One year on, China's vision for own Nasdaq-style technology board draws praises and disdain
Zhang Shidong and Daniel Ren in Shanghai shidong.zhang@scmp.com, ren.wei@scmp.com
The meteoric rise and recent stumble of China's budding technology board in Shanghai has captivated investors since its beginning one year ago, minting billionaires and burning investors in its infancy.
At the centre of the spectacle is the Science and Technology Innovation Board, a stock exchange created under an edict by President Xi Jinping in November 2018. The Star Market, as the board is also called, aims to support fundraising for start-up high-technology companies and those in strategic emerging industries, in the mould of the 48-year old Nasdaq Stock Market.
The mainland's vast army of investors, known for parlaying into any stock or investing theme with a presidential seal of approval, drove the first batch of companies to more than 200 per cent gain within two weeks of their debut on July 22. Valuations skyrocketed to levels even today's behemoth Apple Inc and Tencent Holdings would be envious of.
The Star Market is now home to 56 of the nation's future champions, whose technologies have the potential to replace their American counterparts in the cutthroat global marketplace, according to Zhou Qinye, a former deputy general manager of the Shanghai Stock Exchange.
Some 60 billion yuan (US$8.6 billion) has been raised from initial public offerings on the board since it went live in July. Another 61 are making a beeline for growth capital, according to official data.
One year on, Xi was back this week at the China International Import Expo in Shanghai, where he first unveiled his vision of a hub for the nation's high-technology superstars. A bruising trade war, a slowing economy and an intensifying technology race have since unfolded, casting a shadow over one of the milestones in China's more than two decades of capitalist market reforms.
The euphoria has waned, giving way to sobriety. Valuations have slumped from their lofty peak in August, three of the stocks dipped below their IPO levels this week, and institutional investors are fleeing. Is the model broken, or is it just growing pains?
"The performance of (Star Market) should not be measured by the stock price and valuation," said Hong Hao, managing director at Bocom International Holdings in Hong Kong. "The significance is in whether it can be a role model for reforms in China's financial markets. It is a reform of listing rules, that is more important. It is a success."
The Star Market was one of the three tasks Xi delegated to the Shanghai Stock Exchange at the inaugural CIIE expo last year. The president also called for the expansion of the city's free-trade zone and the integration of the Yangtze River Delta region.
"All of the three tasks proved to be difficult to accomplish as they were aimed at chasing high quality economic growth," said Su Ning, a researcher at the Shanghai Academy of Social Sciences. "That was why Shanghai was given the job to help push reforms forward."
The Star Market members are broadly engaged in basic science, semiconductor chip manufacturing, computing, robotics, new materials and life science, according to data published by the Shanghai Stock Exchange. None, though, are considered e-commerce or internet firms.
At its peak, the board's capitalisation reached 690 billion yuan on August 15. The average daily trading volume was 13.7 billion yuan, or more than 10 times the average on Hong Kong's GEM, a board created in 1999 to host technology companies.
Forty of the companies generated a combined net income of 8.58 billion yuan in the first nine months, according to data released by the Shanghai Stock Exchange. That was 40 per cent higher than a year earlier. The earnings growth rate for companies on Shanghai's main board, was 8.1 per cent in the period.
A contestant experimenting with a robot during a hi-tech competition in Qingdao in Shandong Province in October 2019. Photo: Xinhua alt=A contestant experimenting with a robot during a hi-tech competition in Qingdao in Shandong Province in October 2019. Photo: Xinhua
As a group, the Star Market members are trading at 66 times earnings compared with an all-time high of 103 times in August. Even so, that is still almost five times more expensive than the average of members on the Shanghai Composite Index.
Apple's historical valuation topped 149 times and Tencent 101 times. Alibaba Group Holding, owner of The South China Morning Post, saw 82 times at best, according to Bloomberg data.
"Those companies have solid fundamentals given their growth prospects, competitiveness, product quality, investment in research and development and per-capita productivity," said Zhang Chengyuan, a portfolio manager in Beijing at China Asset Management, which manages 1 trillion yuan of assets. "They have innovative capabilities and are highly representative of the hi-tech industries."
