Who remembers Bunker Ramo? Probably not many of us. The maker of military electronic devices was hired in 1971 by the National Association of Securities Dealers (NASD) to develop an “automated quotation” system with up-to-date prices for brokers in the US. The NASD’s ‘AQ’ system became Nasdaq, which has grown into the world’s second largest stock market, behind the New York Stock Exchange. It boasts many of the world’s most valuable firms, including Apple, Amazon and Facebook.
Bunker Ramo subsequently became part of Honeywell, a defence heavyweight that has infuriated Beijing by selling arms to Taiwan (see page 8). But the Chinese have been looking to its earlier work for inspiration in launching a Nasdaq of their own this week. After a suitably stellar trading debut on Monday, questions are being asked about whether the new tech-focused board could emulate the success of its American forerunner.
How did the debut go?
The preparations for the STAR Market – short for the Shanghai Stock Exchange Science and Technology Innovation Board – have kept regulators busy for much of the last eight months.
Planning for the new bourse sped up when Chinese President Xi Jinping advocated its advantages at the first Chinese International Import Expo in Shanghai last November. In the wake of an escalating trade and tech war with Washington, the idea was to initiate a new fundraising platform to spur innovation and new sources of growth.
Nearly 150 companies have applied for an initial public offering on STAR – 25 of them went public when the new bourse commenced trading on Monday, after raising a combined Rmb37 billion ($5.4 billion) or so ahead of their debut. And when the opening gong was struck on Monday morning, an explosive buying spree sent all the stocks to more than double their offer prices.
China’s mom-and-pop investors have a history of speculating on new listings and analysts had been expecting “a burst of stir-frying” – a local term for buying stocks and then selling them quickly. But it was even more frenetic than most of the forecasters had predicted. Everbright Securities, the sponsor for a number of the debutants, had reckoned that the 25 firms would see their share prices surge an average 29% on the first day of trading. But by market close on Monday the average gain was a colossal 140%.
The brisk opening came despite a struggling broader market, with the benchmark Shanghai Composite Index retreating more than 1% on the same day.
The standout performer in percentage terms was Anji Microelectronic Technology, a chipmaker that surged more than 600% from its IPO price at one point and ended its trading debut 520% up.
The market value of Western Superconducting Tech also tripled.
As a result, the Financial Times noted that a trio of company bosses had been catapulted into the exclusive (US dollar) billionaire club (Chen Wenyuan, the chairman and holder of a 74% stake in flat-panel producer Suzhou HYC Technology, was now the richest of the three with a net worth of $2.4 billion).
In Chinese currency terms, National Business Daily reported that a much larger group of 125 executives and larger shareholders in STAR firms was also celebrating – each now worth more than Rmb100 million.
How is the STAR Market different?
The runaway gains on Monday were made possible by one of STAR’S key differentiators: there is no daily limit on price moves over the first five trading days (price gains for new stocks listed on the main bourses in Shanghai and Shenzhen are typically capped at 44%).
After the initial five-day period, STAR stocks are then subject to a daily price curb of 20%, before triggering a suspension. That compares with a 10% daily cap on the other Chinese bourses.
Another key difference is that market regulators in China generally don’t allow IPO candidates to price their shares at a valuation exceeding 23 times their latest earnings. But there is no such rule on STAR (in this case the 25 firms’ average price-to-earnings ratio at IPO was 53 times).
Lossmaking companies are also allowed to go public, a restriction that has prevented promising start-ups from listing on the other domestic bourses.
But perhaps the boldest reform of all has come in the vetting process. The China Securities Regulatory Commission (CSRC) has traditionally been responsible for scrutinising IPO hopefuls and the watchdog’s sometimes overzealous approach has seen a long queue of listing candidates waiting for approvals over the past few years.
The STAR Market, by comparison, operates a so-called registration-based system. This requires that listing candidates and their sponsors set the offering prices after gauging investor demand with a bookbuilding process.
The Shanghai Stock Exchange (SSE) – and not the CSRC – is responsible for ensuring the integrity of the company disclosures. However, investor protections have been increased in other areas. Only retail investors holding more than Rmb500,000 worth of cash or securities in their trading accounts are allowed to buy and sell on STAR (and they need to show two years of trading experience too). Underwriters are also obliged to buy at least 2% of the IPOs they sponsor and are subject to a two-year lock-up. Firms found guilty of serious violations in the listing process have been warned they will be booted off the board (i.e. delisted, a rare occurrence in China; see WiC453).
All in all, regulators have set out to make STAR different from China’s other bourses – or as Shanghai Securities News put it, it has been set up to “benchmark” major global stock exchanges, such as Nasdaq.
Who are the STAR debutants?
Despite the looser earnings requirements, all 25 debutants were profitable in the last financial year.
