Xiaomi was almost set to beat other Chinese internet giants to become the first to list at home via the China depositary receipts (CDR) route.
However, Xiaomi decided to suspend that plan at the last minute, realizing it won’t be able to meet the requirements of Chinese regulators.
It’s been reported that Chinese regulators have set three listing criteria for potential CDR issuers.
The first is that a company’s CDR listing date has to be ahead of its initial public offering in Hong Kong. This actually was not a problem for Xiaomi, as it had originally set the CDR listing for July 16 and its debut on Hong Kong bourse on July 17.
The second is that the fund-raising scale of a company’s CDR listing must be higher than that of its Hong Kong IPO.
This would be somewhat challenging.
Xiaomi is expected to raise 70-80 percent of its fund from the Hong Kong market, and the rest from the mainland.
China has set up six yuan-denominated strategic funds totaling 300 billion yuan (US$46.35 billion) early this month. These funds are said to be acting as cornerstone investors for the CDR listing.
Such funds can help boost Xiamoi’s fund raising scale from the domestic market, but it would still be a stretch to meet the regulator’s criteria.
The third criterion is the most difficult to fulfill, as Chinese regulators wanted to cap its CDR price range at the lower end of Hong Kong offering.
The Hong Kong float price range is usually decided by controlling shareholders and sponsor banks, after taking into account the market feedback. Hot IPOs in Hong Kong are typically priced at the higher end.
For example, if the pricing range of a stock is HK$6.8 to HK$7.9 in its Hong Kong offering, and the listing price is ultimately set HK$7.9, the cap of its CDR would be HK$6.8, nearly a 20 percent discount to the Hong Kong offering.
Such large price gap would be hard to implement.
Yet the biggest hurdle to Xiaomi’s CDR is the bearish market sentiment.
Both mainland and Hong Kong equities plunged after US President Donald Trump announced a 25 percent tariff on US$50 billion Chinese goods, which stoked concerns of a full-scale trade war between the world’s two largest economies.
Mainland investors are concerned that Xiaomi’s CDR offering would further weigh on the stock market. And Xiaomi might tumble below its issue price very quickly in the secondary market.
Xiaomi will proceed with its Hong Kong offering as planned. Though it’s likely to lower its valuation target to US$70 billion, far below the original target of US$100 billion.
This article appeared in the Hong Kong Economic Journal on June 20
Translation by Julie Zhu
[Chinese version 中文版]
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