An IPO (Initial Public Offering) is the process in which a company first gets listed on an exchange, and starts trading as a stock for the public to buy and sell. Companies IPO in an effort to raise investor money, by sharing ownership of their firm with the public.
The popular electronics company, Xiaomi (SEHK: 1810), completed its long awaited IPO on July 9th, and the road has been bumpy. In an effort to raise capital and ensure a successful IPO, Xiaomi positioned itself as more than just a smartphone and hardware company, but instead as an “Internet servicing company”.
Generally speaking, Internet servicing companies are priced at a premium over hardware companies, meaning more money and a more successful IPO for Xiaomi.
Xiaomi smartphone sales (hardware) account for over 70% of revenue, while Internet service only account for about 10% (CSRC Survey, July 12). Their claim of being an Internet company is questionable, yet they moved forward with an application to IPO in both China and Hong Kong. This put the company under the microscope as China’s financial regulatory agency, the CSRC, questioned the validity of their IPO application. The CSRC responded to the Chinese IPO request with 84 highly critical and detailed questions, and responding to each would take months for Xiaomi to complete. This tactic not only expressed China’s skepticism, but also prevented them from having an IPO in China in the short-term. While it seems like the CSRC went hard on Xiaomi, it’s worth noting that they have been notoriously stringent. Companies such as JD.com, Alibaba, and Baidu have all struggled with their Chinese listings.
Despite this hiccup, Xiaomi managed to pull off its IPO in Hong Kong this week, raising $4.7 billion in capital on a total company valuation of $54 billion. While the first session saw the stock trading below the IPO price of HKD 17, the stock has climbed to HKD 19.37 at the time of writing, for a gain of 14% in just four days (Bloomberg, July 12).
For the investors, preliminary setbacks may end up being a blessing. A valuation of $54 billion is on the lower end of expectations, which ranged as high as $100 billion, ultimately allowing more room for growth.
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The O&G Research Team holds Series 65 and Series 3 certifications and are experienced traders in international financial markets.
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