Xiaomi pays a hefty price for low valuation and poor timing

Xiaomi Corp sells its products at a substantial discount to those of competitors, and may have to get used to trading at the low end of the price range as well when its shares debut in Hong Kong on Monday.

Bids of 9.4% below the issue price have been reported by institutional investors since the retail subscription of the company’s high-profile initial public offering in Hong Kong. Bloomberg reported that there were no offers in grey-market trading ahead of the launch. 

It is a huge setback for what has arguably been China’s fastest growing consumer brand in the last seven years, selling stylish mobile phones and other home appliances at prices suited to Asian budgets.

But traders aren’t all that surprised: Xiaomi slashed its valuation to about US$54 billion, only half the original target, putting the IPO at the bottom end of the price range. Buyers were also deterred by the decision to abandon plans to sell shares in China, which would have boosted Xiaomi’s market appeal. It would have been the first company to list with China depository receipts.

The other problem Xiaomi faced was one of timing. Investors are bailing out of the Hong Kong market because of fears of a prolonged trade war between the US and China, which will hit listed Chinese companies. Hong Kong stocks have fallen 4% since Xiaomi offered its shares on June 25.

Investors are bailing out of the Hong Kong market because of fears of a prolonged trade war

According to an announcement to the stock exchange, Xiaomi attracted a total of 1.03 billion shares from retail investors, or about 9.5 times the near 109 million shares it plans to sell in Hong Kong.

Pricing at HK$17, the biggest technology listing in the past five years raised HK$23.97 billion, giving the company a valuation of HK$380 billion, or less than half of its original target of HK$780 billion.

Even at that valuation, the price-earnings ratio of Xiaomi is priced twice as high as that of rival Apple, despite the fact its mobile phone, which accounts for two-thirds of turnover, costs only half as much.

Xiaomi is the first Hong Kong company to opt for weighted voting rights, a mechanism adopted by Hong Kong Exchanges and Clearing to accommodate dual-class shares, thus enabling the founding shareholders to have more control over ownership.

It is the latest of a series of new economy stocks that tried to entice investors with high valuations but were only able to price at the low end. Mainland online video streaming company Inke, which tapped the market for HK$1.2 billion (US$152.9 million), was apparently priced towards the bottom of its proposed price range, as was Qeeka Home — which slashed its original price target by 30%.