The hullabaloo about the Shanghai sci-tech board is echoing in media and investment circles worldwide as numerous (141 applicants as of July 4) Chinese tech companies are pouring into new marketplace these days. Designed to nudge slowing domestic economy, the STAR Market is in high gear since it was officially opened on June 13.
The sci-tech board project had a set of concrete goals and two precisely defined groups of target market users. The first of them comprises red-chip firms and other enterprises that are listed overseas; luring mature companies back to China is an essential step towards the construction of a sustainable financial ecosystem within the country.
Another type of might-be-listed firm is, obviously, a “young but promising tech enterprises”. These companies haven’t been linked with any of the existing trading marketplaces yet. They often need to be treated differently from the large government-owned or government-backed corporations having shares circulating on the main boards in Shenzhen and Shanghai.
Choosing a landing spot
At the end of the day, a bourse is an element of financial infrastructure. It is created and maintained for businesses, executives of which, when IPO time comes, tend to be sensitive choosers that consider all the options existing. We tried to wear these decision-makers’ shoes in the last article, comparing the new board with Nasdaq. There is a real option as more than 150 companies (with a total market capitalization of over USD 1 trillion) of “Chinese origins” keep their shares listed on the largest American venues: NASDAQ, New York Stock Exchange, and NYSE American.
What happens when you put a predator into the den that has already been occupied by a few of other carnivores? Exactly. Survival of the fittest. The China’s bourses’ case isn’t that extreme, but the new institution will definitely have some influence on the in-country stock exchange market balance.
For example, some firms were planning to go public on the main boards, ChiNext or SME Board last year, but eventually changed their minds due to the appearance of the STAR Market. And this is just a tiny fraction. A vast majority of China-born tech companies are expected to start blueprinting their public future in the following years. There is the very place where the sci-tech board's potential can be found.
Plainly the comparison between the domestic venues is needed. In terms of rules, there are three key things to ponder: requirements for investors, listing requirements, and stock maintenance requirements. The second was discussed in the previous article. Now we focus on the other two.
Seemingly, the STAR Market is created to serve only experienced investors who also must be solvent: at least CNY 500,000 (more than USD 72,000) in the pocket and two years of trading practice officially recorded. While the cash requirement is a novelty in Mainland China, another one has been widely adopted on the main boards in both cities. To sum up, the demand-side will face more restrictions than before (but still nothing insurmountable). What about the supply-side?
It is above par. An acute alleviation could be detected in the day-to-day share price volatility issue: no price band within the first five days of trading and a daily deviation of 20% may create room for speculating and allow the companies to raise funding faster. For now, it is hard to say whether opportunities overweight the possible setbacks, but the drifting-down degree of market regulation is a good sign. Moreover, according to people familiar with the matter, all the Mainland China trading marketplaces might adopt the STAR Market’s standards in the future. By the way, this may smooth out the disbalance problem raised above.
Who's on board?
The stock exchange business is the case when the market users can indirectly dictate the rules of the game by their collective behavior, convincing the market maker to deregulate the field gradually. So, the inner characteristics of those who joined (or about to join) a certain board is what shapes the marketplace’s future. Only mentioning distinctive features such as rules of different venues is an entirely superficial way of comparative analysis.
In the next part of the STAR-Market series, we conducted a quantitative analysis in order to analyze the companies listed on the four submarkets. Alongside with the "classic" indicators, we chose three unusual metrics:
Marketplace HHI – Herfindahl-Hirschman index that is calculated based on the total income of top-20 enterprises listed on a certain board in a particular period (here, we use the annual data). This indicator is designed to show the degree of marketplace concentration. The main purpose of adapting this index to the trading venues is a need for testing hypotheses on the "atomic" nature of Mainland China's exchanges.
Marketplace R&D expense to operating income ratio – the total amount of R&D expenses of all the companies listed on a certain board to the sum of operating revenues of these companies. Tech companies should concentrate their activity around R&D to remain to be competitive.
Marketplace net profit margin – the total net profit of all the firms listed on a certain board divided by the sum of these companies’ total income. Seeing much hype around possible "unprofitability" of the STAR Market applicants, we must pay some attention to figure out the real picture.