Updated: Aug 21, 2019
A NASDAQ ‘styled’ market, the STAR Market is a new board on the Shanghai Stock Exchange targeting 3rd and 4th Industrial Revolution technology and research driven companies within high growth innovative sectors.
Notably different from earlier attempts at high growth markets, The STAR Market has less stringent listing and trading criteria, and will offer companies easier access to private risk-willing capital.
Over time, the STAR Market could be a game changer for Venture Capital and Private Equity backed companies who will find domestic listings easier and more attractive.
The STAR Market is ready for business
Source: SSE, August 2019
The STAR market is a potential a game changer for PE and VC backed companies
Larger companies that might otherwise chose to list overseas, i.e. Bytedance, Didi, may instead opt for domestic listings or at least consider dual listings. Thus lessening the dependence in particular on US markets for IPO exits and deepening the domestic capital markets.
Smaller companies that would not be approved to list on the main boards or overseas will have another exit path and better access to additional risk-willing private capital.
In both cases, it increases the exit opportunities. And, while not confirmed, there is speculation that over time the regulator enforced onerous lock-up periods will be reduced or even done away with further increasing the attractiveness to the initial backers.
Investor access - overseas investors not (yet) welcome
Limited to institutional and high net worth investors and, for now, not part of the Hong Kong – Shanghai Stock Connect it is not easy for overseas investors to gain exposure the STAR Market.
So for investors wanting access to these types of companies, far better, perhaps, to invest in these companies through VC or PE well before they seek a listing and in this benefit from hands-on ownership and oversight, better initial valuations, and now improved exit opportunities.
Launched by Xi Jinping to fund China as a research powerhouse
Underlining the importance associated with the STAR Market, it was President Xi Jinping who in November last year announced the launch of what was then known as the Science and Technology Innovation Board.
The goals: to facilitate private investment into high-growth technology and research driven companies and through this help drive innovation in China, deepen the domestic capital markets, and keep Chinese tech firms from listing overseas.
A NASDAQ 'style' market for 3rd and 4th industrial revolution high growth companies
Table 1: STAR Market target sectors
Source: PE-Compass, August 2019
Companies within these sectors are expected to focus on ‘hot’ industries such as SaaS, Artificial Intelligence, Renewable energy, Autonomous Driving, Robotics, and more. All of which are set to benefit from the latest 5-Year Plan and in line with the Made in China 2025 strategy - guaranteeing tailwinds.
China has tried this before and failed
In 2009 Shenzhen Stock Exchange launched the ChiNext for small fast growing companies. This was followed by the New Third Board in 2013. Despite high hopes, both have seen lackluster interest from investors. This partially due to the same restrictive IPO regime as the main boards and partially due to small free floats and long lock-ups.
The STAR Market is different
Aside from the high profile government backing both IPO and trading requirements have been tweaked.
IPO listings will be based on registration, rather than approval, with a simplified subscription process. There is no profitability requirement, no daily price limit for the first five trading days, an no IPO valuation ceiling. And companies will be allowed to list with dual share classes.
Why is it important?
All these features are attractive to founders and investors who might otherwise find it more attractive to list overseas. At the same time these initiatives are expected to help increase access to private risk-willing capital and help drive capital market reforms.
STAR Market performance - sky rocketing returns and volatility
Of the initial 140 applicants 25 were approved and began trading on Monday the 21st of July collectively raising more tan USD 5.4bn . As widely anticipated, the first day saw massive gains. According to CNN the average gain was 140% with all companies seeing gains of at least 84%, and Anji Microelectronics, a manufacturer of semiconductors, gaining 400%.
Since this initial, almost inevitable exuberance, the froth has come somewhat off, and the average gain after five trading days staying at around 139%, with high volatility. The top three performers were Anji Microelectronics @ 350%, Shanghai MicroPort @ 215%, and Beijing PIESAT @ 210%.
Up to another 150 companies have applied to join the board. Once the total number of IPOs reach 30 the SSE STAR Market Component will be released.
China markets: only for the well-informed, the brave or the foolish!
Tempting as these retuns many be, the recent accounting scandal at Kangde Xin shows, China’s equity markets are generally not for the faint-hearted or the less than well informed investors. This goes even more for high growth yet-to-be profitable companies.
Further underscoring this point, the same accounting scandal led to the investigation of China’s second largest audit firm, Ruihua. This in turn caused dozens of companies to suspend fundraising plans and four companies to halt their IPO process on the STAR market.
Additionally, investors should expect significant volatility and possibly small free floats, and less liquidity.
Sources: Bloomberg July 2019, CNN, July 2019, DBS June 2019, Franklin Templeton, June 2019, Nikkei, August 2019, TNW, July 2019, Yahoo Finance, August 2019