Launched in November 1999, Hong Kong’s Growth Enterprise Market was the first attempt to create a China-focused answer to Nasdaq. Hopes were high that it could replicate the US bourse’s success, turning lossmaking start-ups into supernovas.
But within a year, the project lost traction. Aside from the dotcom bubble’s implosion, the fundamental issue was the shortage of tech firms in Hong Kong itself and across the border.
At the time Alibaba and Tencent were relatively unknown and less than two years old. Zhongguancun in Beijing, a cradle for tech unicorns, had only just started to gain recognition.
Much has changed in the last two decades.
As of October China had produced 206 unicorns worth more than $1 billion each. In the past many of these firms have generally preferred to go public in the US. But in a bid to keep them at home in China, a new tech board was set up in Shanghai on July 22 last year. The Science and Technology Innovation Board, or STAR Market, celebrated its first anniversary this month.
Is it doing any better than the earlier effort in Hong Kong?
How much has the tech board raised?
In just 12 months, the STAR Market has made a quantum leap to become Asia’s second biggest growth market for technology companies, hosting 133 listings worth a total of Rmb2.8 trillion ($400 billion). The largest tech exchange was its Shenzhen cousin ChiNext, with a capitalisation of Rmb9.2 trillion. However, six times more firms are listed on that bourse, which was set up 11 years ago. (Hong Kong’s GEM board is languishing at a meagre $14.6 billion, with a daily turnover of less than $50 million last month.)
STAR’s success was fuelled by companies that had long been shut out of the country’s main exchanges – owing to restrictive regulations – as well to frenetic trading activity. More often than not, companies that went public on the STAR Market were rewarded with big first-day share price “pops”. Tapping a total of Rmb150.7 billion from the primary market, firms listed on the board saw an average first-day spike of 163%, with their prices hitting 110 times their earnings at one point. At least eight companies jumped fivefold from the offering prices. The lofty valuations, critics warned, were out of touch with fundamentals.
Loose liquidity aside, the frenzy, which seems to have defied the coronavirus pandemic and mounting geopolitical risk, would not have been possible without more relaxed rules that were tailor-made for the new bourse.
Aside from streamlining the IPO application system, the board accepts companies that have yet to make a profit, or that possess weighted voting rights. Caps on valuations, limits on first-day market moves and the rationing of the number of IPOs were also dispensed with (new listings in more established stock markets in China cannot price their IPOs at more than 23 times earnings and face a 44% ceiling for first-day share price moves).
“The STAR Market has changed the listing criteria from sustainable profitability to sustainable operating ability, which allows companies with core technologies and a long cash-conversion cycle like us to successfully go public,” Qi Xiangdong, chairman and CEO of Qi An Xin, a cybersecurity firm, told Xinhua.
In the first half of this year the board helped Shanghai become the world’s second largest IPO hub, with STAR contributing 45% of the total funds raised in the city.
Enabling a wider range of companies to go public, the board has also minted 13 billionaires. Top of the rich list is Chen Tianshi from Cambricon Technologies (see WiC487). With a 38% interest in the Beijing-based artificial intelligence chipmaker, the 35 year-old founder, formerly a computer science professor at the Chinese Academy of Sciences, saw his net worth swell by Rmb42 billion as of July 22.
Second is Zhao Yan from Bloomage Biotechnology (see WiC470). Her 59% stake in the world’s largest maker of hyaluronic acid dermal fillers has added Rmb40 billion to her personal fortune, making her the 12th richest self-made woman in the world, according to the Hurun Research Institute.
As the STAR Market continues to shine – with average daily transaction volumes more than double their initial levels – Shenzhen’s ChiNext Board is also planning to adopt similar IPO and trading rules. Currently it is home to 833 companies.
Which firms are the heavyweights?
For much of the past year the biggest company listed on the STAR Market was Beijing Kingsoft Office, a spin-off from the software enterprise associated with Xiaomi’s boss Lei Jun (see WiC476). Worth around Rmb177 billion as of July 22, the creator of WPS Office, China’s answer to the Microsoft Office suite, has seen its market value multiply nearly nine times since its flotation last November. Its share price got an extra boost in February, thanks to MSCI’s decision to include it in two major indices. Sentiment on the stock was also buoyed by the coronavirus outbreak which forced more people to work from home.
