A Twinkling Star: Three Months of ‘Shanghai’s Nasdaq’
COVID-19 and China
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Intending to fuel the tech sector and to improve the efficiency of the local capital markets, the Chinese government has launched a new Nasdaq-like trading board on the country’s largest bourse; it has now been de facto operational for three months. EqualOcean has been keeping an eye on the sci-tech marketplace since its inception. In this article, we briefly summarize the major changes that took place on the Shanghai Stock Exchange (SSE) Star Market over the past few weeks. 

Created in large part to spur domestic innovation by ameliorating capital-raising channels for homegrown tech enterprises, the board is now playing an important role in the country’s economic reform. Though a lot has been said about its special status (read more in EqualOcean’s recent report – download), the business community lacks the evidence to conclude whether the Shanghai experiment is going well.

A parallel?

Nothing speaks for a stock exchange better than the various qualitative and quantitative characteristics of its applicants. The latter is where the first insight comes from: while the Shenzhen-based venue ChiNext, which was widely considered the first attempt to ferruminate China’s capital markets and high-tech-related businesses, attracted nearly 100 companies in the first three months after its establishment, the Star board added only nine new listings within the same period.

There are three major reasons for this dissimilarity. First, back in 2008-2009, when the ChiNext started out, several dozen companies were delisted from the Shenzhen Stock Exchange (SZSE) main board and then immediately added to the new marketplace.

The Shanghai exchange doesn’t seem to have followed its southern twin’s experience. However, we’ve recently seen a lot of tech-driven companies that had been queueing for a listing in other venues finally file for an IPO on the new sci-tech platform, which turned out to be a more efficient channel to raise money.

Secondly, the ‘Shenzhen Nasdaq’ was inaugurated ten years after its first official mention; China’s regulators had been talking about possible similar projects since the end of the previous century. By comparison, the Star board was launched a little more than half a year after the first announcement.

Another possible explanation for this phenomenon is that the country’s economy as a whole is at a stage of transition from ‘Original Equipment Manufacturer’ (OEM) to ‘Original Design Manufacturer’ (ODM) status. The vast majority of the local firms involved in high-tech circuits have either already gone public or are still in the process of capability accumulation.

In the meantime, many industry experts and private equity investors are talking about the new generation of Chinese startups that happened to stockpile a lot of cash over the past two years (right before the so-called 'Capital winter'). A huge number of supergiant rounds – funding events of over USD 100 million that China was once famous for – filled entrepreneurs’ pockets and boosted investors’ confidence in the elephantine consumer market.

While these firms are meant to provide the next brood of geniuses for China’s digital economy, luring the most prominent of them to file for a local IPO is a truly challenging thing for the capital market authorities. Seeking for more transparent and stable macro conditions, fast-growing upstarts often consider an overseas listing to be the first priority. Thus, a trading platform with brand new rules looks like a decent solution for the problem. But what if it is also obscure and utterly volatile?

With only a few stocks listed, the Shanghai tech venue isn’t a good subject to make generalizations about – so far. That’s why both the degree of transparency (determined by the market maker’s decisions) and volatility (resulting from the way market users behave) of the new board are yet to be tested. Nevertheless, it is vital to track the bellwether stocks in order to understand where the whole story goes to. 

Since the first week of trading on the Shanghai tech board tailed off, most of the first-batch shares have been falling down, drawing highly correlated trajectories. Among them, the marketplace’s biggest companies – CRSC (688009:SH), Montage Technology (688008:SH) and AMEC (688012:SH) – currently have market caps of CNY 85.7 billion (USD 12.12 billion), CNY 69 billion (USD 9.76 billion) and CNY 34.1 billion (USD 4.82 billion) respectively.

Since July 29, the three abovementioned stocks have lost 17.1% in share price on average, resulting in a combined loss of almost CNY 40 billion (USD 5.66 billion) in market cap. Meanwhile, the ChiNext price index shows quite a stable performance. What’s more, according to EqualOcean analysis, there is a moderate inverse correlation between each of the Shanghai pioneers and the Shenzhen board’s aggregated indicator.

