New star rises in Shanghai
2019-06-20 08:26:46 China Daily Mo Hong'e
Shanghai announced the setting up of a high-tech company incubator to provide more policy and financial support to early-stage startups that could list on the new STAR Market in the near term. (Photo provided to China Daily)
Tech-focused market meant to pioneer reform of IPO reviews
The highly anticipated launch of the Shanghai Stock Exchange's tech-focused STAR Market last week heralds essential reform of China's capital market as the country undergoes an economic transformation driven by scientific and technological innovation.
President Xi Jinping announced in November that a new tech board with a pilot registration-based initial public offering system would be launched at the Shanghai Stock Exchange. Preparatory work then proceeded efficiently and the first three companies passed review by the Shanghai exchange on June 5.
This week, HYC Technology, a manufacturer of automatic detection equipment for industrial applications that is based in Suzhou, Jiangsu province, became the first company to start the IPO process for the new tech board, the Shanghai exchange said on Wednesday.
The company, which counts Apple, Samsung and LG among its clients, received final approval for its IPO just eight days after the exchange completed the review of its application.
The official launch of the STAR Market－a Nasdaq-like science and technology innovation board－on June 13, was one of the highlights of this year's Lujiazui Forum, an annual event in Shanghai in which government officials, financial experts and leaders gather to discuss and foster international financial cooperation and further the reform and opening-up of China.
Participants attend the 11th Lujiazui Forum 2019 in Shanghai last week. [Photo/Xinhua]
This year's forum, the 11th, had "promoting high-quality economic growth" as one of its themes, and the launch of the new tech board is part of that effort. According to regulations released by the China Securities Regulatory Commission in late January, the new board will mainly focus on six high-tech and strategically important emerging industries: new-age information technology, high-end equipment, new materials, new energy, environmental protection and biomedicine.
Vice-Premier Liu He said at the forum's opening ceremony that the ultimate goal of introducing the STAR Market is to allow the capital market to help nurture more companies involved in scientific and technological innovation, which, in the long run, will help China realize its economic transformation.
As the Government Work Report, released in early March, said, new economic drivers in China, represented by large scientific projects, transformation of traditional industries and flourishing startups, are profoundly changing the ways of production and life, and honing a new competitive edge for the country.
Media record the launch of the STAR Market at the Shanghai Stock Exchange. [Photo/Xinhua]
The launch of the STAR Market has won unprecedented attention from the central regulators, capital market and even individual investors, according to Xu Biao, chief analyst at TF Securities. Such attention will last for a very long time, he said, because technological innovation and advancement is the way China can overcome the "middle-income trap", which has seen economic growth slow in rapidly developing countries just as they approach the cusp of prosperity.
"There is strong demand for technology and incubation in China," Xu said. "It will not be changed for the next 10 years. Therefore, the market will show exceptionally high interest in the STAR Market, for technology is the most important driving force of China's economic growth."
In late November, Shanghai's municipal government announced the setting up of a high-tech company incubator to provide more policy and financial support to early-stage startups. Zhang Quan, director of the municipal government's science and technology committee, said the incubator is sure to give birth to STAR Market-listed companies in the near term.
"Capital is the magnifier that can accelerate the development of technology companies and industries," he said. "The integration of technology and the capital market will provide strong impetus to the economy."
It took just 220 days to launch the STAR Market in Shanghai, compared with five years for the SME Board at the Shenzhen Stock Exchange, and 10 years for its ChiNext board.
The Shanghai exchange had received 123 applications from companies wanting to list on the new board by Monday, and two had their IPO registration approved by the CSRC on Friday. The next day, the online trading system for the new board was launched.
Huang Hongyuan, chairman of the Shanghai exchange, said the first companies will start trading on the STAR Market within two months.
The unprecedented speed with which the new tech board has been launched is an indication of its importance to startup companies and long-expected reform of China's capital market, according to industry experts.
The registration-based IPO system it is piloting is the most critical institutional innovation in the A-share market, said Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology in Hubei province.
He said the exchange had implemented fairly transparent and standardized review procedures, and it should be a smooth process to promote them in other submarkets.
"By adopting the registration-based system across more submarkets, market forces will play a more decisive role in resource allocation, raising the A-share market's efficiency in serving economic restructuring," Dong said.
Reviews of IPO applications under the registration-based system focus on verifying whether the filings disclose authentic and adequate information in accordance with related rules. The goal of the reviews is to ensure investors get the information they need to make investment decisions, with the regulators not endorsing or offering any assurance about the investment value of listed firms.
This constitutes a fundamental difference from the approval-based system used by other submarkets in China. Under the approval-based system, regulators decide which companies can be listed by comparing their financial indicators, Dong said.
By doing so, the regulators judge the investment value of the applicant firms, he said, making the reviews a contest won by the firms with the best financial results.
"Such a review mechanism could induce financial fraud, because firms want to 'beautify' their financial reports and win the contest," he said. "And innovative companies often find it hard to get listed because they do not have the stellar historical financial results their peers in mature industries do."
Dong added that registration-based systems also strengthen the market's role by reducing administrative controls in the IPO process, helping to boost regulatory efficiency.