However, more recently Kingsoft has been edged off the top spot by Semiconductor Manufacturing International Corp (better known as SMIC). Investor enthusiasm for China’s largest chip foundry pushed its market capitalisation to Rmb590 billion on its debut on the A-share market this month. It raised Rmb46.3 billion, the largest in China’s onshore market in a decade. The stock’s turnover was high too – in marked contrast to its American Depositary Receipts in New York which were only thinly traded in the prior 16 years (see WiC454).
Although SMIC is still far from mastering the know-how to produce the 7-nanometer chip that its Taiwanese rival TSMC has been manufacturing since 2018, investors seem sanguine that the Shanghai-based foundry will eventually make the necessary jump thanks to government support.
Guosen Securities, a state-owned brokerage, believes SMIC’s valuation has the potential to surpass not only TSMC (which broached $400 billion this week) but also Kweichow Moutai, currently the most valuable A-share.
A preferred stock among foreign investors, baijiu distiller Moutai had a market value of Rmb2 trillion as of July 24.
Guosen Securities’ prediction for SMIC might look a stretch. However, it is not alone in forecasting that investors will reallocate more of their money from the ‘old economy’ stocks listed on Shanghai’s main bourse (such as banks and baijiu makers) to tech counters.
Which are the best market performers so far?
Among the companies listed on the STAR Market, 30% are involved in making high-tech equipment; 26% in software and information technology; 25% in telecommunication and electronics; and 16% in pharmaceuticals.
Firms in the semiconductor industry particularly stand out as some of the most highly traded and best performing. Take National Silicon Industry Group (NSIG). It was the first Chinese firm to mass produce 300-millimetre silicon wafers (the highest standard is 450mm) and has returned 1,054% since its share offering in April. That made it the biggest market winner year-to-date.
Founded in 2015, NSIG was established by the National Integrated Circuit Industry Investment Fund (see WiC271) in a bid to break foreign dominance in silicon wafer manufacturing. Despite supplying France’s Soitec and America’s Qorvo, its global market share remains only 2%. But surging orders from local chip makers, due partly to US export bans, are expected to help the company scale up. The consensus forecast is that NSIG will turn profitable this year, with full-year revenues of Rmb2.3 billion, more than eight times the figure from four years ago.
In terms of market turnover, microelectronic equipment maker AMEC, short for Advanced Micro-Fabrication Equipment China, and Montage Technology, a fabless memory interface developer, have been the second and third most traded stocks on the board, respectively, behind SMIC.
Backed by venture capital from the Shanghai government and Qualcomm, AMEC initially focused on making the etching machines used in wafer manufacturing. In 2017 it made a breakthrough in producing metal-organic chemical vapour deposition (MOCVD) equipment that is essential for making light emitting diode (LED) semiconductors. The following year the 16 year-old company broke the sales stranglehold of existing stalwarts such as Aixtron from Germany and Veeco from the US, and accounted for 41% of the global market.
Following a deal to build manufacturing facilities in Jiangxi province in 2018, AMEC has been on the receiving end of government subsidies. In the first four months of this year it was given a total of Rmb178 million, roughly the size of its net profit for 2019.
Montage Technology is another investor darling due to its leading position in the market for memory interface chips, with a 46% share. The company, in which Intel has a 9% stake, has been setting the standard for each generation of data buffers (a part of a physical memory storage unit that’s used to temporarily house data) since 2011, counting Samsung Electronics, SK Hynix and Micron among its key customers.
On its debut (which occurred on the STAR Market’s first trading day), Montage Technology’s share price closed 202% higher than its offering price. Since then its valuation has risen to Rmb93.5 billion, or 19 times what it was worth when it was taken private from Nasdaq in 2014.
Outside of the semiconductor sector, QuantumCTek has made an impression by delivering the largest first-day jump of any Chinese initial public offering in history. Making a leap of 924% on its maiden trading day, its new shares were valued at 499 times trailing earnings.
Founded in 2009 by Pan Jianwei (see WiC465), a world renowned scientist in quantum communications, the Hefei-based company sells technology and equipment that prevents encrypted messages from being hacked – providing a failsafe method for distributing secretive digital keys among scattered parties. Not surprisingly, its technology has a high national security component.
