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China』s IPO hopes buoyed by outsized belief in 『unicorns』

雖然小米據說實現了盈利、並且擴充了商業模式,但要說它價值1000億美元,則是一個太過大膽的假設。

Xiaomi has a scant 7 per cent share of the smartphone market and is still clawing its way back from a particularly torrid low point. Now bankers advising the Chinese handset maker on a potential initial public offering reckon it could be worth up to $100bn — roughly the same as investment bank Goldman Sachs or miner Rio Tinto.

It may be unfair to call out the bankers. In Xiaomi』s case their view is doubtless aided by founder Lei Jun. After the company was valued at $45bn in a 2014 funding round, he has swiftly segued from last year』s hubristic to exuberant.

More generally, markets are whipping up animal spirits, with indices in the US and Hong Kong setting fresh highs in recent days. That has already wooed US tech groups like Dropbox, the file-sharing platform, which this month appointed bankers to lead its initial public offering.

It is no surprise that the tide is washing up in even bigger waves in China, home to four of the 10 biggest unicorns, private companies worth more than $1bn, and six 「deca-corns」, those worth $10bn. All are now considered fair game to go public, regardless of bottom line losses and an almost universal proclivity to burn cash.

Those with a vested interest in a buoyant IPO market — the advisers, exchanges and regulators who have chafed at start-ups』 predilection for staying private for longer — point to tightening monetary policy and founders』 egos as reasons for more of them to go public.

Others may find it a less than irresistible proposition.

For investors, start with precedent. Some companies have performed supremely well after listing but half of last year』s Chinese start-up IPOs are trading below their offer price, according to Dealogic.

Tech is an industry where Chinese regulators are playing catch-up but they carry big sticks when they do. Case in point: payday lenders, which took a hit when Beijing signalled concerns about injudicious lending, usurious interest rates and coercive collection practices.

Last October, Qudian, which is backed by Alibaba affiliate Ant Financial, raised $900m on the New York Stock Exchange, the largest US IPO ever by a Chinese fintech group. It was followed by PPDAI, which raised $221m in a deal that priced below the initial price range. Share prices of each are now roughly half the offer price.

Second, Chinese tech is an entirely new ballgame, not US mark 2. As John Hsin, a partner with China Renaissance』s Huaxing Growth Capital puts it, US investors like investing in Chinese copycats of US companies: they know and understand the business model, and simply get to plug in a bigger number because China has more people.

But, he adds, Chinese tech has evolved away from companies focused on a single area, such as social media, towards tech conglomerates that invest in everything from banking to shopping to video games. Meituan-Dianping, which began life as a discounting site like the US』s Groupon, now offers food delivery, travel bookings, restaurant reservations and ride-hailing.

Companies also have reason to be wary of the public markets. Sure, there is cash to be had, particularly overseas cash which few Chinese groups earn and is useful for acquisitions. There is prestige too, and an IPO means less reliance on a smaller (but very rich, very liquid and very willing) pool of investors. Yet existing investors can be a useful bunch. Most tech start-ups have received money from Alibaba or Tencent, and the two giants bring more than money. Most important, they can provide traffic: Tencent』s WeChat app has just shy of 1bn monthly active users; Alibaba boasts 550m mobile customers who use its Chinese marketplaces every month.

Most Chinese start-ups are still burning through cash. In businesses where scale is everything, subsidies to woo drivers and other suppliers as well as customers are a cost of doing business. That makes it tricky to estimate when things will be profitable, which does not go down well with the impatient investors who dominate Wall Street.

Xiaomi by all accounts is back in the black, but not massively so. It has supplemented its initial business model — making iPhone-like phones for a fraction of the price — with connected home appliances, exercise wristbands, looping them all into a fledgling ecosystem. But saying that is worth $100bn is a heroic assumption too far — and one that risks swiftly dampening animal spirits.

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