Financial centers set to duel over Chinese tech giant but, if the company gets its way, both sides could win

Author: Jonathan Rogers

Xiaomi, China’s large, fast-growing smartphone maker, plans to take its stock public this year. Exchanges in New York and Hong Kong will likely battle over the listing rights, prompting heated debate about the merits of issuing dual-class shares (DCSs).

The company in late January chose CLSA, Goldman Sachs and Morgan Stanley to jointly sponsor the IPO, which is penciled in for the second half, and likely to be the largest tech sector float of 2018.

Chinese banks, as well as Credit Suisse, Deutsche Bank and J.P. Morgan, also feature in the frame as they vie to become part of the sponsor syndicate.

Early talk puts the IPO’s fundraising target at $16.5bn, imputing Xiaomi’s full value at around $100bn, based on the company’s recent financials. Analysts expect Xiaomi to book net profit of around $1bn for 2017 and to double that figure this year, on annual revenues of more than $17bn.

Hong Kong is widely rumored to be the venue for the tech firm’s listing, despite its preponderance of banks and heavy industrial companies.

Hong Kong’s financial authorities “are keen to build up credentials as a listing venue for China-based tech companies and there has been a degree of bitterness over failing to win Hong Kong listings for Alibaba and Baidu, which each opted to list in New York,” says a Singapore-based equity banker. “From their point of view, the stakes are high this time and they hope to create a tailwind which would see more China tech companies list in Hong Kong.”

To this end, the Hong Kong exchange last December approved the listing of DCSs which allow for weighted voting rights–a move widely seen as an accommodation for Xiaomi. DCSs enable company founders to avoid dilution of control in the face of equity issuance, whether from public listing or the conversion of debt to equity by early investors in a startup.

But DCSs are controversial, regarded by adherents of environmental, social and governance (ESG) advocates as encouraging a culture which works to the detriment of minority shareholders and clouds transparency.

Still, Xiaomi–founded in 2010 by Lei Jun, the 48-year old billionaire from Xiantao –seems to be eyeing the advantages of DCS in terms of boardroom voting rights over brickbats from the ESG community.

And Hong Kong appears to be an attractive listing venue given the auspicious first-day performance of IPOs debuting there recently, including Tencent subsidiary China Literature, which surged 86% when free to trade, and tech companies Razer and Intel, which popped up 18% and 6% respectively on their first days of trading.

If that is the criterion for IPO listing consideration, though, New York still holds the upper hand when it comes to first-day trading performance versus Hong Kong. Since 2011, some 80% of New York-listed IPOs have registered a premium to listing price on the first day of secondary trading, while half the big-ticket IPOs in Hong Kong have ended up flat or down.

Wherever the listing emerges, Xiaomi offers an attractive proposition to investors. It is in the top five producers of smartphones globally, albeit in a market which shrank marginally last year according to IDC data.

But Xiaomi bucked that trend, shipping 92.4 million smartphones in 2017 for a 74.5% increase on the previous year’s volume. The affordability of Xiaomi’s products enabled it to snatch the No. 1 position in smartphone sales in India from Samsung, and its development of smart fitness trackers, rice cookers and water purifiers heralds a diversification of revenue.

In what might be a hint to Xiaomi’s intentions, the company’s Huami subsidiary last week commenced bookbuilding on an New York Stock Exchange issue, via which it aims to raise up to $120m from American depositary shares.