Shanghai and Shenzhen remain being the stock-trading powerhouses of China. Now both bourses have tech-oriented boards in their arsenals. And those aren't alike. In the last article we discovered what makes the Shanghai Stock Exchange Sci-Tech Innovation Board (or the STAR Market) stand out from the earlier established Shenzhen Stock Exchange ChiNext board and other major trading platforms in China. That piece was concentrated mainly on the rules and requirements for market users. The fresh part of the analysis weights the two relatively new marketplaces against each other. We chose three metrics to prove or disprove the hypotheses basing on the STAR Market-related stereotypes that are recently viral in the investment circles.
MHHI – Marketplace Herfindahl-Hirschman Index that is calculated by the use of total income recorded by the top-20 enterprises listed on a certain board in a particular period (this time we use annual data);
Marketplace aggregated R&D expenses 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;
Marketplace aggregated net profit margin – the total net profit of all the firms listed on a certain board to the sum of these companies' total income.
The latter two will be scrutinized in the following article while this piece is aimed at the first indicator.
Market concentration analysis: ChiNext and the STAR Market
China's bourses are recently seen by the global investment community as clumsy platforms full of shares issued by state-owned companies that are tremendous in scale. In fact, the main boards of both the SZSE and the SSE can rightfully claim to obtain this status. But how can the “overly centralized” country cultivate systems that are pivotal in what we used to call “market economy”? Aren’t these projects doomed to be filled by those state-owned hypergiant corporations? To answer this, we have tracked some of the essential financial indicators of the on-board firms within ChiNext and the STAR Market.
We applied the HH index to this case in order to explore differences between the two venues. Before weighting them against each other, we observed ChiNext’s path, starting from the first year of operating.
A couple of findings here laid a decent foundation for the further research: first, in the early stages some fluctuations might be seen as huge companies joining the board create imbalance. When the situation reaches its “new normal” (in this case – from 2015 on), we see another feature of MHHI: deviation barely takes place. Let’s pull it apart: given various standards and circumstances, the picture should be different when it comes to the STAR Market’s performance. So, is ChiNext’s experience useless? Far from it. Let’s finally clash the two boards.
The first impression: the new venue is way more concentrated. It is so. Taking into account the giants such as CRSC and the smaller total number of firms listed, we may conclude that the layout is less diverse at the moment. Though this statement sounds logical, there is something to look at: as of today, more than 140 companies submitted their IPO applications in Shanghai. The number is almost the same with the 2009' record of ChiNext. Yet, historically, the STAR Market's MHHI has been significantly higher.
It definitely can be said that the market concentration of a certain trading venue highly depends on the stage which this platform is placed at right now. Besides, the "new normal" zone is what can be inevitably reached as the scale is boosting. It seems likely that for the sci-tech board this indicator can behave differently over time. Hereby, both the strategic position of the SSE project and the competitive environment might get severely affected.
Out and in
When touching upon the shifts and imbalances that might be brought to the markets by the new institution, such an essential detail as the venue’s inner unevenness, can’t be omitted. For now, we are facing the STAR Market constantly encountering numerous problems that are caused by the fundamental imbalances within the three dimensions:
Unprofitability of entrants – only one company on the list losses money significantly. Risk mitigation is still among the pivotal concepts of China’s regulators;
Standard chosen – almost 90% of the companies that applied for a listing with the Shanghai platform chose the first standard, which requires applicants to have a positive net income recently (indeed, there are some overlaps with the "unprofitability" dimension);
The companies' scale – as this research shows, the sci-tech board is an overconcentrated market. What's the “new normal” for the platform's MHHI? Can the way to this status be accelerated by non-market forces? The challenges exist.
To figure out whether the STAR Market is playing in the different league, it is vital to compare other indicators. We will reveal how the companies belonging to this and other venues vary in the next articles.