Xiaomi IPO gets a vital helping hand from home

Chinese smartphone maker’s huge IPO is about to get much easier, thanks to support from domestic investors

Forget Chinese stocks joining MSCI’s indexes: A bigger opening-up is taking place in Chinese markets — for the country’s own technology giants.

Smartphone maker Xiaomi is set to be the first one to test this out.

The company could raise up to half of the $10 billion ($13.03 billion Canadian) it is hoping for in an initial public offering this summer by issuing depositary receipts in Shanghai — a new market mechanism designed by Beijing to lure its big technology firms to list at home. Xiaomi’s Hong Kong listing will still take place, allowing it to raise capital for overseas expansion and for its existing foreign shareholders to cash out.

Xiaomi’s targeted valuation of about $75 billion ($97.8 billion) looks pricey, valuing it at more than 100 times last year’s earnings, excluding one-offs. But the deal will be easier to pull off with the help of mainland Chinese investors.

Thanks to capital controls, piles of cash are trapped inside China with few investment op- tions beyond the country’s stock markets, where sky-high valuations are commonplace.

This is especially true for companies with strong brand recognition like Xiaomi.

Foxconn Industrial Internet, a subsidiary of Taiwanese iPhone assembler Hon Hai Precision, has gained 74 per cent since making its debut in Shanghai last Friday. The company is now worth $74 billion ($96.4 billion) — already bigger than its Taiwan-listed parent’s $51 billion ($66.4 billion), even though FII’s revenue last year was only a third of its parent’s.

China’s leader in car batteries, Contemporary Amperex Technology, has gained 58 per cent in just two days since its IPO in Shenzhen. Newly listed stocks in China return on average 200 per cent one month after their debut, according to Goldman Sachs.

There is a pot of cash standing by to snap up these Chinese depositary receipts, too: Chinese regulators have recently approved six leading asset managers to launch funds worth a total of 300 billion yuan ($47 billion, $61billion Canadian) to invest in them.

All of this could help Xiaomi out of a hole: The company has faced serious questions about its valuation since its IPO process launched, with expectations already lowered way below initial hopes that it could be worth about $100 billion ($130.2 billion Canadian). It’s good news too for other Chinese unicorns planning to list, including Jack Ma’s Ant Financial, currently valued at $150 billion ($195.3 billion) after a $14-billion ($18.2-billion) private fundraising round. For Chinese tech stocks, home is where the heart is.