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China aims for IPO adrenaline to fund strategic chip makers

Shanghai's new STAR market part of efforts to encourage investment in tech startups

Shanghai's STAR market was created to channel funds from Chinese investors into smaller, higher-risk startups. (Source photo by Getty Images)

TAIPEI/HONG KONG/SHANGHAI -- China is accelerating the public listings of chip companies on Shanghai’s more loosely regulated STAR stock market in the latest initiative by Beijing to counter U.S. technology sanctions and speed the development of its high-priority semiconductor industry. 

At least three chip companies have moved up their plans to list on STAR, China's version of Nasdaq, in as soon as one year, the Nikkei Asian Review has learned. The move is designed to inject funds into China’s burgeoning tech industry and give early stage venture capital investors an early exit, the idea being they will then recycle funds back into technology companies.

Beijing has explicitly encouraged smaller, high-risk tech startups to seek financing outside the country’s banking sector, which is weighed down by bad debt. Although the listings come amid a global investor backlash over tech stock valuations, they will be able to channel funds from Chinese residents blocked by capital controls from investing overseas who have few other alternatives to invest in.

As a result, the chip company listings may well be able to avoid fiascoes such as WeWork's pulled IPO this month. Beijing has prioritized its semiconductor industry in its push to develop non-U.S. suppliers for strategic industries and companies such as Huawei, the world's biggest telecom equipment maker.

"The creation of the new tech board [or STAR market] is really a new round of policymakers’ move to help local chip companies have easier access to capital," said Roger Sheng, a semiconductor analyst at Gartner. "Smaller companies will be able to IPO sooner than they used to be able to."

Among the companies planning to list is Horizon Robotics, a prominent artificial intelligence chip unicorn with a focus on autonomous driving, which plans to list as soon as in 2020. Horizon, which is not yet profitable, counts on high-profile investors such as Intel, SK Hynix and several Chinese state-owned investment funds on its investor register.

"The Washington-Beijing battle is a key reason  these chip companies want to turn to capital markets at home. … The supply chain is decoupling while the capital market is decoupling too," said Arisa Liu, an analyst at Taiwan Institute of Economic Research. "Another possible reason these companies would love to list at home is to avoid close reviews from foreign regulators."

Bestechnic, a Bluetooth and wireless audio chip startup backed by Xiaomi and Alibaba Group Holding, is meanwhile considering filing for an IPO within a year, the people said.

National Silicon Industry Group, a Beijing-sponsored semiconductor material and chip wafer provider, is also set to resume its application for an IPO after it suspended a first attempt in mid-August, three people told the Nikkei Asian Review. The company has reported a net loss for the past three years running, according to its prospectus.

"We have a plan to list in as soon as one year ... and definitely no later than three years," one senior Horizon executive told the Nikkei Asian Review. "The tech board is a great policy of encouraging local chip companies to find capital at home. ... We are keen to participate in it." 

Other domestic chip companies such as UNISOC Communications, the country’s second-largest mobile chip developer, has also said it will apply for an IPO at the tech board next year. Meanwhile, Semiconductor Manufacturing International Co., China’s top contract chip maker, is widely expected to list on STAR after it delisted itself from the New York Stock Exchange in May.

The acceleration of these chip makers' IPO plans potentially addresses several problems at once.

It comes amid Beijing’s desire to cut reliance on foreign technology, a flash point in U.S.-China tensions. It highlights China’s attempt to lure more domestic tech innovators to stay at home as startup companies find it increasingly difficult to convince investors globally to pour more money into their operations.

It also answers a recent call by China's central bank. Worried about the health of the banking sector, given bad loans that increased by 10% in the first half of the year to 2.24 trillion yuan, the central bank said in June that it "would support companies to leverage financial markets and explore more fundraising channels." STAR is one of those channels.

Crucially, by providing an exit for early stage investors via IPOs, venture capital may be encouraged to resume investing in startups. That could provide a shot of much-needed adrenaline for private financing of Chinese technology companies, which has stalled recently.

Several Chinese unicorns have had to pull their fundraising plans this year as hitherto abundant pools of venture capital have suddenly dried up -- although none of them have been in the key chip manufacturing industry. In the first quarter of this year, fundraising by unlisted Chinese companies almost halved to just $9 billion from $17.5 billion the year before. 

Lastly, the initiative will help further develop the STAR market, which opened this July in a ceremony marked by videos of naval vessels and military rockets, with the proceedings led by Li Qiang, Shanghai's top Communist Party official. More than a fifth of the 29 companies already listed on STAR are already related to chip making, and so far they have cumulatively raised more than 8.9 billion yuan, according to company filings.

"The STAR market has already given domestic chip makers a big boost," said Eric Yang, a partner of Shanghai-based Glory Ventures, which specializes in semiconductor and other deep-tech investments. Furthermore, "since chip companies listed on the STAR market have all received high valuations, Chinese venture capitalists are now motivated to enter this highly risky sector."

Unlike the main stock markets in Shanghai and Shenzhen, where startups must first reach a profit of 50 million yuan before planning an IPO, companies on STAR do not face such restrictions. Yang said such rules will allow investors to cash out more quickly, which in turn gives them another incentive to back high-tech companies.

Whether these companies will prove to be a sound investment for retail punters is another matter.

On the positive side, they are founded by well-known tech executives or backed by established industry leaders. Horizon, which has partnered with German car maker Audi and a roster of leading Chinese automakers to develop driverless cars, was founded in 2015 by former Baidu executive and AI expert Yu Kai.

Bestechnic, formed by a group of former executives from RDA Microelectronics in 2015, already supplies Huawei Technologies, Xiaomi and Lenovo Group. National Silicon Industry Group meanwhile makes the basic chip materials required for semiconductor manufacturing that China has long lacked, and counts global customers such as STMicroelectronics, NXP and China's Yangtze Memory Technologies, its prospectus shows.

On the less positive side for potential investors, however, is the highly speculative nature of tech companies listed on the volatile STAR market.

 All six chip stocks listed on STAR have more than doubled in price since their original listing. But they are also highly volatile. In a roller coaster ride, Anji Microelectronics Technology, which produces chemicals used in chip manufacturing, listed at 39.19 yuan, ended its first day of trading at 197 yuan, and now trades at 151 yuan, as of  the market close on Wednesday. 

"The extremely high valuation [of STAR-listed stocks] has always been a concern [and] whether the popular tech board would turn out to be a bubble later," said Bruce Zhang, an analyst at Zhongtai Securities. Then again, "high risks bring higher returns," he added.

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