On March 5, National People’s Congress (NPC) representative Lei Jun said in an interview that the dual-class shares implemented in the Hong Kong Stock Exchange is favorable towards internet companies, and thus technology innovators are likely to list their companies in Hong Kong. Lei said, “Dual-class shares recognize founders’ value in high-tech companies and innovative companies.”
Lei Jun, who also founded Xiaomi, did not clarify whether dual-class shares will attract the Chinese electronics enterprise to go public in Hong Kong. He had refused to comment on the listing issue.
Xiaomi’s listing is full of uncertainty. Outsiders speculated that Xiaomi will go public in Hong Kong, and later thought Xiaomi would have both A-shares and H-shares. Now, there is no clear answer.
A person in close contact with Xiaomi said, “A China Securities Regulatory Commission (CSRC) executive interviewed Lei Jun. Xiaomi is now more mature, and authorities hope that Xiaomi will list domestically (through A-share).”
During the two sessions, the listed internet companies all declared their willingness to return to A-share. In this context, Xiaomi is currently under heavy pressure.
Xiaomi is most likely to go public in Hong Kong with CDR
One securities trader believes that Xiaomi has three options in listing:
One option is to go public in A-share. In this case, Xiaomi will need to change its structure and face pressure to bear the burden of tax, cost, and time associated with foreign exchange turnover. Considering the recent government support for unicorns to be listed as A-share, the time cost is the biggest obstacle of the three.
The second option is “A and H” shares, although, according to the analyst, this description is inaccurate. A and H requires companies to be registered in China, but Xiaomi is still using the variable interest entity (VIE) structure. Its offshore company Xiaomi Corp is registered in Caimas, which controls Xiaomi Technology Co., Ltd through the VIE structure. In order to achieve A and H, Xiaomi needs to be restructured and set a new main body. As a result, it is difficult to determine whether Xiaomi could go public this year.
The third option is to list as a red chip with a Chinese depository receipt (CDR). Xiaomi could first be listed in Hong Kong, and then issue the CDR in A-share.
The CDR does not impose a requirement for the company’s structure. It is equivalent to Xiaomi issuing a financial product in China.
Early in the 21st century, the CSRC failed to attract overseas-listed Chinese companies back to China via CDRs. In 2008, the CSRC proposed to set up an international board to win more than 300 red chips back, but failed again. This time, CDRs are used to attract overseas listed technology and internet enterprises.
For Alibaba, Baidu, JD.com, Inc. and other companies already listed in the United States, they can issue CDRs in A-share. The CSRC does not pay too much attention to Chinese shares whose value is less than $5 billion. Xiaomi attracts attention from the CSRC for its market value and field.
Xiaomi might adopt the red chip with CDR method. This way, Xiaomi can be listed as early as the second half of this year. Also, Xiaomi can be listed overseas with this method, and its stock can circulate in A-share in the form of a CDR.
In general, a CDR does not make up a large proportion of a company’s liquidity. However, it is yet to be determined how CDRs will be issued domestically. “It is mainly due to technical issues,” says the analyst.
According to internal materials, the proposed valuation is about $200 billion after the listing.
Is the valuation too high? Insiders believe that it is possible to achieve this value. “Xiaomi shareholders have waited to list for years. Moreover, Hong Kong’s capital market recognizes mainland companies.”
In March 2016, Lei Jun stated that “Xiaomi will not be listed within five years.” Two years later in 2018, Xiaomi is bound to be listed. Why did Xiaomi suddenly accelerate its IPO? One industry insider believes that after experiencing a decline in 2016, Xiaomi now regained confidence in both volume and capital markets. Now is undoubtedly the best time to be listed.
Competition between CSCR and SEHK
Recently, both the CSCR and the Stock Exchange of Hong Kong (SEHK) have made moves to attract high quality companies.
On February 26, Xinhua News Agency issued an article to win BATJ (Baidu, Alibaba, Tencent, and JD.com, Inc.) back to China. Later, Baidu CEO Robin Li, NetEase founder Ding Lei, JD.com founder Richard Liu and others all said that they would respond positively to the national call to return to A-shares.
A CSCR insider has described the CSCR’s stance as having “great determination”. The CSCR hopes that A-shares will have a batch of new economy companies. He said, “Currently, there are few companies with large market capitalization in A-share. The few that do have them are in traditional industries.”
It is reported that the first batch of CDR list has been released, listing a total of eight enterprises, including BAT, Ctrip, Weibo, NetEase and Sunny Optical. The insider did not respond to the report directly, but said that the CSCR had begun to contact some U.S.-listed Chinese companies. Some companies responded very positively, and some did not.
Companies that embrace the new rule have needs for financing and desires for magnified benefits. Less receptive companies are more concerned that their boards will be internationalized, and existing shareholders often have the right to vote. In addition to the difficulty navigating the new rules, it is unrealistic to issue shares at a high premium in the domestic market.
Moreover, unlisted internet companies begin to consider going public at home.
Currently, as long as the companies are new unicorns, the CSCR will support and permit them throughout the listing procedure, as evidenced by Foxconn Industrial Internet Company’s listing. Their IPO prospectus showed that the company had been operating for less than three years and skipped a two-year queue. “The CSCR will cooperate with the company smoothly. In the future, the CSCR will move beyond imagination,” another person close to the regulatory executives said.
In the meantime, the Hong Kong capital market has also made frequent moves recently. At the end of February, the SEHK released a “Listing Regime for Companies from Emerging and Innovative Sectors”, asking for the market opinion on dual-class shares, a listing of biotechnology companies and other emerging and innovative companies.