Xiaomi grapples with geopolitics and doubt on trading debut

Xiaomi grapples with geopolitics and doubt on trading debut

09/07/18, 07:52 am

BEIJING (Jul 9): It was hailed as the biggest and most important Chinese technology debut in years. Instead, Xiaomi Corp. begins life as a public company on the defensive, struggling to justify a lofty valuation while buffeted by a geopolitical storm beyond its control.

When billionaire Chairman Lei Jun strikes the gong on Monday in Hong Kong, he will usher onto public markets a company twice as expensive as Apple Inc. that is pitching itself as a high-growth internet play on par with the likes of Facebook Inc. At about US$50 billion, Xiaomi will become the world’s third-largest publicly-traded maker of mobile devices, a standard-bearer for Chinese corporations seeking to become global players and leaders in technology.

That vision will soon get tested: institutional investors saw bids on the gray market 11% below the initial public offering price. That’s after Xiaomi’s IPO came in at the very bottom of a marketed range. If that level holds during actual trade, it may have a chilling effect on a swathe of tech corporations keen on raising capital this year to fuel their ambitions, from Meituan Dianping to Tencent Music. Longer-term however, Xiaomi’s expanding global footprint may help it grow into its valuation.

“The valuation I’ve put in our analysis is still aggressive for Xiaomi. But its aggressive for a reason and that’s obviously because Xiaomi has a very interesting footprint,” said Peter Garnry, head of equity strategy for Saxo Bank. “The trade war could deal a negative impact on consumer sentiment in general, not only in China but also in the US and globally. I think it’s the main risk.”

Xiaomi’s tribulations began almost the moment it embarked on its IPO journey. It’d planned on raising about US$10 billion and a valuation of as much as US$100 billion by taking advantage of Chinese depositary receipts: a new instrument Beijing pushed to entice companies to list at home. But that fell apart when it couldn’t adequately address 84 questions posed by regulators.

Key among those queries: why a company that gets the vast majority of revenue from phones would pitch itself as an internet company, putting it at a higher price tag than Tencent Holdings Ltd.

Read more on Xiaomi’s turbulent IPO journey: Xiaomi reveals a huge  loss despite scorching growth How Xiaomi’s IPO will  mint dozens of in-house millionaires China’s  84 tough questions Xiaomi has a shot of being the world’s  priciest phone maker A remarkable  turnaround

When Xiaomi finalized its offer, it did so just as the Hong Kong bourse went into a tailspin. Escalating tensions with the US exacerbated growing concerns about the fallout from a slowing Chinese economy, fueling a climate of uncertainty. Compounding the challenge: traders can short-sell the stock from day one and Xiaomi won’t be considered for inclusion in benchmark MSCI gauges.

“It’s not looking like a very positive IPO to be honest,” said Andrew Jackson, head of Japanese equities at Soochow CSSD Capital Markets, who’s been monitoring Xiaomi and thinks it too richly valued. “It’s a wake-up call for realistic valuations, but its also a case of bad luck for Xiaomi’s timing.”

But Xiaomi may have no choice. Its last equity fundraising was in 2014 and it needed to bankroll Lei’s vision of expanding globally and embracing technology from artificial intelligence to cloud computing, areas where it would be pitted against Alibaba Group Holding Ltd. and Baidu Inc.

Lei, who once drew comparisons in domestic media to Steve Jobs, has even resumed taking potshots at Apple. It’s a far cry from a year or so ago, when the billionaire prompted a bout of internal soul-searching via a heartfelt missive after sales flatlined in 2016.

It remains to be seen whether Xiaomi’s been penalized for circumstances beyond its control. The company has urged investors to recognize its worth as one of the few from China’s tech sector to make inroads abroad.

It’s taken pains to explain its strategy of selling cheap phones to goose revenue from services such as video and music, while investing in an ecosystem of connected devices from vacuums to watches.

“The problem with Xiaomi is that people are very confused. They are not clear about why you call yourself an internet company,” said Anthea Lai with Bloomberg Intelligence. “Many people won’t feel comfortable paying a price similar to Tencent, which has a proven track record, and a 100% of its profit came from internet.”

US sanctions on Huawei could backfire

SINGAPORE (May 27): It was only to have been expected. After nearly a year of pressure that failed to stop Huawei Technologies Co’s expansion -- especially in the rollout of the next generation 5G wireless network globally -- in its tracks, US President Donald Trump signed an executive order effectively barring American firms from doing business with the Chinese telecommunications equipment company. The inclusion of Huawei on the US Department of Commerce’s Bureau of Industry and Security’s (BIS) Entity List means that companies would need to apply for a waiver to supply goods with 25....

Annica chairman Ong quits just as $33 mil goes missing at his law firm JLC

SINGAPORE (May 27): Jeffrey Ong, managing partner of law firm JLC Advisors, may have given instructions to pay out a sum of $33.2 million held in escrow by his firm for a client, Allied Technologies. According to Allied’s statement filed with Singapore Exchange on May 23, the payment may have been “unauthorised”, citing a letter it received from JLC on May 22. Allied’s statement did not specify who the payment was made to. Ong also abruptly resigned as non-executive chairman of Annica Holdings on May 20. In a May 22 filing with SGX, Annica CEO Sandra Liz Hon Ai Ling said Ong resigne....

SGX RegCo sees targeted approach in enforcement, more powerful market discipline

SINGAPORE (May 27): Tan Boon Gin, CEO of stock exchange regulator Singapore Exchange Regulation, says the market can expect a stronger regulatory presence. “You will see a series of enforcement cases coming up quite soon,” he tells The Edge Singapore. Tan’s assertion comes amid significant changes in the market as sentiment remains lacklustre and investors’ expectations change. The local stock market has gone through significant upheaval, not least because of the penny stock crash in 2013 that wiped out some $8 billion in value from the market. The event dented investor sentiment, a....