China Railway Signals & Communication (CRSC), a state-controlled heavyweight responsible for developing China’s railway signalling system, was the most profitable of the group. It reported net income of Rmb3.4 billion from Rmb40 billion in revenues last year (more than double the combined sales of the other 24 STAR firms, which mostly hailed from the private sector).
By the end of the trading day on Monday, CRSC was the biggest of the STAR firms with a market capitalisation of more than Rmb100 billion. That pointed to the power of onshore demand: CRSC’s Hong Kong-listed shares were trading at less than half their STAR valuation (after currency adjustment).
What kind of companies are likely to list on STAR?
In a policy document published prior to the bourse’s launch this week, the SSE said it would generally host companies with “hard technologies” in six strategic sectors, including next-generation information technology, high-end equipment, new materials and biotech.
These are also the industries that the government wants to promote in its so-called “Made in China 2025” blueprint, an effort to upgrade key sectors of the country’s industrial capacity. The campaign is no longer mentioned by the state media, because of the tense backdrop of the Sino-US trade war. Yet without doubt, the 25 firms debuting this week all belong to the sectors that “Made in China 2025” is prioritising.
Interestingly, none of this week’s debutants, or many of the listing candidates being mentioned by local media, are so-called “platform companies”, however.
That term mostly refers to internet firms that sell products and services to consumers from social media apps. A flurry of these firms have gone public recently in the US and Hong Kong, like e-commerce firm Pinduoduo, video streaming site DouYu and food delivery platform Meituan Dianping
When the STAR Market was being planned, one of the rationales was that it would allow companies like these to float in China, rather than overseas. Yet on the same day that STAR opened for business, the Financial Times was reporting that investors have started to shun the crowded consumer-facing tech sector. Private equity deals for firms like these also fell sharply in the second quarter to $2.2 billion from $26.4 billion in the same period last year.
Some celebrated tech unicorns have suffered a slump in share price after going public too. Smartphone maker Xiaomi, for one, has dropped nearly 60% since its Hong Kong listing in July last year.
So while promising start-ups such as Xiaomi were supposed to find a new home on STAR , the new bourse is actually showing more interest (at least for the time being) in fundraising for companies engaging in the “real economy”, Shanghai Securities News suggested.
With the Sino-US trade and tech spats still in full force, commentators have also been debating the definition of “tech firms” in China, especially after sanctions on ZTE and Huawei threatened to paralyse the telecom equipment sector.
“Not so long ago we were talking about the prospects of Alibaba and Tencent becoming the most valuable companies in the world,” a financial blogger wrote on news portal Jiemian. “But the cruel fact is that Chinese tech powerhouses are still relying on American technology to keep their ‘hearts’ [a pun on semiconductor chips] beating.”
That led other commentators to draw conclusions on what should really constitute a ‘tech’ firm in China. The verdict: those that feature (or soon might do) on Washington’s blacklist for American suppliers, such as Huawei, drone maker DJI, surveillance firm Hikvision and a number of state-backed quantum computer developers.
Will STAR keep rising?
Shanghai has been lobbying for a new bourse for 10 years, after Shenzhen launched the ChiNext, another market for high-growth enterprises, in 2009. Initially the ambitions centred on setting up an international board that would luring the secondary listings of multinationals like HSBC, as well as offshore-registered domestic giants such as China Mobile. But the introduction of the Stock Connect schemes linking the mainland bourses to investors in Hong Kong and London (and possibly more links to come) has made an international board less relevant.
Of course, there are limits to how much capital can flow through Stock Connect on a daily basis, and the average investor in China is curtailed by capital controls, which means that domestic savings are largely invested inside the country.
That makes it less of a surprise that new opportunities for investment are engulfed in tidal waves of cash. Monday’s excitement in the STAR Market proved this phenomenon yet again, although the smarter money was already showing signs of locking in its profits the following day, when all but four of the 25 stocks fell. The sell-off erased 9% of STAR’s market value (down to about $71.5 billion) in a single session, with railway giant CRSC, plunging more than 18%.
All in all, it made some of the early trading on STAR look like a game of hot potato, although retail investors have a local colloquialism for the situation, calling themselves the “chives” in the stock market. That is a reference to the way that chives can sprout soon after their stems are cut (an analogy for the short memories of many investors) and how they sometimes serve as stuffing for dumplings (a reference to how retail shareholders often end up getting stuffed with losses by smarter insiders).
The problem is that this kind of investor mentality makes it harder for STAR to serve as a predictable place for China’s most promising companies to raise capital. When ChiNext – also billed as more of a tech-heavy bourse – started trading in late 2009, it had a very similar mandate to promote a new wave of growth stocks. A total of 28 of these debut companies averaged first-day gains of 70% but most of the upside would soon be wiped out and it has been a wild ride ever since. ChiNext is still 60% down from its 2015 peak, with millions of investors burned by the experience.
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