STAR Market positioned to Become China’s NASDAQ

Ant Group, the biggest unicorn company in China as well as the world, is preparing to launch a dual listing on both the A share and H share market with a target financing amount of USD30 billion, making it the largest IPO in history. The A share of Ant Group will be listed on the STAR Market of the Shanghai stock market, which opened only about one year. Against the background of a joint blockage by the US and European countries of Chinese tech companies, the listing of Ant Group was imbued with greater significance. The Hong Kong stock exchange made a series of reforms to welcome the return of Chinese tech issuers. Many practitioners in financial industry believe that both the mainland and Hong Kong are improving the ecology for new financial stocks in an attempt to break the blockade of the US and European countries. As more Chinese tech stocks choose to return to China, with Ant Group as the “ballast stone” listing, SSE STAR Market is well positioned to become China’s NASDAQ.

By Luolan ZHANG of Wenhui Bao of Hong Kong, from Shanghai

The Shanghai Stock Exchange Sci-Tech innovation board Market (Hereinafter referred to as SSE STAR Market) has welcomed its first anniversary on July 22. The STAR Market is viewed as the trial ground for capital market reforms. It has assumed multiple functions such as the strengthening of national power through innovation and technology development, the transformation of science and technology research into production power, the execution of various reforms, and the trial run of various new policies. STAR Market should provide science and technology research startup companies with access to the capital market, helping them integrate into the cycle among technology, capital, and the general economy.

140 Listings within a Year since the Launch of the STAR Market

According to data from the SSE on the day, there have been 140 listings within a year since the launch of STAR Market with a total market capitalization of over RMB2.79 trillion and a total financing amount of RMB217.9 billion. At present, there have not been many “well-known” brands among the 140 listed companies on STAR Market. However, the situation will be changed soon. Ant Group has announced its dual listings on STAR Market and HKEx main board recently, and the market consensus is that the total financing amount of Ant Group will reach RMB230 billion, and it could become the largest IPO in the world.

Zhan Guohao, Auditing Service Partner of Ernest & Young, expressed his endorsement of the positive effect brought by Ant Group’s listing. He emphasized that the listing of Ant Group will exert a positive driving effect on STAR Market and the companies waiting to be listed on STAR Market. By his estimation, “Industry leaders such as Ant Group will act like ballast stones for STAR Market and help the market to grow steadily and sustainably.” He expects that Ant Group’s listing will attract many companies that befit the requirements for listing on STAR Market and having more companies listing on this market will undoubtedly raise its attraction, bring greater investment momentum.

Listing of Well-known Companies Helps Bringing in More Liquidity

Ruan Qingsong, Deputy Dean of Tongji SEM and Professor of the Department of Economics and Finance, also believes that Ant Group’s listing on STAR Market has great significance. Ant Group is a leader in FinTech, and this deal is exemplary. It can be reasonably argued that other big tech companies such as Byte Dance may also choose STAR Market to do its listing, and in turn, bringing in more investment, further help the scientific and technological development of China, and forming a good business cycle. At the same time, most mainland Chinese investors could have a slice of the “pie” brought by the development of Chinese tech companies as evidenced in Ant Group’s listing; besides, the additional capital attracted by Ant Group is expected to help improve liquidity, activate market movements, rationalize market pricing, expand investment scope, and elevate the efficiency of capital allocation.

Zhang Bingwen, a senior researcher of the Zhixin Investment Research Institute, believes that Ant Group’s listing on STAR Market will bring a significant influence among institutional investors, especially overseas institutional investors. When investing in Ant Group, the institutional investors will also take notice of other listed companies on the market. The magnetic effect of this deal cannot be downplayed.

As to the lack of outstanding listed companies currently, Zhao Guohao pointed out that it was determined by STAR Market’s inclusive positioning, “ STAR Market introduced the ‘market capitalization’ index, which combined with revenue, cash flow, net earnings, and R&D investment, and they will give investors a differentiated set of listing standards, to meet the listing needs of various types of scientific and technological innovation companies that have achieved breakthroughs in core technologies or achieved phased results through continuous R&D investment in key areas, have good development prospects, but have different financial performances.”

Six Companies Exceeded the 100 billion Market Capitalization Mark

In the opinion of Ruan Qingsong, industry leaders such as SMIC and Cambricon have listed on STAR Market. The market currently hosts 6 companies with more than RMB100 billion market capitalization and 64 companies with more than RMB10 billion market capitalization. “STAR Market follows a set of listing standards that are close to the international market, which significantly increased the inclusiveness of the market, enabling companies with longer investment cycles, higher tech barriers, innovative development, and outstanding business model to have more options.”

Hero of Its Own Kind: Hong Kong Market with Its Unique Strength, which cannot be replaced by the A Share Market in the Near Future

It has been one year since the establishment of the Mainland Science and Technology Innovation Board, and there are 140 listed companies currently.

The picture shows the establishment and listing ceremony last year. From profile picture

Some analyses have raised concerns that STAR Market may become a fierce competitor with HKEx, as such, it will “diverge” companies from HKEx. Zhao Guohao spoke frankly that within the first year of the launch of STAR Market, many companies have indeed chosen this market as their entry point into the capital market. Accommodating policies such as allowing different rights to the same shareholders, VIE, and red chip companies to list when fulfilling certain requirements have made the STAR Market the place to go for companies waiting to be listed.

