This afternoon, a piece of news has blown up among Xiaomi shareholders, as shown in the picture.
Let me first explain in plain language what "old first, new later" placement means, and then analyze the pros and cons.
It means that Xiaomi's major shareholder "lends" part of their holdings to Xiaomi, and the company sells those shares to institutions at a discount lower than the market price in order to achieve rapid financing.
The company subsequently issued an equal number of new shares to return to the majority shareholder, thus keeping the majority shareholder's holdings unchanged, but expanding the overall total share capital.
Let me give an example to help everyone understand.
Assuming Mr. Lei holds 1 billion shares of Xiaomi stocks:
1. He first sells 0.75 billion shares at 53.7 Hong Kong dollars to institutions, and the company receives about 5.3 billion US dollars;
The company subsequently issued 0.75 billion new shares to Mr. Lei, so his holdings remain unchanged, restoring the original status, but the total share capital increased from 25.1 billion to 25.85 billion shares. This dilutes the total share capital by approximately 3%.
This "old before new" method of placing shares has the following two advantages over the traditional method of issuing shares:
1. No need for shareholder meeting approval, financing can be completed within one day; while the traditional issuance method generally takes several weeks, delaying the speed of financing.
2. Because institutions receiving the shares can immediately sell the stocks, the risk is relatively low, so the discount is not too large, generally around 5%-8%; while the discount for ordinary issuances is usually around 10%-20%, a higher discount will have a greater impact on short-term stock prices.
I have been a shareholder of Xiaomi since 2019, holding onto my shares for 6 years now, firmly believing in Xiaomi as a value investor (will never admit to being stuck in...).