It sounds like a familiar tale: a tech company that raises more than expected from its initial public offering and sees its share price soar. Or rather that was what was happening on Shanghai’s STAR Market until July 2021, when the benchmark STAR 50 Index hit a high of 1,591. Since then, the trend has been downhill all the way, with the index losing 40% of its value through to May 9 and closing at 946.42. Initial public offerings (IPOs) have not fared very well either.
As we wrote in WiC581, Vanchip’s STAR Market listing had a particularly torrid time. Shares in the manufacturer of radio frequency chips lost 36% of their value on their opening day in mid-April, the worst debut since the STAR Market’s launch in 2019.
Not far behind was Rigol Technologies, a company that manufactures testing and measurement instruments. It fell 35% on its debut in early April.
Indeed, about half of the market’s IPOs have traded down so far this year. This has prompted CSRC vice chairman Fang Xinghai to urge the bankers who bring companies to market and the investors who buy their stock to be more disciplined in valuing the IPOs.
The issue underlines how China’s capital markets are still in a transitional phase in moving away from the longstanding practice of fixed IPO valuations capped at 23 times earnings. Newer bourses such as the STAR Market and Shenzhen’s ChiNext, which target high-growth companies, are allowed to set market-driven valuations. However, the market has not yet had much practice in reaching the right balance between short-term gains and long-term performance.
One company has bucked the trend. Suzhou Novosense Microelectronics listed on April 22, raising eight times more than it first planned: Rmb5.8 billion ($862 million) compared to initial expectations for Rmb750 million.
At Rmb230 per share, the manufacturer of signal chain analog chips also enjoyed a pretty punchy valuation of 107 times 2021 earnings.
However, one of the reasons why Novosense has done well is because its IPO was offered at a sensible discount to some of its nearest comparables such as 3Peak Inc, which is trading at a consensus forward valuation of 71.5 times estimated earnings, according to S&P Global Market Intelligence data. Novosense has traded up to Rmb255 as of May 9, giving it a forward valuation of 75.4 times.
The domestic media believes another reason for its success is because Novosense is one of the leading lights in the “domestic substitution” story. The view is that the company has Huawei to thank for much of this too. In 2018, the Shenzhen tech giant incorporated Novosense into its supply chain as part of efforts to reduce its reliance on foreign chip companies. “Huawei didn’t just start putting its money on domestic horses. It also helped them up into the saddle and then escorted them part of the way,” claims PE Daily.
It added: “Mobile phone companies such as Xiaomi, Oppo and Vivo have also begun to realise that they need to do the same. Not only have they become more active in finding domestic suppliers but they’re also more willing to cultivate better ones.”
The reporter noted that another feature of the efforts to bolster the domestic supply chain is the way that larger customers have been investing in the pre-IPO funding rounds of up-and-coming semiconductor firms.
One of Novosense’s pre-IPO investors was Qiansheng Capital. Founding partner Xiong Wei told the Securities Times that Novosense’s rapid rise “cannot be separated from being in the right place at the right time, but is also down to having the right people”.
The PE fund initially turned Novosense down in investment terms in 2018. But it changed its mind the following year and went on to lead its Series A round on the grounds that “the import substitution campaign for high end chips was about to begin”.
Novosense’s principal founder is Wang Shengyang, who began his career at what is now one of his main competitors, Analog Devices. He left the Nasdaq-listed company in 2013 after getting restless. “I was scared, but I knew it was time to make some changes,” he later recalled.
After teaming up with some of his former colleagues at Analog, Wang moved into consumer electronic sensors before shifting focus to the industrial and car sectors in 2015.
“We decided that we should move into products that weren’t available in China and had scarcity value,” he reflected. “We knew this strategy would be more difficult to execute but we felt we would reap the rewards over the long-term.”
And so it has turned out. Novosense now derives a growing portion of its revenues from sensor isolation chips, which protect circuits from faults and eliminate ground loop interference (they’re most commonly used in industrial communications and medical devices). Another topseller is sensor interface chips, which support conditioning and data communications functionality.
Novosense has a roster of top-tier clients across a range of industries including ZTE, Hikvision, BYD, Dongfeng Motor, SAIC, FAW Group and CATL.
Another investor is Puhua Capital. “China’s semiconductor industry needs a group of outstanding young entrepreneurs like Wang Shengyang. Only then can its semiconductor industry achieve the scale and technology we need,” explained Qi Yaoliang, a partner at Puhua, to the Securities Times.
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