The Hong Kong IPO Market

The Hong Kong IPO market is expected to be very active over the next year with Xiaomi, Meituan-Dianping, China Tower and Didi Chuxing planning listings for the second half of 2018, and Alibaba launching Ant Financial in early in 2019. Each company is planning on an offering of greater than $5bn.

Xiaomi, the world’s fifth largest smartphone manufacturer, will be the first to go public on July 9. On Saturday, the company announced that it is planning on selling almost 2.2 billion shares to global investors at a price range of between HKD 17 - 22. If done at this range, the company will raise approximately $6 billion and would be valued between $54 billion and $70 billion, considerably lower than the 100bn valuation that the company was seeking. They also decided to cancel a Mainland listing because of a disagreement between the company and regulators over the valuation of its China depositary receipts (CDRs).

There are a couple of reasons for the lower valuation. First the company has never made a net profit. In 2017, the company generated revenue of RMB 115 billion, up 70% with operating profit more than tripling to RMB 12 billion. However, after deducting the cost of redeeming convertible preference shares held by investors and employee compensation, he firm posted a net loss of Rmb41.8bn. Also, last week, the company reported 1Q numbers which showed a net loss of Rmb7bn ($1.1bn) in the first quarter on Rmb34.4bn in revenues.

Another reason for the caution is the reliance on the low-end smartphone market. The Mi series of phones helped to drive company’s expansion, but weakness in the global market has led to more dependence on emerging markets such as India. Currently, the company generates 70% of its revenues from that segment. Xiaomi’s chief executive, Jun Lei, has described Xiaomi as part Samsung, part Google, and part Amazon with smartphone, internet and e-commerce offerings and has pledged that it can strengthen its platform and expand in major markets such as Europe. However, it’s uncertain if Mr. Lei can meet these lofty goals considering the cash burn the has experienced in the last couple of years.

According to Reuters, the company already has seven cornerstone investors taking up to 10% of the shares including U.S. chipmaker Qualcomm, China Mobile, state-backed investment firm CICFH Entertainment and state-run conglomerate China Merchants Group Ltd.

In other IPO news, on Friday, Ant Financial announced that it raised approximately $14 billion in what is being described as the biggest-ever single fundraising round by a private company. In a statement, the company said it would use the proceeds to speed up global expansion plans for its Alipay platform and further R&D.

Analysts were expecting that after this funding raising, the company could be valued at approximately $150bn before its planned IPO net year. This paces it at almost double the current valuation estimate for Uber.

The current pipeline of IPOs in Hong Kong should be positive for the Chinese new issuance market which has been fairly subdued for the past few years and positive for Hong Kong Stock Exchange (338 HK). The VFTP Thematic Portfolio is long Alibaba and expects the Ant listing to be a major catalyst for the stock.


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