The Shanghai Stock Exchange Sci-Tech Innovation Board, known as the Star Market, has been trading for eight weeks since it got off on July 22. It is high time to have a glance at the want-to-be-listed companies' recent financial performance.
Over the past three years, the tech board applicants have collected more than CNY 454 billion (USD 64.13 billion) in operating revenue. This number grew at a 28.17% CAGR from CNY 113.67 billion (USD 16.06 billion) in 2016 to CNY 186.74 billion (USD 26.38 billion) in 2018. An impressive growth that, however, pales when compared with how the combined net profit had changed: up from CNY 6.98 billion (USD 985.97 million) to CNY 16.5 billion (USD 2.33 billion) over the same period.
The weighted average net profit margin reached 8.84% last year, growing 2.7% since 2016. Notwithstanding this truly giant leap, there is something to sound. Conceptually obsolete sectors such as industrial electronic equipment and machinery grow way more slowly than other groups of firms. Moreover, most of these manufacturers have been seeing the profit margins hovering below the average marketplace level.
Accounting for only 5.5% in the Star board revenue stack, software companies and IT services providers make up 13.3% of the total net profit earned by the marketplace applicants. Enterprise network security and risk management solutions developer Hillstone Networks (688030:SH), one of the biggest software firms in the batch, hulled CNY 128.96 million (USD 18.22 million) in the net profit at a margin of nearly 13% within the past two years.
By comparison, Neoway, Shenzhen-based IIoT (Industrial Internet of things) devices producer of the same size as Hillstone, garnered less than 8% of its revenue in 2018. In general, capital-intensive hardware companies rather flounder, being exposed to all the risks taking place in both upstream and downstream zones of a supply chain.
Unlike those developing digital products, they must keep in mind an extensive list of multifaceted factors when it comes to the ‘input’ part of a certain business model. And, given the overall increasing flexibility of industrial contracts, the ‘output’ is even more complex in this regard.
This is also true of any large-scale to-be-listed company intending to start a public journey in Shanghai. No ‘superstars’ detected among the applicants, and small niche players unquestionably outperform their bigger peers in relative numbers.
Although it is in a class of its own in China, the Star Market still contains fundamental imbalances. The inner mechanism needs to be further polished and synchronize to eventually become a keystone in the country's financial system.