China is launching a new share market that will raise funds for early-stage high-tech growth companies. The Science & Technology Innovation Board on the Shanghai Stock Exchange should attract investment from overseas institutions and could prove to be the boldest reform yet in China’s capital markets.
It is hoped that new home-grown tech giants will emerge and emulate China’s existing major internet-based corporations. At the very least, Sci-Tech could help reveal some smaller hidden tech champions.
The Science & Technology Innovation Board will help promote advances in areas such as integrated circuits, biomedicine, artificial intelligence, big data, cloud computing, software, the internet-of-things, 5G technology, aeronautics, robotics and automation, new materials, autonomous driving and new energy cars.
Even before the Sci-Tech board's launch, well over 100 companies had released prospectuses to float, seeking an average of almost RMB1 billion (nearly USD150 million) with one raising over RMB10 billion. Most companies want new capital for R&D projects or working capital.
‘Red-chip’ companies – firms based in China but listed in Hong Kong – are being welcomed along with companies transferring from the National Equities Exchange & Quotations, a Chinese over-the-counter board, or previously listed on Nasdaq, the US technology-stocks exchange.
We estimate at least 200bn renminbi is looking for Sci-Tech investments, with 100 funds said to be in the pipeline.
For historical and regulatory reasons, most Chinese high-tech companies have listed in the US or Hong Kong, though since the resumption of A-share offerings in 2014, more than 1,000 stocks have chosen China. Even so, the country lags far behind developed economies for rules-based capital markets free of distortions.
Listing rules in neighbouring Hong Kong were simplified last year to attract new-economy companies and this encouraged Chinese president Xi Jinping to launch the Sci-Tech board with unprecedented speed.
High-tech industries are China’s growth engine but many start-ups find raising funds difficult and often burn through cash before they become profitable.
The Science & Technology Innovation Board differs from the big Shanghai and Shenzhen stockmarkets on listing criteria, offer-price mechanisms, investor eligibility and delisting rules.
Any company with a three-year history, proper internal controls and operational capacity that is being run legally is eligible. There is less focus on current profits and market value, and more emphasis on expected values and revenues.
Individual investors need a brokerage account balance of 500,000 renminbi and at least two years’ stock market experience. This will exclude most private investors but strikes a balance between market liquidity and potential risk.
Sci-Tech will cut red-tape, reducing the 23 existing general requirements to just four. However, the accuracy, authenticity and integrity of company fillings should be much stricter than for other A-share markets.
If rolled out to the broader market, the reforms proposed for the Sci-Tech Innovation Board could reduce existing inefficiencies and distortions and attract more institutional investors to the A-share market that has traditionally been the preserve of retail investors.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specif ic recommendation(s) or views contained in this research report: Steven Sun, CFA
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