China's Xiaomi set to lead the way on CDRs

The Chinese Securities Regulatory Commission (CSRC) indicated that it had accepted the application but gave no further details on the offering. CDRs are a means through which Chinese technology companies that are either listed overseas or structured offshore can sell shares in their domestic market – albeit in closely controlled conditions.

Xiaomi is reportedly seeking to raise at least $10 billion in its Hong Kong IPO at a valuation that could come close to $100 billion. Founded in 2010 by serial entrepreneur Lei Jun, the company found early success by selling handsets at less than half the price of products with comparable specifications. In addition to phones, Xiaomi launched the MIUI operating system and messaging service MiTalk.

As the company gained traction, its valuation rose. In late 2014, Xiaomi raised $1.1 billion at a valuation of $45 billion, briefly becoming the world’s most valuable technology start-up. This was followed by a difficult two-year period in which handset sales slowed and overseas expansion plans stumbled. Xiaomi overcame its troubles in part due to an online-to-offline retail strategy and a start-up portfolio constructed with a view to creating a technology ecosystem.

The company generated RMB114.6 billion ($18 billion) in revenue last year, mostly from smart phone sales. It also swung from a net profit of RMB491.6 million in 2016 to a loss of RMB43.9 billion in 2017. Investors include Morningside Ventures, Qiming Venture Partners, DST Global, Matrix Partners China, Hopu Investment, IDG Capital, Shunwei Capital, Dragoneer Investment, All-Stars Investment, and Ratan Tata’s RNT Associates.

Xiaomi is the first company to seek a listing in Hong Kong under new rules that permit weighted voting rights (WVR), which allow founders to retain control of companies even after their equity interest has fallen below 50% due to new share sales. This only applies to innovative companies with market capitalizations of at least HK$40 billion ($5.1 billion). Alternatively, the minimum market cap can be HK$10 billion if annual revenue is HK$1 billion or more.

China – where IPOs by companies with WVR structures are still banned – is being similarly selective on CDRs. First, businesses must be high-tech in nature. Second, listed companies must have a market cap of at least RMB200 billion, while their unlisted counterparts should be valued at more than RMB20 billion and have an annual operating income of RMB3 billion. It is unclear whether a privately-held company must pursue an offshore listing concurrently with a CDR issue.

Only a handful of overseas-traded Chinese companies meet the criteria, including Tencent Holdings, Alibaba Group, Baidu, JD.com, and Netease. Several other unlisted unicorns have been linked to potential CDR offerings, among them Ant Financial, Didi Chuxing, Meituan-Dianping, Lufax, and DJI.

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• Topics
• Greater China
• Technology
• IPO
• China
• Xiaomi
• Morningside Technologies
• Qiming Venture Partners
• DST Advisors
• Matrix Partners
• Hopu Investment Management
• IDG Capital Partners