Xiaomi IPO came sooner than planned amid reforms in listing regulations

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Chinese electronics and software company Xiaomi’s IPO apparently came sooner than previously expected, as the rather controversial major reforms in Hong Kong and China’s listing regulations have paid off for the Asian market.

Xiaomi filed documents in early May to list in Hong Kong. The company is expected to raise $10 billion from the offering and aimed for a valuation of about $100 billion, despite the head of the company’s top lawyer Zhang Liang said in March 2015 that the company had no plans to list within the next 5 years.

The application came after the China Securities Regulatory Commission reportedly issued new listing rules in April in hopes of retaining potential technological giants in the home market, by promising fast-tracked approvals and easing regulations, on top of additional incentives.

The new rules allow non-listed local companies to conduct initial public offerings without meeting the traditional financial requirements, according to reports.

“Changing the requirements will unlock opportunities for both start-ups and investors and is something that should have been done years ago,” said Shaun Rein, managing director of the China Market Research Group in Shanghai.

“Many Chinese firms that would prefer to go public in China ended up listed in the US instead because of onerous profit requirements. In fact, many great companies like Amazon never would have been allowed to go public in China if they had been Chinese start-ups.”

Meanwhile, the pain of losing out on a listing by Chinese e-commerce juggernaut Alibaba in 2014 has also prompted the Hong Kong Exchanges and Clearing (HKEX) to examine new measures.

Since then, the HKEX had been aggressive in wooing big name China-based tech firms, including Xiaomi, to raise capital onshore by pushing through rules to let technology companies with multiple classes of stocks sell equity in Hong Kong.

The new regime, which came into effect on April 30, allows technology firms to submit listing applications under the newly approved dual-share class structure, which is popular amongst U.S.-listed tech firms as it gives company founders controlling power over their businesses even if they only hold a small portion of the stock.

Such structure has received criticism in the past, as some investors feel it does not give equal treatment to all shareholders, as opposed to the traditional one-share, one-vote system.

While the size of the IPO has been a major focus, as the offering represents the biggest global deal since Alibaba debuted in New York in 2014, investors have reportedly questioned the $100 billion valuation goal that has been cited in most media.

Analysts now believe the valuation of the company could fluctuate between $30 billion to more than $100 billion, largely depending on how investors interpret Xiaomi’s main businesses.

While 70 percent of revenue comes from selling smartphones, according to the company’s earnings reports, co-founder Lei Jun noted that Xiaomi’s real goal is to be an internet services company making money off ads and online games.

Most internet companies such as Tencent and Alibaba tend to have much higher multiples, about 40 and 54 times, while smartphone manufacturers like Apple and Samsung Electronics have multiples closer to the 10-20 range.

As a result, valuing Xiaomi’s entire business using a multiple of 15 would result in a market valuation close to $250 billion, while applying a mutiple of 40 would arrive at about $80 billion valuation.

“Xiaomi is still an early stage company with multiple businesses investors don’t fully understand,” said Haifeng You, an accounting professor at Hong Kong University of Science and Technology. “With high uncertainty, there’s a greater chance of a company getting overvalued.”

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