Chinese goods, the US has guaranteed China will return with equivalent fire.
Increasing protectionism was expected over the coming quarters that could severely affect global economic growth, said Laurent Clavel, Research & Investment Strategy at AXA Investment Managers.
Prospects clouded by a trade war involving China, the economy that Hong Kong’s economic and equity market developments hinge on, is bad news especially when the city is riding on hopes for a bumper IPO year with new listing rules in place.
So far this year, 137 companies have filed to list on the Hong Kong stock exchange, with 37 applications pending, according to Bloomberg data. Out of the 100 companies that have gone public, more than half, or 58 per cent, were trading at prices below their offering prices in their first month of trading.
Performances of small IPOs have especially been hit by the exchange’s efforts to clean up problematic corporate behaviour to enhance investor protection. New rules to crack down on back-door listings and related so-called shell companies were proposed last week.
Uxin, an online car marketplace, ended up pricing a US depositary receipt issue way below its intended range last month.
The Hang Seng Index is trading near a seven-month low of around 28,0000 while the Hang Seng China Enterprises Index, a gauge of Chinese companies trading in Hong Kong, has slipped into bear territory.
Amid the bearish sentiments, investors are turning their attention to other technology-related companies that have applied to go public in Hong Kong.
In the past week, China Tower, the world’s largest mobile mast operator, has won approval to raise up to US$10 billion. Credit Suisse-backed online lender WeLab Holdings has also applied for listing on the main board, reportedly targeting to raise US$500 million.
An increasing number of high-growth Chinese companies – whose businesses rest on nothing but a vision – have roped in investment banks to bring them to market, and are likely to pass over the US in favour of Hong Kong for its deeper understanding of mainland issuers.
Analysts said Hong Kong investors were eyeing blockbuster IPOs of Chinese unicorns that are genuinely new economy firms, engaged in internet-based ecosystem businesses. Ctrip-backed travel agent Tongcheng-eLong and online food delivery platform Meituan-Dianping were likely to wait till the third- or fourth-quarter, after the trade war blows over, before launching their jumbo listings, they said.
Meantime, the deflated Xiaomi IPO had resulted in some upsides, said Stanley Chan, director of research at Emperor Securities, which included containing irrational investor behaviour in chasing IPO shares to push valuations higher that threaten the risk of triggering an even sharper collapse in stock prices under the current market sell-off.
The reduced offer price of HK$17 a share translates to a forecast price-earnings ratio of 22.7 times in 2019, a level that Chan believes is more acceptable and in line with the Beijing-based company’s rapid business growth. Apple, the world’s most valuable company, is trading at 17 times trailing earnings and 14 times forward earnings, Thomson Reuters data showed.
Analysts estimated that Xiaomi’s adjusted earnings before interest and taxes could rise at a compound annual growth rate of 58 per cent over the three years, hitting 29 billion yuan (US$4.4 billion) by 2020.
“Xiaomi is already making adjustments to its pricing and valuations and that is likely to curb the room for sharp volatility even if it does drop on its debut trading,” Chan said.
The success of Hong Kong’s new listing reforms lies on whether the city can create a quality and safe marketplace that draws new overseas investors to invest in the companies – especially new economy firms – it hosts, and turn the IPO market into one comparable with the US.
The reforms seemed to have paid off, with funds raised from IPOs on the main board and the GEM board rising 78 per cent to a three-year high of US$11.47 billion in the first half, according to data from Thomson Reuters. In the second-quarter alone, US$3.28 billion were raised from IPOs, even though prices of these stocks have fallen 3.4 per cent from their offer prices.
The numbers are not enough to topple New York’s top spot with US$19.46 billion raised in the first half and the Nasdaq Stock Market’s US$11.69 billion at No 2. Based on the current market climate, Hong Kong could raise US$20-30 billion in 2018, compared with last year’s US$35 billion, the smallest amount raised since the 2008 global financial crisis, analysts predicted.
“The pie should indeed get bigger but a long-term process is needed for these new economy companies to come to use Hong Kong’s platform,” Chan said.