The bearish harbingers

For sure, the 25 companies that started trading from day one, are the primary material for any the Star Market-related analysis. Yet, new listings are oftentimes able to provide even more valuable insights into investors’ perceptions as well as the current atmosphere in the marketplace. This is especially true for large applicants that strive to catch the wave of China’s capital market frenzy.

The story behind Transsion (688036:SH), a Shenzhen-based smartphone producer that, to date, has provided more than half of African mobile users with its Tecno-, Infinix- and Itel-branded handsets, is the epitome of this tendency. The firm filed for an IPO in late March, becoming one of the venue’s ‘early birds.’

About five months later, it got approved by the listing committee, which further published a number of statements, emphasizing a handful of risks that Transsion’s core business is exposed to. For instance, the SSE authorities mentioned the currency exchange rate among the factors that are likely to jeopardize the mobile leviathan’s sales.

Overall, the company possesses a pretty sustainable and, what is more important, flexible business model that helps it generate gains. Transsion’s net profit leaped in 2017, reaching CNY 677.26 million (USD 95.82 million), up almost seven times from 2016’s CNY 86.28 million (USD 12.2 million). Last year, this indicator slightly declined, hitting CNY 653.8 million (USD 92.43 million).

The latter doesn’t mean that the firm has reached the global smartphone market oversaturation deadlock – au contraire. In 2018, the consumer electronics giant spent more capital than before in its quest to conquer the developing world, seeing the sales in the existing markets growing roughly 13% over the previous year. As a result, its operating revenue peaked at CNY 22.65 billion (USD 3.2 billion), with more than 120 million phones sold on a global scale.

It is now the third-largest company by market cap on the Star board, trailing only CRSC and Montage. But, significantly dropping in price after the IPO, it has a fair chance to give its bronze to AMEC

Transsion’s scenario is a cautionary example for the secondary market investors that are extremely bullish about the new marketplace. Importantly, it is not alone. It even belongs to the majority. Security software provider Hillstone Networks (688030:SH) is the only firm among the nine ‘latecomers’ that has seen its shares taking a strong uptrend in the first two weeks of trading. 

After the short period of faltering at the price level close to the initial one, the stock rallied by 16.41% on October 23. According to the SSE, over 93 million shares were bought by five major institutional investors, including branches of Dongzheng Securities (东正证券) and Sinolink Securities (国金证券), on that day.

The order

The way applicants to the sci-tech board were grouped and scattered on the timeline resembles the Chinese economy as a whole: starting with high-tech manufacturing (microelectronics, chemicals, new materials and other industrials), the focus apparently shifted to software companies, which formed the second clique of stocks.

In late September, EqualOcean reported on Infrastructure as a Service (IaaS) provider UCloud (A19019:SH) and cloud computing firm Eazytec (A19090:SH) completing the review process. So did Kingsoft Office (金山办公, A17055:SH), the developer behind Microsoft Office-alternative WPS Office, which is owned by Xiaomi (1810:HK) CEO Lei Jun.

It is a known fact that state management intends to leverage all kinds of disruptive tech concepts like Artificial Intelligence and Internet of Things. Therefore, companies with solid positioning across a number of industry verticals, where these ‘mascots’ of our century are extensively applied, are more likely to receive government support in their rainy days. Thus, chipmakers – micro technology blacksmiths that are, indeed, deep in the game, will almost certainly broaden the presence on the SSE tech venue.

Another trend that can’t be missed is an influx of Biotech startups, including young medical equipment designers and manufacturers. Among the latest, Hong Kong-listed Haohai Biotech (688366:SH) has cast its anchor in Shanghai, involving Swiss investment corporation UBS (officially, the first foreign bookrunner in the venue) as the main underwriter.

In a nutshell, as more applications are getting approved, the whole ‘Star Market’ project gradually takes the shape of a carefully thought-out plan. However, the volatility conundrum, as well as other structural problems, are yet to be resolved.

Editor: Luke Sheehan

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