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China tech

China tech stocks soar as Nasdaq-style board for startups opens

Around 25 companies debut on Star Market with some shares jumping over 100%

SHANGHAI -- China's new Nasdaq-style stock exchange commenced trading on Monday with shares soaring between 106.97% and 415.44% during morning trading.

Around 25 companies debuted on the Shanghai Stock Exchange's Star Market, which is meant to serve as a testbed for market reforms and prevent local money and startups from going abroad.

Some 145 technology companies have applied to hold initial public offerings on the new market, potentially raising 75 billion yuan ($11 billion).

By easing the listing rules, the government also hopes to direct private funds into capital-deprived startups involved in vital industries such as pharmaceuticals.

Investor appetite appears strong, with 21 of the 25 IPOs oversubscribed, said Michelle Qi, chief investment officer at Eastspring Investments.

"The demand is partly because of investors' preference for new-economy names, especially as some are leading players in relevant subsectors," Qi said.

One example is Suzhou HYC Technology, a maker of industrial test equipment that counts Apple and Samsung Electronics among its customers. Suzhou set its IPO price at 24.26 yuan ($3.52) per share, which, at 41 times the company's earnings in 2018, is well above the average multiple of 23 for mainland Chinese stocks.

But the new board's debut comes amid the slowest economic growth in 27 years, with China's GDP slipping to an annualized rate of 6.2% in the second quarter.

The launch follows President Xi Jinping's call in November to nurture local startups as a means to raise China's prowess in science and technology.

Private equity funds in China manage assets worth 12 trillion yuan, but only 1 trillion yuan is invested in equities while the rest sits in other forms of securities, according to the China Securities Regulatory Commission.

Much of this capital goes into established companies, especially those that are growing, with little invested in startups linked to science and technology, the commission says.

"We have to increase the intensity of policy support for private enterprises involved in science and technology," Xiao Gang, the former commission chairman, said at a conference in Beijing last Tuesday.

Authorities have made listing easier for Star Market-bound companies, guiding them through a faster registration process that contains less-demanding criteria.

Unlike IPO applications for the main boards in the Shanghai and Shenzhen markets, companies will not need to meet the three-year profitability criteria as long as they fall under vital industries such as semiconductors and biomedicine. But they will need to prove their market value is at least 1 billion yuan and disclose their order books.

Biomedicine startups working on new drugs are often hampered by inadequate capital as investors lack the patience to see those companies reach development milestones which can take as long as 10 years, said Cen Saiyin, vice president of Shenzhen-based Cornerstone Capital.

"More Chinese investors will be confident to invest in these Star Market-approved startups going forward," said Cen, who manages 8 billion yuan in venture capital.

With looser controls, including no limit on share price movements during the first five days of its listing, companies like Suzhou Zelgen Biopharmaceuticals are heading to the Star Market instead of Hong Kong or the U.S., the initial target destination when Cornerstone invested two years ago.

Zelgen, founded in 2009 with three research centers including one in the U.S., helps produce cancer drugs that are in circulation in the West but not yet available in China, according to the company's website.

In the past, some privately owned Chinese companies chose to list on foreign markets partly due to strict domestic regulations. E-commerce giant Alibaba Group Holding went for New York, while internet conglomerate Tencent Holdings is listed in Hong Kong.

Among the first batch of 25 companies to begin trading Monday, nine fit the category of "measurement equipment, telecommunications and electronic manufacturing," while eight fall under "special equipment manufacturing." The rest are three "aerospace and transport equipment manufacturing" companies, two businesses in "software and information technology" and one each for "nonferrous metal," "instrument" and "general equipment manufacturing."

"These sectors track the Made in China 2025 blueprint with emerging tech companies accounting for more than half, potentially creating value for the market," said Wang Delun, chief strategic analyst at Chinese brokerage Industrial Securities, referring to China's strategic plan to produce more higher value goods and services.

Lingering trade tensions with the U.S. have put the new board under a greater spotlight, as the carefully selected companies might be leading players in technology.

"Investors may have preference over these names as they will benefit from the future trend of China's economy -- greater emphasis on innovation and less dependence on foreign technology -- and thus deliver stronger growth," Eastspring's Qi said. The trade war could have accelerated this trend, she said.

So far 120 businesses apart from the 25 starters on Monday had applied for the new board, aiming to raise 75 billion yuan with 15% price appreciation on a base case scenario, according to UBS Securities, a unit of Switzerland's UBS Group.

The board has also attracted foreign investors such as UBS Securities, which sponsored Haohai Biological Technology, a Hong Kong-listed manufacturer of therapeutic drugs.

UBS, which is the first foreign-controlled brokerage joint venture to support the secondary listing for Haohai, welcomed the structural reform allowing companies with short track records to list.

"It also enhances the competitiveness of the A-share IPO market," said Eugene Qian, president of UBS Securities, referring to the stocks listed on China's main boards. 

Though acknowledging that market reforms could instill confidence, some investors have adopted a wait-and-see approach toward the untested board.

Investors like Tang Dajie prefer Hong Kong rather than the Star Market for now, as the former is more mature. The chairman of Shenzhen Qianhai Triwise International Capital Management, a 3 billion yuan venture capital fund, said unlike Chinese markets that are dominated by retail investors, the Hong Kong market is anchored by institutional investors and considered more stable.

Chinese retail investors buying into newly listed companies may have shorter endurance compared with private equity or venture capital funds, said David Yu, adjunct professor of finance at New York University's Shanghai campus.

"The companies will have to deliver," Yu said.

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