As of the end of 2018, the total length of China’s quantum communications network had reached 7,000 kilometres of optical fibre; of which over 85% had adopted technology supplied by QuantumCTek. Its customers are mostly contractors in large-scale communication infrastructure buildouts – predominantly commissioned by local governments.
Between 2017 and 2019, the annual sales of QuantumCTek’s quantum key distribution machines were around 650 units (below its production capacity of 951). Prices having fallen by a quarter to less than Rmb300,000 per unit, notes Sina, a local news portal.
Which companies are poised to be the next stars?
Ant Group, the operator of China’s largest mobile payment services platform Alipay, is undoubtedly the standout candidate. Its planned dual listing in Hong Kong and on the STAR board could see the crown jewel of the sprawling Alibaba empire sell up to 10% of its shares in what might be the world’s biggest ever IPO.
In its last financing round in 2018 the fintech unicorn was valued at $150 billion. The rapid expansion of its business – which runs the gamut from micro lending, wealth management, insurance, credit scoring to B2B technology services – has reportedly pushed its worth to at least $200 billion in the private market.
For comparison, global payment processing giants Mastercard and Visa have market capitalisations of $307 billion and $419 billion respectively. E-wallet provider PayPal is valued at $207 billion.
In the last financial year Ant’s pretax profit was estimated at around Rmb28 billion, according to Shenwan Hongyuan, a Shanghai-based brokerage. That puts its compound annual growth rate since 2013 at 58%.
But Ant should not be valued as a pure play financial services firm says its CEO Hu Xiaoming, who is hoping to draw 80% of Ant’s revenue from selling technology services to businesses within five years, up from the current 50%. The shift will see Alipay evolve into a super-app hosting millions of mini-programs servicing merchants and consumers.
Another pillar of its profit growth is its blockchain solutions, which have been deployed in shipping and insurance claims processing and around 50 other areas. To promote wider adoption, Ant has launched a dedicated workstation (similar in size to a laptop) that it claims to be able to speed up blockchain transaction processes substantially.
Another factor: Ant’s extensive investments across the world. In the last five years it has invested in over 160 companies, including India’s Paytm and UK-based WorldFirst. Such determined dealmaking has a goal to bulk up Ant’s customer base to 2 billion from the current 1.3 billion globally.
What else is ahead?
The South China Morning Post believes Ant’s decision to list on STAR will jumpstart “a positive feedback loop of deeper secondary market trading that attracts still more companies”. Geely Auto, Great Wall Motor, CanSino Biologics (see WiC492) and CSPC Pharmaceutical (see WiC500) are some of the Hong Kong-listed firms that have already announced plans to raise new funds on the STAR board.
The so-called “A+H shares” capital structure should put mainland companies in an enviable position, where they can tap foreign institutional money from the H-share market in Hong Kong, and simultaneously enjoy the relatively high valuations that onshore Chinese investors tend to give.
A case in point would be SMIC, whose Shanghai stock price was roughly triple that of its Hong Kong counterpart on its debut. The same is true for drugmaker Shanghai Junshi Biosciences.
Meanwhile the STAR 50 Index has so far returned 47.7% year-to-date. Launched on July 23, the new benchmark tracks the 50 largest companies on the board. However, because the STAR 50’s compilation methodology requires companies to have traded for at least six months it still excludes more recently listed giants like SMIC. These could boost the index later this year when they become eligible.
Somewhat belatedly the compiler of the Hang Seng Index also unveiled a tech benchmark five days later to keep tabs on the performance of the top 30 (out of 163) tech companies listed in Hong Kong. With Alibaba, Tencent, Meituan Dianping, Xiaomi and Sunny Optical carrying a combined weight of more than 40%, the index has climbed 30.6% this year through July 28. Chinese tech firms will be even more influential after the imminent listing of Ant. (Ride hailing firm Didi Chuxing is reportedly looking for a Hong Kong listing this year as well.)
As the STAR Market celebrated its first birthday, the lock-up period for many of the shares held by founding shareholders, venture capital funds or institutional investors also expired. That means 3.1 billion of additional shares – worth about Rmb188 billion – are set to join the free float. That has put some investors on edge as such a sudden influx could trigger a sharp sell-down. Companies on the STAR Market are now trading at close to 100 times trailing earnings on average, versus a multiple of just 34 for Nasdaq stocks, or 45 for the major tech stocks in Hong Kong.
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