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Why Xiaomi priced its shares low despite huge buyer interest

Xiaomi priced its shares at lower end of HKD 17 each. The pricing values Xiaomi at about USD 54 billion, roughly half of the Xiaomi's initial expectation.

Mudit Kapoor   New Delhi     Last Updated: June 29, 2018  | 21:00 IST
Why Xiaomi priced its shares low despite huge buyer interest

Xiaomi recently went public in Hong Kong raising USD 4.72 billion. Almost 2.2 billion shares were offered for sale between June 25 and June 28 with the price band of HKD17 - HKD22 raising total expected amount of USD 4.7 to USD 6.1 billion. Trading on the stock will commence from July 9, 2018. Goldman Sachs Group Inc., Morgan Stanley and CLSA Ltd. led Xiaomi's IPO as joint sponsors.

Interestingly, Xiaomi priced its shares at lower end of HKD 17 each. The pricing values Xiaomi at about USD 54 billion, roughly half of the Xiaomi's initial expectation.The biggest Hong Kong IPO in nearly two years attracted orders from billionaire George Soros and Chinese investment firm Hillhouse Capital, as per a Bloomberg report.

This has been the world's biggest tech float in the last four years since Alibaba Group Holding Ltd raised USD 25 billion in New York in 2014.

Lets analyse some of the reasons which lead Xiaomi to price its IPO at the lower price range of HKD 17.

  • Escalating trade tension between the US and Chinese governments created a skeptism in investor trust.
Investors are wary about the trade tariff war between the US and China because the tariff implosion would result in lesser trading between the two economic giants, adversely impacting businesses.
  • Limit the profit margin to 5% on its consumer hardware products
This year Xiaomi founder Lei Jun pledged to keep the net profit margin below 5 per cent for its hardware products. This decision of Xiaomi would have to be matched by massive investments into the business to increase sales volume to cover the loss arisen due to decreased profitability margin.
  • Postponing the China Depository Receipts (CDRs) which could have raised an additional 4 billion.

Xiaomi's initial plan was to raise around $10 billion through two sources: IPO in Hong Kong and simultaneous CDR issuance in China. But due to undisclosed reasons Xiaomi opted for going public in Hong Kong first, postponing the Chinese issuance of CDR to an undecided date. This took the wind away from Xiaomi's maiden sail.

"Xiaomi's exceedingly thin margins from hardware significantly drags down its valuation for potential investors," Bloomberg quoted James Yan, an analyst with Counterpoint Research, in Beijing. "I expect it to invest more in the smartphone unit, especially on international expansion. It also needs cash to beef up its ecosystem in markets like India. All those fronts are extremely capital-intensive."

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