The balloon is up

Xiaomi, Lufax Test IPO Investors' Credulity

Hong Kong's tech IPO boom has sent up a gigantic trial balloon.
Anindito Mukherjee/Bloomberg
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Investors, beware Hong Kong's crazy tech IPOs. The market is facing a $160 billion trial balloon.

That's the combined valuation bankers are pitching for initial public offerings by China's Xiaomi Corp. and Lufax this year.

With Xiaomi now appointing Wall Street kings Morgan Stanley, Goldman Sachs Group Inc., Credit Suisse Group AG and Deutsche Bank AG among its underwriters, the smartphone maker's ambitions for a $100 billion valuation could be a step closer to reality.

Meanwhile Lufax, a wealth manager owned by Ping An Insurance (Group) Co., also has an impressive list of Western underwriters and is hoping for a $60 billion valuation from a Hong Kong float in the coming months, according to the South China Morning Post.

The $100 billion tag Xiaomi is said to be seeking -- more than double the level three years ago -- smacks of wishful thinking. Growth in its home market has slowed since it last raised money in 2014 at a $45 billion valuation.

Ambitions for an IPO that might overshadow the last record, Alibaba Group Holding Ltd.'s $25 billion New York float, ride less on domestic expansion than on founder and Chairman Lei Jun's cult-like status in China and the company's success rivaling Samsung Electronics Co. in India.

However, India is a far from assured market for any foreign investor; and Xiaomi, as my colleague Tim Culpan has noted, is no Samsung, barely making money on its phones.

Lufax, too, is looking for a valuation more than three times the $18.5 billion it was worth in the last funding round two years ago. While anything fintech seems to capture investors' imagination, Lufax -- whose full name is the less snappy Shanghai Lujiazui International Financial Asset Exchange Co. -- faces a tougher regulatory landscape than it did back then.

That's not to say the window isn't open for Chinese companies tapping the Hong Kong IPO market.

C-Mer Eye Care Holdings Ltd., backed by the tech giant Tencent Holdings Ltd., surged 85 percent in its debut Monday. The eye-clinic chain was oversubscribed at least 1,557 times by individual investors, who are more likely than institutions to flock to companies with famous backers.

But Xiaomi and Lufax are aiming for the big leagues too fast. At the target valuation, Xiaomi would be worth more than state commodities giants China Shenhua Energy Co. or Cnooc Ltd. And Lufax's $60 billion dream would make it bigger than billionaire Li Ka-shing's flagship CK Hutchison Holdings Ltd., whose tentacles reach to European mobile phones and Australian utilities.

Too Big to Fail?

At the valuations Xiaomi and Lufax are seeking, they could be among China's biggest companies listed in Hong Kong

Source: Bloomberg

Investors also should heed the fate of some exemplars of Hong Kong's tech IPO frenzy.

The two that marked the re-emergence of the craze after years of SOE listings have surged since going public, thanks to massive first-day pops, but are underperforming the benchmark Hang Seng Index. That’s a problem for institutional investors, which, unlike individuals, don’t sell in the early days of trading. 

Tencent's e-books business, China Literature Ltd., raised $1.8 billion in an IPO that was so coveted by individual investors it drove up interbank borrowing costs. Shares of ZhongAn Online P&C Insurance Co., which began the rush, look decidedly unexciting compared with the Hang Seng. The benchmark, one of world's best-performing major indexes in 2017, is close to record highs this year on the back of old-school bank and insurance stocks, rather than tech.

Not So Hot Now

After successful IPOs last year and an initial surge, China Literature and ZhongAn are underperforming the benchmark index

Source: Bloomberg

Note: ZhongAn shares started trading in Hong Kong on Sept. 28, 2017, followed by China Literature on Nov. 8.

There's no question Hong Kong will be home to a wave of tech IPOs, especially as the city's exchange opens up to dual-class shares. Whether they're good buys at the kind of valuation being discussed is another matter. Even in buzzy tech, investors should do their homework.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

    To contact the editor responsible for this story:
    Paul Sillitoe at psillitoe@bloomberg.net

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