Investors Blanch at Xiaomi Valuations as IPO Roadshow Kicks Off
Luo Qi
/SOURCE : Yicai
Investors Blanch at Xiaomi Valuations as IPO Roadshow Kicks Off

(Yicai Global) June 22 -- The roadshow for Xiaomi's much-touted initial public offering in Hong Kong is underway, but some investors have their doubts about the valuations the Chinese electronics giant is gunning for.

The Beijing-based company aims to raise USD6.1 billion when it goes public next month. If a 15-percent over-allotment option is triggered, the world's fourth-biggest smartphone maker could be worth as much as USD70 billion. IPO funds typically equate to about 10 percent of a company's market value.

"The firm spent the entire lunch telling investors why its valuation is so high, but I wasn't impressed," one senior investor told Yicai Global. The pitch namedropped some of the IPO's cornerstone investors, which include telecoms giant China Mobile, courier SF Holding and American chipmaker Qualcomm.

Another participant said that even if Xiaomi had an EV/EBIT multiple of 15, higher than Apple's 13, it still would not even be worth USD40 billion. EV/EBIT calculates a company's enterprise value over its earnings before interest and tax and can be used to determine a firm's market value. As the IPO figures stand, the price is really expensive, the investor added.

Xiaomi plans to issue 70 million class A shares (worth USD175,000) and 200 billion class B shares (worth USD500,000), with a 15-percent over-allotment option. Class-A shareholders have 10 votes for each stock they hold, while class B shares entitle investors to just one vote per share.

If it does not exercise the option, its post-IPO valuation would be between USD53.9 billion and USD69.8 billion. If it does, the figure increases to between USD54.3 billion and USD70 billion and puts Xiaomi's offer price at between 39.6 and 51.3 times its forecast earnings ratio for this year, and 22.7 to 29.3 times expectations for 2019, the investor added.

As more and more new economy companies list in the special administrative region, investors will better understand their true worth, said Liu Yuan, co-head of internet research in Hong Kong and China at UBS.

"It takes a process for investors to get to know new economy companies, and investors in Hong Kong will gradually see how those in other markets view these firms," Liu said.

E-commerce colossus Alibaba Group Holding, one of China's leading new economy businesses, raised USD25 billion in a New York floatation in 2014. It is still the world's biggest initial offering to date. Xiaomi's is expected to be the largest since Postal Savings Bank of China raised USD7.4 billion two years ago.

Editor: James Boynton.

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Keywords: Xiaomi , Hong Kong , Road Show , IPO , Market Value , Valuation