Lippo cash crunch 08 Shrinking loan tenors 09 League tables 10
sponsors for the Xiaomi IPO.
AIMING HIGH
Xiaomi, however, has set
ambitious targets for the IPO.
It is looking for a valuation of
at least US$70bn, according to
people close to the discussions,
and is positioning itself closer
to its internet peers than other
hardware makers.
In an open letter alongisde
the IPO filing, chairman and
founder Lei Jun described
Xiaomi as an “innovation-
driven internet company”.
Its numbers showed that its
operating profits more than
trebled in 2017 to Rmb12bn
(US$1.89bn).
Still, talk of a US$70bn market
cap may be too rich for some.
“The valuation target will
put Xiaomi at around 83
times earnings based on its
2017 adjusted profit, which
is much higher than other
smartphone makers. To justify
the valuation, Xiaomi has to
demonstrate strong growth in
overall markets other than just
in India,” said a fund manager.
Samsung Electronics and
Apple, which ranked first and
second in terms of market
share in the first quarter,
traded at around 8.7x and 17.3x
earnings respectively.
According to IDC, Xiaomi was
the fourth-largest smartphone
maker in the world for the first
quarter of 2018 with a market
share of 8.4%.
Xiaomi posted revenues of
Rmb114bn in 2017, up 67%
from a year earlier.
However, a Rmb54bn loss
derived from fair value changesof convertible redeemable
preferred shares led to a loss of
Rmb43.9bn in 2017, versus a
profit of Rmb491m in 2016.
Excluding the loss of
preferred shares and share-
based compensation, Xiaomi
posted adjusted profit of
Rmb5.36bn in 2017, a 183%
gain from a year earlier.
The sale of smartphones
contributed 70.3% of Xiaomi’s
revenue last year, down from
71.3% in 2016. Revenues from
internet-of-things and lifestyleproducts, such as smart TVs and
laptops, amounted to 20.5% of
overall revenue, up from 18.1%
in 2016. Revenue from internet
services including advertising
and value-added services
contributed 8.6% of the total
revenue, compared with 9.6%
in 2016.WEIGHTED VOTING RIGHTS
Hong Kong Exchanges and
Clearing introduced new rules
on April 30 aimed at attracting
“innovative” companies to
the exchange. From now on,
companies with dual-class share
structures, and pre-revenue and
pre-profit biotech companies,
can list on the city’s bourse.
Hong Kong’s long-standing
opposition to weighed voting
rights took it out of the
running for the record Alibaba
IPO in 2014, and the rulechange proved instrumental in
allowing Xiaomi to list in the
city.
According to the filing, Lei
Jun and Lin Bin, co-founder and
president, are the beneficiaries
of the company’s weighted
voting rights, controlling less
than half the equity but around
85% of the voting rights.
Currently, Lei Jun owns 31.4%
of Xiaomi’s share capital, split
between 429.5m Class A shares
and 222m Class B shares. Each
Class A share carries 10 votes
and each Class B share has one
vote, giving him control of over
55% of the votes.
Co-founder Lin Bin has 240m
Class A shares and 39m Class B
shares, giving him a 13.3% stake
and 30.0% of the voting rights.
Xiaomi plans to use 30% of
the funds raised for research
and development, 30% for
investments, 30% for global
expansion and 10% for working
capital and general corporate
purposes.
As of March 2018, Xiaomi
had about 190 million monthly
active users of MIUI, its
customised operating system
based on Google’s Android
OS. Over 1.4 million users
had more than five connected
Xiaomi products excluding
smartphones and laptops. nothing more than higher-
yielding bullet bonds.
NOT ENOUGH INCENTIVES
However, some analysts doubt
Shandong Iron & Steel Group is
offering enough incentives to
convince investors to swap the
bonds into equity.
“In theory, issuers could
have more pricing advantage
when there is an option to
swap bonds into equities,” said
a Beijing-based credit analyst
with a Chinese securities house.
“however, I don’t think equities
in the unlisted Laiwu Steel
would be attractive at all to
investors.”
He said investors would
treat the bonds like regular
perpetual bonds unless they
were promised either an IPO
of Laiwu in the near future or
a private share placement of
the listed Shandong Steel &
Iron Co. As it stands, there is
no certainty either will happen
during the life of the bonds.
An investor with a Chinese
fund house speculated that
the offering might only target
distressed-debt managers such
as China Huarong, giving them
a new route to participate in
the country’s debt-for-equity
swap scheme, which aims to
ease the debt burden of state-
owned enterprises.
Shandong Iron & Steel
Group, whose debt-to-assets
ratio stood at 84% at the end ofMarch, signed an agreement
over a Rmb26bn debt-for-equity
swap programme with ICBC in
May 2017.
The company expected the
programme would lower its
debt-to-assets ratio by as much
as 10%.
The perpetual offering, if it
goes ahead, would also mark
the first time in China a bank
has underwritten equity-linked
products, which are currently
only available on the Shanghai
Stock Exchange and Shenzhen
Stock Exchange. Only securities
houses, not banks, are allowed
to arrange deals in the two
stock bourses.
“We need to see if [the deal]
is a one-off innovation inthe interbank bond market,
or if the regulators are
really encouraging the new
structure,” said a syndicate
banker away from the deal.
The introduction of such
equity-linked perpetual bonds
to the interbank bond market
would require coordination
among different regulators, he
said.
For instance, if such perpetual
bonds are allowed to be swapped
into shares of listed companies,
the China Securities Regulatory
Commission, which oversees the
stock exchange market, would
also have a say, he said.
China Construction Bank is the
sole lead on Shandong Iron &
Steel’s offering. For daily news stories
visit http://www.ifrasia.com“The valuation target will put Xiaomi at
around 83 times earnings based on its 2017
adjusted profit, which is much higher than other
smartphone makers. To justify the valuation,
Xiaomi has to demonstrate strong growth in
overall markets other than just in India.”