The Chinese Securities Regulatory Commission (CSRC) is scrutinising Chinese smartphone giant Xiaomi. The regulators have asked why Xiaomi positions itself as an internet company rather than a hardware manufacturer. The firm is under pressure from regulators to justify the pricing of its initial public offering which would make it twice as valuable as Apple on a price-to-earnings basis.

Asking the question

Xiaomi, which has been planning to raise about US$10 billion, the CSRC has said the firm’s internet services account for less than 10 per cent of its revenue, while smartphone sales makes up between 70 and 80 per cent. The CSRC question in full: is ‘Please explain whether it is accurate to position your company as an internet firm rather than a hardware company, based on your major products, business nature, income breakdown, and source of profit.’ Internet firms tend to enjoy much higher valuations than manufacturers in public offerings because of the perceived extra room for growth. Smartphone sales in China appear to have peaked, falling last year for the first time.

Business structure

According to a South China Morning Post report, the regulator is also questioning the business structure of the firm, how it can to sustain or increase profitability growth, and whether promises it made to early investors is pushing Xiaomi to set the offer price higher than it actually deserves. Xiaomi is in the late stages of a public offering that could value it at US$85 billion. The company is seeking to raise up to US$10 billion through an IPO on the Hong Kong market as soon as July, according to sources mentioned in the paper. The firm will raise more than US$5 billion from the mainland market by issuing CDRs, or Chinese depository receipts, a new financial tool Beijing is using to attract leading technology firms that were formerly barred from the domestic markets because of their corporate structures.

A month to respond

The securities watchdog said it has given the company a month to respond to more than 80 written questions about its latest prospectus aimed at mainland investors.