July 9, 2018 / 7:33 AM / 2 months ago

Breakingviews - Xiaomi IPO will punish bankers twice

HONG KONG (Reuters Breakingviews) - Xiaomi’s lacklustre initial public offering will punish bankers twice. The Chinese smartphone- maker’s shares opened below the issue price in their $54 billion debut in Hong Kong on Monday. The Beijing-based company’s advisers failed to sufficiently lower an unrealistic valuation target. Their punishment could be that other large listings in the Fragrant Harbour are delayed. 

Xiaomi founder, Chairman and CEO Lei Jun (L) greets a guest as he attends the listing of the company at the Hong Kong Exchanges in Hong Kong, China July 9, 2018. REUTERS/Bobby Yip

CLSA, Goldman Sachs and Morgan Stanley, the three banks leading the deal out of 23 appointed, made some headway grounding expectations. Ahead of Xiaomi’s formal application to go public, a $100 billion valuation goal was widely reported, more than double the level secured in its last pre-IPO fundraising in 2014. The offer was eventually marketed in a range of up to $70 billion.

That was still wide of the mark. Shares began trading at HK$16.60 ($2.12) each, compared to an IPO price of HK$17. It means Xiaomi stock was changing hands at a market value of $53 billion, more than $1 billion below where it was offered and far from the first day pop that tech companies covet. 

The failure to manage expectations could come back to bite the banks. Xiaomi’s debut performance was expected to be one of the determining factors of whether telecoms infrastructure giant China Tower begins book-building as planned next week for its up to $10 billion Hong Kong IPO, Thomson Reuters publication IFR reported on July 4. 

Other tech firms in the queue to list may also want to be more conservative. Industry sources have previously told IFR that takeaways-to-taxi startup Meituan-Dianping hopes to achieve a $60 billion valuation when it goes public in Hong Kong later this year, double the $30 billion it achieved as part of a private fundraising in October.

Companies can often have lofty ideas about valuations. The responsibility rests with banks to talk them down to a sensible level where at least some value is left for investors. Xiaomi is primarily a hardware company, making most of its money selling handsets, rather than an internet stock. The market saw through the shrill pitch. Advisers and issuers will have to tread more carefully. 

Breakingviews

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