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A year later, Shanghai's 'Nasdaq' looks increasingly Chinese

STAR Market wrestles chipmaker SMIC away from NY listing

A ceremony marking the start of trading on the STAR market in July 2019. (Photo by Yusho Cho)

SHANGHAI -- As China's STAR equity market approaches its one-year anniversary next month, the Nasdaq-like board in Shanghai appears increasingly beholden to state policy from Beijing designed to promote advanced domestic technology.

The Shanghai Stock Exchange will conduct a final review of Semiconductor Manufacturing International Corp. on Friday -- less than three weeks after China's top chipmaker applied June 1 to join the exchange's tech-heavy STAR Market.

The announcement by the bourse last week prompted a frenzy among Chinese business news outlets, since SMIC's initial public offering is poised to break the record for the fastest approval. If certified, the chipmaker would float on or around July 22, the same date the STAR Market opened for business last year.

"It would raise the celebratory fireworks for the one-year anniversary," said a source from a Chinese brokerage.

It is essentially standard practice for China to talk up a splashy IPO by emphasizing the speed of the approval process. Contemporary Amperex Technology Ltd., the world-leading electric vehicle battery supplier known as CATL, needed only about 30 days to win authorization for its debut on Shenzhen's stock exchange in 2018.

Though CATL is based on the mainland, the company is an affiliate of Foxconn, the Taiwan-based Apple assembler also known as Hon Hai Precision Industry. The Politburo sent two messages with the Shenzhen listing: its ability to draw CATL to a mainland IPO, and that the battery supplier will propel Beijing's "Made in China 2025" industrial modernization initiative.

SMIC said in May 2019 that it would terminate its listing on the New York Stock Exchange. A year later, the company unveiled plans to go public on the STAR Market. This sequence of events conveys the message from Beijing that China will not give an inch to the U.S.

The STAR Market, formally called the Science and Technology Innovation Board, was first announced by Chinese President Xi Jinping during his keynote speech at the China International Import Expo in November 2018.

The expo served as China's venue to flaunt its purchasing power as the trade war with the U.S. intensified beyond expectations. The idea of the STAR Market came as China scrambles to wean itself from the U.S. in terms of advanced technology and capital.

Lead underwriters for STAR listings mostly are served by mainland financial groups, such as China International Capital and Citic Securities. The makeup of the bourse has long reflected Beijing's aspirations to promote the founding of tech companies that will develop a digital sector on par with the U.S. As bilateral tensions escalated, the STAR Market deepened its role as a front for the government's agenda.

Components tied to the military-industrial complex have become prominent on the board. Of 110 companies listed, about 30 fit a broad definition that includes upstream semiconductor suppliers and lithium-ion battery makers. Part of this contingent is Harbin Xinguang Optic-Electronics Technology, which supplies optical instruments for China's new Long March 7 rocket.

China's defense industry does not generate much profit. The return on equity for about 70 listed companies in the sector has hovered around 3% over the past five years, well below the 7%-9% ROE for publicly traded Chinese enterprises as a whole.

Yet the STAR Market has opened its doors to companies that are in the red, and the screening process has been simplified. This allows military contractors to raise capital by listing on the bourse.

However, stock prices on the STAR Market have staged a bull run this year after trending weakly through fall 2019. International investors are not behind the surge, since STAR is not part of the Hong Kong-Shanghai stock connect. Instead, purchases by mutual-fund-like vehicles are suspected of fueling the equity bubble.

For roughly 80 companies whose earnings have been projected by analysts, the average price-earning ratio surpasses 90 for profitable enterprises. The multiple trumps the P/E ratio of 15 for the Shanghai and Hong Kong stock markets. The P/E ratio in Tokyo grew to between 60 and 80 right before Japan's economic bubble collapsed in the early 1990s.

The state backing lets STAR investors gamble their money in peace. But at its current state, the market is far from an ideal exchange that rewards growth enterprises without relying on state intervention.

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