A staff member works on a design at a high-tech material company incubator in Gu'an county, Hebei province. [Photo/Xinhua]
With the CSRC in charge of both market regulation and IPO application reviews under the approval-based system, administrative controls, such as the unspoken price-earnings ratio cap of 23 for IPOs and pauses in IPOs to mitigate market downturns, were more likely to be overdone, Dong said.
The registration-based system has adopted a more reasonable division of tasks, with the exchanges handling reviews of IPO applications and the CSRC focusing on market regulation.
But the most substantial change in the registration system, Dong said, is that it enables companies to go public whenever they satisfy the IPO standards and file the necessary application documents.
According to the STAR Market's trading rules, released at the beginning of March, companies that have not yet reported a profit will be allowed to go public on the new board as long as they satisfy one of five financial indicators.
While the A-share market's other submarkets all require at least three years of profitability, the STAR Market does not consider profit mandatory, making it just one of five factors considered. The others are: investment on research and development, cash flow, estimated market cap, and approval from central regulators for certain products.
Zhao Haizhou, associate partner at Deloitte's East China A-share department, said that change in the listing rules will be extremely attractive to "hard technology" companies.
Such companies used to find it difficult to obtain financing from banks because most had minimal assets. The amount of preliminary investment in them is huge, but is unlikely to be returned in a decade, he said.
"The new tech board will provide a more convenient financing channel for technology companies," Zhao said. "Investors, on the other hand, will not miss the opportunity in rising technology companies."
The new board will also allow dual-class share structures, widely used by tech companies to ensure their founders remain in control despite large-scale equity financing.
Fu Lichun, research director at Northeast Securities, said the stock exchange in Hong Kong changed its trading rules to allow such structures in April last year, and the change adopted by the new tech board in Shanghai will help the Chinese capital market see more listings by technology companies.
Northeast Securities estimates that about 100 companies will be listed on the STAR Market by the end of this year, with total financing of 100 billion yuan ($14.4 billion).
As the market will have the right to say whether a listing will proceed under the registration system, securities firms will shoulder more responsibility in terms of research, compliance, and risk management.
That will see the Chinese securities industry give greater emphasis to brokerages' investment bank competence, according to Cai Yong, chairman of Guoyuan Securities.
"Securities firms' abilities in pricing, sales, evaluation and research are given more stress with the new board and the registration system," he said. "Their income will no longer be largely reliant on underwriting fees, but on other businesses such as private equity investment."
Cai said this meant the industry would become more polarized, with the good brokerages getting better and the bad ones getting worse. The leading companies "will breed new profit models", he said.
Wang Jiang, a professor at the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, said financing through the stock market may not necessarily be the primary goal of public companies, with self-owned capital and debt-financing the most frequently used tools.
"In this sense, the launch of the STAR Market will form a pricing mechanism based on market rules," he said. "The pricing mechanism will help listed companies finalize their investment strategies and seek other financing possibilities."
Bi Mingjian, chief executive of China International Capital Corp, said China has never been short of the right targets for a tech board. The number of hotly pursued Chinese companies listed in the United States proved that. The only problem was that the China's capital market was not able to provide the financial services such startup companies needed.
"The launch of the STAR Market comes at the right time because China's economic status has provided all the necessary elements," he said. "With this, the long-awaited capital market reform will also be truly unveiled."
Huston Huang, head of China global investment banking at J.P. Morgan, said the STAR Market will be complementary to the other boards in the A-share market, as well as to the Hong Kong and U.S. markets. And STAR Market-listed companies may also seek IPOs in the Hong Kong and U.S. markets in the future, he said.
Michelle Qi, chief investment officer for equities at Eastspring Investments in China, said the launch of the STAR Market will be a good opportunity for the A-share market, which was unable to list companies like e-commerce giant Alibaba and internet behemoth Tencent due to earlier market rules.
"Hopefully, we may be able to see companies like (group-buying website) Meituan Dianping or (e-commerce platform) Pinduoduo listed on the new board," she said.
Meituan Dianping is already listed in Hong Kong, and Pinduoduo is listed on the Nasdaq board in the U.S..
Timeline
Nov 5－President Xi Jinping announces plans to launch the STAR Market at the Shanghai Stock Exchange and pilot a registration-based IPO system
Jan 23－Overall implementation plan for STAR Market and registration-based IPO system approved
Jan 30－China Securities Regulatory Commission solicits public opinion on supervision rules and IPO rules for STAR Market
Jan 30－SSE solicits public opinion on rules for the STAR Market and registration-based IPO system
Mar 1－Supervisory rules and IPO rules for STAR Market approved
Mar 4－SSE releases trading rules for STAR Market and registration-based IPO system
Mar 13－STAR Market stages first systematic test run
Mar 18－SSE launches IPO application review system for STAR Market
Mar 26－First nine companies submit the necessary application documents
April 13－First listing committee for STAR Market formed
April 22－First seven mutual funds win approval to invest in STAR Market
June 5－First three companies pass SSE review
June 11－First three companies enter registration process
June 13－Launch of STAR Market
June 14－First two companies complete IPO registration
June 15－Launch of STAR Market trading system
