Are investors sitting out Xiaomi IPO for China Tower?

June 28, 2018 13:25
Xiaomi IPO brochures are displayed at a news conference in Hong Kong on June 23. The Chinese firm’s offering is said to have drawn relatively muted response from retail investors. Photo: Reuters

Xiaomi Corp is reported to have drawn muted interest from Hong Kong investors as the Chinese smartphone maker prepares to close the retail book for its IPO of up to US$6.1 billion. 

Although the offering has won the backing of some big mainland and Hong Kong tycoons, retail investors appear to be holding back their wallets, leading to a situation where the issue may not get oversubscribed too much unlike some recent tech listings.  

Valuation concerns, margin financing costs and a generally weak overall market environment seem to be keeping investors in check. Also, a decision by Xiaomi to indefinitely delay its mainland listing, through a Chinese depositary receipts offering, has unnerved some people.   

Reports that Chinese authorities queried Xiaomi's listing arrangement with a list of 84 questions have fueled doubts as to whether the company is a good investment option at this moment.

Some investors withdrew their orders for IPO shares in the past few days, indicating that they are no sure as to how Xiaomi stock will perform after it makes its market debut on July 9.

As people sit back and exercise caution over Xiaomi, they are mulling other potential IPO options which could prove more attractive in terms of returns on investment.

Foremost among these is state-owned China Tower Corp, which has filed for a Hong Kong IPO and is said to be planning to raise around HK$78 billion in the third quarter this year.

China Tower is drawing a lot of attention, given the company's status as the largest telecom tower infrastructure provider in the world.

Founded in 2014 by China Mobile, China Telecom and China Unicom, China Tower acquired the transmission tower assets of the top three Chinese telecom carriers and now leases the facilities, generating huge fee income.

The firm operated 1.9 million tower sites and had 2.7 million tenants as of end-2017. Its operating revenue rose nearly 23 percent last year to 68.7 billion yuan, while profit surged more than 25 times to 1.9 billion yuan, Reuters reported in May, citing a filing from the company.

China Mobile owns 38 percent of China Tower, while China Unicom holds 28.1 percent stake and China Telecom 27.9 percent. China Reform Holding, a state-owned asset manager, has the remaining 6 percent.

Given the support of the big three telecom operators, China Tower is no doubt a much better choice than Xiaomi in terms of business outlook and risk factors.

As China is gearing up for 5G rollout in the next twelve months, operators need to install new equipment across the nation for the deployment of the advanced wireless network. That will come as a big boost for China Tower's business.

While China Tower hasn't disclosed the size of its planned IPO, reports suggest that it may raise about US$10 billion. Market observers feel the firm can offer stable returns, given its business model and infrastructure business which some have likened to that of a real estate investment trust.

Also, the firm is expected to command high valuations, going by those enjoyed by global rivals. 

Reuters noted that peers such as US-listed American Tower and Crown Castle are trading at about 54 times and 111 times last year’s earnings.

Investor response to China Tower IPO will depend a lot on how the company values itself and if it leaves sufficient scope for appreciation. But given the Chinese government's support and blessing to the key infrastructure entity, it shouldn't be a tough task for China Tower to be a red-hot IPO.

Coming back to Xiaomi, there is a feeling that new-technology firms may not be suitable for all investors, especially retail investors who just want to take quick profit from the market.

Xiaomi's business model and corporate governance has come under doubt, especially as its management has failed to provide satisfactory explanation as to why the firm deserves its extremely high valuation when compared with global giant Apple in terms of price-earnings ratio.

The management, led by founder Lei Jun, want investors to believe in the notion that Xiaomi ought to be valued at Apple multiplied by Tencent, given the firm's unique three-pronged strategy of retail, internet and e-commerce businesses.

The fact, however, is that Xiaomi generated more than 70 percent of its revenue from smartphone sales, and not from the other two businesses. The management's claims of the company being substantially more than a smartphone entity are not backed by concrete figures.

Given all these factors, it's not surprising that retail investors are taking a lukewarm approach to the Xiaomi IPO. Statistics from local brokers indicated that margin financing used to subscribe to Xiaomi's shares amounted to just HK$8.5 billion, suggesting that demand has been relatively tepid.

One can assume that quite a few investors have chosen to sit out the IPO, waiting for other potentially lucrative offerings, especially China Tower.

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EJ Insight writer