Xiaomi, Chinese Gadget Maker, Opens Floodgates for Hong Kong IPOs

Posted May 3, 2018 6:25 p.m. EDT

HONG KONG — A gadget maker. An online delivery service. And the electronic payment company owned by the tech giant Alibaba.

These are among a spate of Chinese companies expected to open their doors to ordinary investors in Hong Kong over the next year through public listings, after a loosening of rules by the city’s stock exchange. If many of them end up listing in Hong Kong, then China will have accomplished a major goal: keeping its hugely successful tech boom at home.

The flurry of big-name Chinese companies potentially choosing to stay home, rather than go abroad, in search of funding is part of a broader push by China, which has sought to develop homegrown champions in an array of sectors. But the new regulations, which allow companies to retain more control, have also been criticized as an encroachment by Beijing on Hong Kong’s legal system and corporate governance standards.

Xiaomi, the gadget maker, announced Thursday that it would list in Hong Kong, the first company to do so after the rule changes.

Its decision is a victory for Hong Kong, which missed out on blockbuster stock offerings by Alibaba and other rising internet companies in mainland China in recent years. It is also a win for Beijing, which has embarked on a campaign under President Xi Jinping to nurture the development of new industries in technology and lure back homegrown stars that listed overseas in years past.

“I think it rather stuck in the throats of the leadership in Beijing that large companies had to go overseas to list and not in Hong Kong, which they view as part of home,” said David Webb, publisher of the financial and corporate governance website Webb-site and a deputy chairman of Hong Kong’s Takeovers Panel.

“There has been somewhat of a campaign to bring companies home and remove them from foreign jurisdictions,” Webb said.

While Hong Kong is officially a special administrative region within the People’s Republic of China, and has a separate legal and financial system, Beijing sees it as a part of the mainland. Some of China’s biggest and most exciting technology startups, like Didi Chuxing, the ride-sharing rival to Uber, and Ant Financial, the financial arm of Alibaba, are making plans to go public over the next year.

In the past, Chinese entrepreneurs like Jack Ma of Alibaba chose to list their shares in markets, like New York, where they could operate as if their companies were still private. They were able to offer so-called dual-class shares, which give shareholders little say in the operations of the business.

Until last week, Hong Kong, which has stricter rules than New York, had not allowed such listings. In its filing Thursday with Hong Kong’s stock exchange, Xiaomi appeared to be taking advantage of the new rules.

The company, whose low-cost smartphones have won a loyal following not just in China but in other emerging markets like India as well, said it would raise an unspecified amount from the public in order to fund the development of new smartphones and other devices like household gadgets. The money will also help Xiaomi pursue expansion overseas.

It could raise as much as $10 billion, according to two people with direct knowledge of the company but not authorized to speak on the record. That would make it the second-largest listing by a Chinese technology company since Alibaba in 2014.

As part of the listing, which could come as soon as June, Xiaomi will offer dual-class shares, which allow for weighted voting rights. This will mean that Lei Jun, Xiaomi’s founder, chairman and chief executive, will have the ultimate say over the company’s operations, rather than investors who buy its shares, even if they end up owning more stock than he decides to hold onto.

This share structure will allow the company to benefit from Lei’s “vision and leadership” while allowing him to maintain its “long-term prospects and strategy,” Xiaomi said in its filing.

The decision by the Stock Exchange of Hong Kong to allow dual-class shares just one week ago has sparked fierce debate here. For the exchange, not allowing companies to list with such a structure meant it missed out on lucrative listings like Alibaba’s $25 billion initial public offering. Alibaba opted to list in New York, where several large technology companies like Facebook and Google’s parent, Alphabet, operate with dual-class shares.

“There is no question that Hong Kong is under tremendous competitive pressure,” Richard Li, the Hong Kong Stock Exchange’s chief executive, wrote in a blog post after the decision. “We are at the precipice of a gold rush of new-economy companies from China, and it’s vital that we position ourselves to benefit from this development.”

But some in the city’s investor community had pushed hard to prevent Hong Kong from changing its rules, arguing that it will mean less rigorous corporate governance.

“There should not be unequal voting rights as they could allow management or minority share owners to override the wishes or best interests of majority shareholders for personal benefit and compromise accountability, leading to potential entrenchment issues,” Mary Leung, head of advocacy for Asia at CFA Institute, an association of investment professionals, said in a statement.

Some big institutional investors have criticized Hong Kong’s stock exchange for throwing out tighter regulations in a bid to compete with rivals. There are also longer-term concerns that companies will not be as closely scrutinized in the future in Hong Kong, which was once a British colony. As part of the British handover of Hong Kong to China in 1997, the territory was promised 50 years of self-administration. But in recent years, the city has experienced encroachment on its independence, and investors have raised concerns that its strong regulatory and legal institutions are slowly being eroded by Beijing.

To these critics, Hong Kong’s decision to allow dual-class shares is further evidence of that erosion.

“Beijing is much happier raising capital in a city that they can partially control rather than handing overall the listings to U.S. markets,” said Andrew Collier, founder of research firm Orient Capital Research. “At the end of the day, the Hong Kong stock market is going to be creeping slowly toward Chinese-style regulation.”

Li did not respond to a request for comment. But in his blog post he said the exchange was “introducing additional safeguards to protect investors against the potential misuse of power,” including more corporate governance requirements and certain limits on founding shareholders in these structures. The exchange’s move to loosen its requirements is expected to trigger a spurt of initial public offerings this year and next amid growing appetite across global public markets for new technology companies.

Meituan-Dianping, an online delivery service for food and consumer products, is making preparations for an initial public offering in Hong Kong this year, according to two people with direct knowledge of the company but not authorized to speak on the record.

Ant Financial, the electronic financial services firm owned by Alibaba, is going through one final fundraising round before it also decides whether to list its shares publicly late this year or early next year, according to these people.

And the Chinese ride-hailing company Didi Chuxing is in talks for its own listing, according to one of these people. It is not clear where it would choose to list.

Despite the criticism about corporate governance in Hong Kong, its rules remain stricter than New York’s — for now.

Tencent Music, the streaming service owned by Chinese tech giant Tencent, is in talks with various banks to help it go public. It is expected to choose New York, where companies can use the dual-class share structure even if the founding shareholder is a company and not an individual. This would allow Tencent, the parent of Tencent Music, to maintain control.

In Hong Kong, the dual-class share structure is available only for individuals. But the city’s stock exchange has already begun seeking feedback from the investor community about loosening this rule, too.