China's Big Tech Stock Plan Hits a Speed Bump

(Bloomberg) -- Xiaomi Corp.’s decision to postpone the China half of its stock debut is a setback to the nation’s plan to compete with Hong Kong and New York for the world’s biggest initial public offerings.

Chinese regulators said this week that the company would go public in Hong Kong ahead of any other listing, despite Xiaomi saying on June 14 that it would sell at least half the shares in its planned IPO to investors in Shanghai.

The change is a win for the former British colony, while appearing to derail what had been a rapid effort by policy makers in China to allow the country’s largest technology firms to list at home. First mooted in February, Chinese depositary receipts were reportedly due to be ready for trading in the next few weeks, but Xiaomi’s delay suggests the world’s second-biggest stock market has some way to go before it can challenge Hong Kong.

“CDR is indeed a complicated matter,” Charles Li, chief executive officer at Hong Kong Exchanges & Clearing Ltd., said at an industry event on Thursday. “There are definitely a lot of challenges when getting the regulations ready within a short time and implementing them in both markets simultaneously.”

This year’s CDR push came as Chinese officials were determined not to lose the next generation of tech companies to overseas markets, Fu Hao, the Shanghai Stock Exchange’s director of global business, said in March. Nearly $1.5 trillion worth of Chinese tech firms are listed offshore, according to data compiled by Bloomberg.

Market participants’ concerns over how CDRs would work and questions about Xiaomi’s valuation in a China IPO may have been among reasons why the company decided to postpone a CDR, said Hao Hong, chief strategist with Bocom International Holdings Co. in Hong Kong. China’s regulators have an unwritten valuation cap that means stocks debut at 23 times earnings or less, a limit that high-growth technology firms would find unappealing.

The immediate beneficiary of Xiaomi’s delay is HKEX, which introduced rules this year that allow tech companies with different share classes to go public at its venue. Xiaomi is seeking to raise as much as $6.1 billion, giving Hong Kong a larger slice of the IPO than earlier indicated, according to people familiar with the matter. That means a larger pool of shares, which should translate into more trading. The IPO price range translates to 22.7 times to 29.3 times Xiaomi’s forecast 2019 earnings, the people said.

Popular Model

Issues around CDRs will ultimately be resolved, and when they are HKEX will have to get used to sharing tech IPOs with Chinese exchanges, according to Goldman Sachs Group Inc. analyst Kinger Lau.

“In our view, we think the combined Hong Kong-CDR listing model will become more popular going forward,” Lau said by phone.

For Xiaomi’s debut, that model will come too late. The Beijing-based firm has lined up China Mobile Ltd., the nation’s biggest wireless carrier, and U.S. chip giant Qualcomm Inc. as cornerstone investors, and aims to start trading in Hong Kong on July 9, according to terms for the deal obtained by Bloomberg.

Any delay to the introduction of CDRs benefits Hong Kong, as the more efficient China becomes, the less need there’ll be for the city’s capital markets, said Andrew Collier, managing director of Orient Capital Research.

“Based on what’s happened with Xiaomi, it is going to be a while before the CDR program takes away significant market share from Hong Kong,” he said.

©2018 Bloomberg L.P.