Chinese mobile phone maker Xiaomi has raised US$3.9 billion in Hong Kong's largest-ever top-up share sale. The company is looking to raise cash to allow it to expand at a time it is winning business away from rival Huawei Technologies.
Xiaomi shares, listed as HK:1810 with a U.S. ADR XIACY, were briefly suspended in morning trading Wednesday in Hong Kong. Details of the offer were announced at lunchtime, a weird break from the normal after-the-close practice.
The shares fell as much as 12% but recovered to a 7.1% loss by the close, not quite matching the 10% discount of the new shares. Xiaomi was the most active stock traded in Hong Kong, helping drag the benchmark Hang Seng index down 0.1% for the day.
Xiaomi in the third quarter became the world's third-largest smartphone seller, with 13% of the market last quarter, according to Counterpoint Research. Its 46.2 million units sold ranks it ahead of Apple's (AAPL) 41.7 million phones, or 11% of the market. Xiaomi falls behind only Samsung, at 22% of the market with 80.4 million phones, and Huawei, with a 14% market share, or 50.9 million units sold.
Huawei's market share has fallen from a high of 18% in the third quarter of 2019, while Xiaomi's market sliver has expanded five percentage points from 8% since then.
Huawei's pain is Xiaomi's gain, and Xiaomi wants a war chest to take full advantage.
Xiaomi therefore announced on Wednesday that it is issuing US$3.1 billion in shares at a price of HK$23.70, with another US$889.6 million raised from zero-coupon convertible bonds due 2027 that would convert at HK$36.74 per share.
The price of the new shares is a 9.9% discount to the average closing price of the last five trading days, which was HK$26.29.
The underwriters of the offering are Credit Suisse (CS) , Goldman Sachs (GS) , J.P. Morgan (JPM) and Morgan Stanley (MS) . Unusually, they do not include any Chinese banks, a similar pattern to Xiaomi's its initial public offering.
The phone maker says it plans to use the proceeds as working capital for business expansion, for "strategic ecosystem investments," and to increase its market share in key markets.
All the shares are being taken up by "at least six" institutional investors, the company said, with none of the shares on sale to the public.
Xiaomi went public with a US$4.7 billion initial public offering (IPO) in Hong Kong in June 2018. This US$3.9 billion top-up surpasses the US$1.9 billion raised in 2006 by the Chinese oil company CNOOC as Hong Kong's largest top-up ever.
Xiaomi was a frontrunner in a now-lengthy list of technology-related companies to list in Hong Kong, which traditionally was dominated by Chinese manufacturers, pan-Asian banks and local property developers.
Its shares are up 125.4% so far this year, making them some of the top performers in Hong Kong. However, by late 2019 they were down half from their IPO price of HK$17. The company reported a 19% leap in third-quarter net profit on the back of a 45% year-over-year increase in smartphone shipments.
Beijing-based Xiaomi offers Apple-like phones at a budget price. Its top-of-the-line phones sell for around US$400, but its cheapest fall below US$100. So far, it has made its biggest inroads in Asia, particularly India, Indonesia, Hong Kong, Singapore and Taiwan. But it is most recently making headway in Europe.
One feature of its Android-based phones is that they're completely open source, allowing users to customize the software and operations of their phones. Xiaomi also makes laptops, smart TVs and TV boxes, smart watches, and even drones, electric scooters and lamps, styling itself as a lifestyle brand.
One incentive for international expansion is that Huawei may be forced to downshift its products in terms of price and quality and thereby compete with Xiaomi's mass-market and mid-range phones inside China. Huawei was also prevented from using the Android system, which led to a jump in Xiaomi's international sales.
Thanks to what the United States says are Huawei's ties to the Chinese military, the administration of U.S. President Donald Trump has imposed an expanding range of curbs on Huawei's ability to operate. The Commerce Department first ordered U.S. chipmakers to get special permissions to sell chips to Huawei. The Commerce Department then expanded the ban's scope, stipulating that no company could sell chips to Huawei if they are made using U.S. technology, even outside the country. Essentially, all chips are made using U.S. software or hardware at some stage in the process.
Although it has been using its stockpile of chipsets, Huawei faces an inability to secure enough for its next-gen phones. Analysts believe its stockpile will run out early next year, grinding sales to a halt.
Qualcomm (QCOM) in mid-November won permission to sell 4G chipsets to Huawei, and Intel (INTC) has a similar license. Huawei has used Qualcomm chips in cheaper phones and its in-house designs for its flagship models, but still requires chips made using U.S. software and fabrication methods. Since most new phones are 5G models, the Qualcomm chips will be of limited use.
The British government on Monday announced U.K. telecoms cannot install new Huawei 5G equipment after September 2021 as part of a plan to cut Huawei technology out of the telecom infrastructure. The Trump administration has successfully called for a boycott on Huawei's 5G equipment, which was planned for use in many developed nations but which the Trump team say could cripple a country in a crisis if put to ill use.