Zhao Guohao stated that Hong Kong market and Shanghai market each has its own merits. Companies will consider a variety of factors when choosing their listing market, and those factors will include but not limited to listing conditions in different markets, quality of market valuation, liquidity, and trade activeness post listing, the listing review process, and listing costs including application fees, fees paid to intermediaries, and yearly payment, etc. Different companies will decide the best place to list in consideration of their industrial characteristic, financing needs, listing timetable, and future development plans after listing.

Further Diversification of Listing Companies in the Hong Kong Market

Ruan Qingsong also mentioned as the policies in the A share market continue to improve, more companies will choose STAR Market as their listing place. Some tech companies closely related to national strategic development are also likely to list on the STAR Market. Both trends will diverge companies from choosing HKEx as their listing place. On the other hand, the two markets have different positioning, STAR Market emphasize the scientific and innovative characteristics of the companies, while HKEx is more inclusive regarding listing candidates. Apart from a few major tech companies that befit requirements for listing on both markets, most of the listing candidates on these two markets are quite different and it is unlikely that they will go into a direct confrontation against one another.

“Hong Kong market is still the holy place to go for listing companies and value investors due to its unique competitiveness guaranteed by its mature system, and it is unlikely that the A share market can replace it any time soon.” Ruan Qingsong made these arguments based on the cases he has studied. Compare with the A share market, H share has multiple advantages, for example, Hong Kong’s market system is well developed, and it has an advance supply of derivatives. Investors could use a combination of stock investments and corresponding options to guarantee their investment return under all circumstances that made investors more likely to invest in H shares. Meanwhile, Hong Kong has the largest quantity of outstanding listed companies in the world. Landing in HKEx is a proof of quality and strength of the company as well as being a free advertisement.

STAR Market is More Likely to Become “China’s NASDAQ”

As Zhang Bingwen points out, Shanghai and Hong Kong markets have their unique strengths separately and it is unlikely that the two markets will form head-to-head competition. STAR Market has more convenient listing procedures and higher inclusiveness, while Hong Kong market is a well-known international financial hub that has its unique characteristics. Companies that aspire to expand international business coverage or intend to build up a global brand image are drawn to Hong Kong market. The money raised from Hong Kong listing can be used more conveniently when the companies would like to conduct overseas business. Ant Group’s dual listing on both Shanghai and Hong Kong markets is an excellent example to illustrate this case.

Market participants have had much debate on whether Shanghai or Hong Kong market is more likely to become “China’s NASDAQ”. In the opinion of Ruan Qingsong, in the long run, the STAR Market is becoming the testing ground for various reforms of forward-looking policies in the A share market, and it will enable a fast lane for high tech companies due to its special positioning in the Chinese capital market. Comparatively speaking, Hong Kong market is a comprehensive market where value stocks are concentrated. Judging from this angle, STAR Market is more likely to become “China’s NASDAQ”.

Shanghai-Hong Kong Co-Finance Hubs: Make Better Use of the Connecting System to Increase Efficiency and to Achieve a Win-Win Situation

Shanghai and Hong Kong are not necessarily to be in competition, and the two markets can achieve a win-win situation by making better use of the existing stock connecting system. Ruan Qingsong believes that with the further internationalization of the A share market, Shanghai and Hong Kong markets should have more opportunities to work together. If the connection between two markets can be further developed, and capital can flow more freely across the two markets, it can be expected that the efficiency of asset allocation will be increased and more leading companies around the world will be attracted to these markets. Therefore, the two markets could make the market share much bigger by joining forces.

Ruan Qingsong put forward two pieces of advice for improving the connection between the two markets: the first advice is to continuously improve the stock connecting system. At the moment, the SH-HK stock connect program is restricted by many rules and policies, for example, the minimum balance of investor’s capital account should be no less than RMB500,000, and the investment targets are restrained to components of the CSI 300 Index and the HSHKLI. STAR Market is not a part of the connecting program yet which to some degree, hindered the free flow of capital between the two markets. If the regulators were to lower the entry requirements for investors and expand the scope of investment targets, to include some growth type tech stocks into the connecting program, it could be reasonably argued that such measures will facilitate a freer flow of capital and more market-based pricing practice.

Sharing of Information and Reduction of Procedures

The second piece of advice from Ruan Qingsong is that the regulators should consider sharing information of companies that are dual-listed or about to list on both markets, and reduce listing procedures accordingly. Ruan Qingsong made a further argument, for example, if a company has already been listed on Hong Kong market, and the company has a certain degree of credit in the market, the stock exchange in the A share market should consider giving this company’s A share listing certain reduction of procedures or other measures to boost the listing speed. We could reasonably expect the A share and H share market will deepen their cooperation in the fields of trading policy-making, information disclosure, and regulatory supervision.

“For STAR Market listed companies that meet all the requirements of Hong Kong market, it should be encouraged for these companies to build a refinancing platform in Hong Kong. The companies listed on Hong Kong market should also be allowed to use STAR Market as a refinancing hub,” Zhao Guohao said. There have already been foundations for cooperation such as the “stock connecting program” and the “bond connecting program”, for companies currently listed on STAR Market, they should be allowed to make use of the rich financing tools and avail themselves of the financing products and services in Hong Kong capital market to achieve their refinancing needs. The regulators should also encourage the companies to make full use of the capital market to facilitate the development of themselves and allow the companies to make dual-listing on both markets.

The original article was published on Wenhui Bao, Hong Kong August 6, 2020