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Guide - 05 September 2019

Launch of the Science and Technology Innovation Board – STAR Market

The newly launched Shanghai Sci-Tech Innovation Board, known as STAR Market, not only attracted a lot of domestic investors and tech companies’ interest but also curiosity and comments from all over the world. In its mission statement, the new stock market shall support Chinese tech companies to make breakthroughs in core advanced sectors and help the Chinese financial market grow stronger and more mature.

What’s its impact?

The idea of STAR Market was to set up a new fundraising platform to drive innovation and new sources of growth. For companies, the launch of the new board provides an alternative option for fundraising in mainland China, a credit-restricted market for private entities. It is anticipated for the STAR Market to become the “China NASDAQ” to compete with Hong Kong Exchange (HKEx), for those still unwilling to fluctuate in Wall Street.

From the local authorities’ side, STAR Market offers an accelerated vetting process compared to the existing regime in The Shanghai Stock Exchange (SSE). Traditionally, The China Securities Regulatory Commission (CSRC) is responsible for the company disclosure procedures, but the queue is so long that listing candidates may end up waiting for years because of their high-strung inspections. With STAR Market, the “registration-based” IPO system replaces scrutiny approach and it will help to speed up the IPO process instead of waiting for government approval like in other local boards. Moreover, the board also allows loss-making ventures (a period most  startups go through in their financing period) to float and shows no limit on the ratio of a share price vs. a company’s earning at the time of listing.

There are several other reforms, such as the absence of a daily limit on price movement during the first five trading days, whileas price gains on other local boards are typically capped at 44%. After that, the price curb can be as much as 20% to trigger suspension compared to other Chinse boards looking at 10% maximum. At last, IPO candidates are also allowed to price their shares at a valuation exceeding 23 times their last earnings.

From the investors’ perspective, only retail entities who can prove two years of trading experience and holding more than RMB 500,000 worth of cash or securities in their accounts are allowed to trade on STAR Market.

 Despite the great potential ahead of STAR Market, Hong Kong Exchange listings remain an attractive alternative because of the maturity of the investors, the market they represent and the free flow of capital that comes with the 1-country-2-system approach in Hong Kong. The future, however still looking positive for STAR Market to really embody “China’s NASDAQ” ambitions,  with plenty of positive reports from foreign press many may find it a great alternative and shift from well-establish markets like London, Hong Kong and New York.

How does it work?

The new STAR Market is not only designed to support Chinese tech industries but also to focus on companies engaged in ultimate-generation information technology, advanced equipment, new materials, new energy, biomedicine, and sectors targeted by the so-called “Made in China 2025” Plan. Naturally, the 25 firms from the first round of initial public offering would be in line with what “Made in China 2025” is promoting.

In order to be listed on STAR Market, the first thing a company needs to do is to make sure that its scientific and technological innovation matches the board’s intentions. Companies also need to ensure top quality and sources of related information and fundamentals for public disclosure, in order to assist on the review process leading to the result of a successful listing.

Once the listing application is submitted, via the Shanghai Stock Exchange’s online review system, the applicant company will receive the first feedback within two weeks. Based on the very first feedback, another round of revisions will be carried out until the necessary set of information is fully disclosed. During this period, companies can ask for the help from consultants and agencies who specialize in IPOs in order to maximise their chances.

LSE-SSE

A few weeks ago, the Shanghai-London Stock Connect was also inaugurated in the London Stock Exchange. This is a significant milestone for the bilateral relationship between China and UK towards its “Golden Era”, as it allows international investors to gain earnings in the Chinese market via London access.

Huaitai Securities, the first issuer using the Shanghai-London Connect mechanism, has raised 1.54 billion USD via the sale of Global Depository Receipts (GDR) to international investors. Through the Shanghai-London Stock Connect, listed corporations in London can issue GDRs in Shanghai and vice-versa.

Together with the rise of STAR Market, foreign investors are able to raise capital conveniently and directly profit from their investments in China.

Conclusion

STAR Market aims to attract both foreign and domestic tech innovators to trade shares in China. , In 2009, when Shenzhen launched the ChiNext, another NASDAQ-style board, a total of 28 debutants gained 70% on the first day. However, since its peak in  2015 ChiNext has been 60% down with many stocks listed on the new board sharing similarities to those listed on ChiNext. Although this should not be used to compare to STAR, whose potential and possibilities are anticipated to be wide and far, but there is a certain level unpredictability one should not disregarded.

According to the Shanghai Stock Exchange, even though there is no current index to track the STAR Market, they plan to launch one right on the11th trading day, following the debut of their 30th company.

During its launch period, foreign investors are likely to pursue a wait and see approach, while domestic investors are shifting between the usual brick market and the stock exchange. Only time will tell whether STAR Market will hold up its expectations.

 

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