Beijing Piesat Information Technology, a software developer, trades at a whopping 2,159 times earnings, according to data provider Shanghai DZH, making it the most expensive of the lot. Sixteen of the 56 companies are trading at more than 100 times earnings.
Such extremes have rang alarm bells in the past. Investors in the Star Market can learn from the history of its forerunners, some money managers said. In the run-up to the infamous dot-com bubble, Nasdaq valuations soared to 152 times earnings. When the bubble burst in March 2000, they crashed to as low as 37 times in the ensuing 24 months.
The Star Market has since lost about 4 per cent of its capitalisation from an all-time high, according to data from the Shanghai Stock Exchange. The average daily turnover has almost halved from the level following its take-off in late July.
The risk has snared IPO buyers. Shanghai Haohai Biological Technology and Tianjin Jiuri New Materials both fell below their offer prices in intraday trading this week, barely a few days after they went public.
Shanghai Haohai closed at 90.85 on Friday, versus its offer price of 89.23 yuan. Tianjin Jiuri, a maker of photo initiator used in consumer electronic products, traded at 67.01 yuan versus its 66.68 yuan offer price. Electric-car battery maker Ningbo Ronbay New Energy Technology, one of the 25 pioneer members, has also traded below its IPO offer price.
For Shanghai-based money manager Hengsheng Asset Management, these stocks remain "too expensive" and the firm is not putting any money into them for now.
"Investing in these stocks is like playing a relay game, passing expensive shares from one investor to another,'' fund manager Dai Ming said in an interview. "You will need to wait for the real opportunity until the valuations tide ebbs."
One problem hindering the growth of The Star Market is the absence of technology heavyweights, or iconic representatives of the nation's fast-growing technology giants such as Ant Financial Services, Alibaba and Meituan Dianping, Dai said.
"At best, the existing line-up is just leading players in very niche markets and they are not big enough," he said. "For the board to succeed, you've got to need some big names with big market capitalisation in the mainstream industries."
Waning interest in the Star Market would be a setback for policymakers, who are eager to insulate the economy damaged by a bruising trade war and a dogfight on global technology supremacy. It is also a reform test-bed for China as it seeks to promote market-based registration system into its IPO market.
The China Securities Regulatory Commission has introduced a slew of accommodative measures specifically designed to give wings to the Star Market, while at the same time delegating some of its powers to the Shanghai Stock Exchange.
Chinese companies applying for listing on the nation's main boards or the ChiNext exchange are required to price their shares at no more than 23 times earnings to prevent a flop. That ceiling is not applicable for Star Market candidates, allowing both companies and investors to negotiate the pricing terms.
The Shanghai Stock Exchange has assumed the role of vetting listing applications, with IPO evaluated on disclosure-based regime, instead of requiring a track record of profitability and earnings outlook.
The bourse also imposes fewer restrictions on movements in daily stock trading of Star Market companies. Prices are allowed to rise or fall without any limit in the first week of trading, and a 20 per cent cap kicks in thereafter. In comparison, there is a 10 per cent cap on daily price swings for companies traded on other mainland stock exchanges.
China is seeking to infuse such characteristics into the nation's main stock exchanges, Yi Huiman, chairman of the securities regulator, said this month. He did not disclose when the move would be introduced.
Strong support for the nascent technology board is likely to sustain demand from investors, given a small pool of listed members at the moment, according to Chen Li, chief economist at Soochow Securities in Shanghai. As such, valuations are likely to stay elevated for longer, he said.
"The policy is now meant to rejuvenate the nation with technology, so social resources and growth capital are expected to concentrate in this area," Chen said. "The monetary policy is still relatively loose and there's still a big chance to see further cuts in interest rates in the next 12 months."
There are signs that the Shanghai Stock Exchange is speeding up approvals for applications to increase choices and the investing universe. Another 61 companies have completed their IPO registration procedures, and are awaiting their listing debut.
"Its imperative is to attract more and more credible and sizeable companies to list and expand its trading volumes," said Hong of Bocom International. "From this perspective, I believe it is likely to do well."
