When it revealed its tagline “the stock market for the next 100 years” back in the 1990s, the main bourse in the Nasdaq’s competitive sights was the NYSE. At the time it was hard but not completely implausible to imagine that stock exchanges in China would be giving the Americans a run for their money within the space of three decades. And even now – when it comes to total market value – China’s Nasdaq-wannabe still has a lot of ground to make up.
Shanghai’s STAR Market will be two years old next month and it has just passed the Rmb4 trillion ($618.8 billion) mark in overall market capitalisation. Although that’s double where it was a year ago, STAR is still a minnow compared to Nasdaq’s $19.4 trillion in market value.
That’s not really surprising as the Nasdaq is celebrating its half-centenary this year, giving it a 48-year headstart. During the first half of this year the Nasdaq reigned supreme again, with IPOs totalling $46.4 billion. The NYSE ranked second, Hong Kong third and Shanghai fourth (on $20.6 billion equivalent).
In the tech space the STAR Market competes more directly with Nasdaq. And here the two are more evenly matched. Nasdaq welcomed $16.2 billion in IPOs in the period, with Shanghai (including the Shanghai Stock Exchange) arranging $15.4 billion.
The STAR Market has momentum on its side, including China’s largest IPO in 2020 (onshore and offshore) when domestic chip foundry SMIC raised Rmb53.2 billion. It also seems likely to clinch the record again this year with news that global agricultural giant Syngenta is moving forward with its own listing plans. Preliminary indications are that Syngenta will raise double what SMIC did.
The Chinese press is reporting that Syngenta made $23.1 billion in revenues during 2020, just beating Germany’s Bayer Group as the world’s biggest agriscience company. Bayer isn’t listed but the industry’s third largest company, America’s Corteva, trades on the NYSE and is currently valued at 2.28 times its $14 billion 2020 sales.
That same multiple would give Syngenta a market value of about $53 billion, equating to an IPO of about $13.25 billion, based on a sale of 25% of its equity.
However, the STAR Market’s higher trading multiples mean that Syngenta will almost certainly aim for a higher valuation than that. This puts its IPO on course to be the largest domestic listing from China since the first decade of this century, when China’s biggest banks floated in Hong Kong and Shanghai.
Syngenta will probably be classed as the STAR Market’s first multinational debutant too. But the reality is that it is domestically-controlled, following ChemChina’s $43 billion acquisition in 2017 (ChemChina’s parent is the State Council’s State-Owned Assets Supervision and Administration Commission, Sasac).
However, the STAR Market isn’t getting everything its own way. So far this year, the two largest IPOs have been in Hong Kong and New York: the HK$48.37 billion ($6.23 billion) flotation of the internet-based video streaming platform Kuaishou (the main competitor to China’s local version of TikTok); and the $4.4 billion listing of ride hailer Didi Chuxing, which began trading this Wednesday (valuing the firm at $68 billion).
China’s largest IPO of the year has been the Rmb22 billion listing of Three Gorges Renewable Energy on the Shanghai Stock Exchange.
What differentiates the STAR Market from the other stock exchanges in China is its focus on technology, much like Nasdaq. Investors are similarly keen to spot which of STAR’s companies will ape the biggest beasts on Nasdaq. Both then and now the broader trends can be gauged from the winners and direction they signalled for the tech sector. In Nasdaq’s case think Intel, which debuted in 1971 (the exchange’s first year); then Apple and Microsoft from the 1980s; Amazon in the 1990s; and Facebook in the 2000s. So which are the potential big beasts of the STAR Market?
Might one of the candidates be Loongson Technology, which makes CPUs like Intel, and is now one of the standard bearers in China’s broader agenda to break its reliance on the US chip industry? Loongson filed an IPO application on Monday, aiming to raise Rmb3.5 billion.
Another candidate is BeiGene, which is also preparing to list on STAR, where it will become the first Chinese biopharmaceutical company to sell shares on the Chinese mainland as well as in Hong Kong and in the US. When it debuted on Nasdaq in 2016, BeiGene raised $182 million. Two years later it was off to Hong Kong, raising a further $912 million. And it won regulatory approvals on Monday to proceed with a Rmb20 billion raise on STAR.
BeiGene has had a spectacular ride, buoyed by explosive growth in the Chinese biotech sector. A host of other companies from that industry have their sights set on the STAR market too. They include Hong Kong-listed Sino BioPharma and CSPC Pharmaceutical.
Another group of candidates hail from the renewables sector. NYSE-listed JinkoSolar and Nasdaq-listed Canadian Solar have both submitted applications. They follow in the footsteps of Xinjiang Daqo New Energy, which listed last month.
As of the end of May, there were 282 companies listed on the STAR Market, with the STAR 50 Index trading around 62 times forward earnings. That’s high compared to the 17 times ratio for the CSI 300 (the 300 top stocks traded on the Shanghai and Shenzhen stock exchanges). But it is still nowhere near the 151 times peak at which the first 25 stocks on STAR were trading during the first early flush of enthusiasm that local investors felt for the new bourse in the summer of 2019.
Yi Huiman, chairman of the China Securities Regulatory Commission (CSRC), has good reason to be pleased with the way the new exchange has developed over the past two years. When it was first launched in July 2019 there were plenty of questions about whether the STAR Market would capture investor attention. Those are now resolved and Yi says the bourse has also fulfilled its role incubating science and technology companies.
He also denied that the regulator is making it harder for new companies to come to market, saying that the CSRC has “neither tightened nor relaxed the rules”. Instead it is focusing on keeping liquidity at healthy levels and maintaining a good balance between sales in the primary and secondary markets.
From the off, the STAR Market has also served as a test bed for equity market reforms. Most notably, it introduced a registration system for IPO candidates and scrapped the informal pricing cap for IPOs of 23 times earnings. There’s also no ceiling for secondary market performance for the first five days of trading, compared to a 44% trading limit range on Shanghai’s main board. After that, stocks are subject to a 20% limit, either up or down, compared to 10% on the main board.
In April the CSRC reiterated that the STAR Market wouldn’t welcome share sales from financial institutions or property companies. It also said that it was introducing new quality control measures governing R&D expenditures. Only companies that employ more than 10% of their staff in that department will be allowed to list, it said.
One high-profile casualty of the rule changes is automaker Geely, which has just withdrawn an application for a STAR IPO that it first made last year. The proposed share sale ran into opposition from regulators, who questioned whether Geely was high tech enough for the bourse, Bloomberg first reported in March. Part of the problem is that electric vehicle models only account for about 5% of Geely’s overall sales, and the company does not have a strong claim to a leadership position in EV technology, the domestic media has reported.
Deloitte still estimates that the STAR Market will be responsible for the majority of A-share listings this year, alongside Shenzhen’s ChiNext, another bourse that claims a mission of welcoming businesses with emerging technologies.
Of course, one of the main draws for companies wanting to debut on STAR are its richer valuations. These have encouraged a new group of state enterprises to pitch themselves as appropriate candidates as well, especially after China Railway Construction Heavy Industry raised Rmb3.68 billion in June. Its speciality in making machinery for boring tunnels may not sound like the cutting edge tech that the STAR Market usually welcomes but the state giant said that the proceeds would be directed into R&D for “intelligent equipment” for “super underground engineering” projects.
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