STAR Market in China – Is it worth it?

The Shanghai Stock Exchange has made a seemingly successful attempt to set up a tech, Nasdaq-esque market. The market is called STAR, standing for Science and Technology Innovation Board. Given that Nasdaq is home to the most legendary and successful journeys from tech giants, China wanted to provide a similar environment for their own. And here is a huge milestone in China’s financial history.

The Chinese government launched the market as a means of igniting innovative development by facilitating an environment of alternative financing for domestic tech companies. The market was also initiated as a way to put a spark back into the slowing domestic economy. This is by luring back mature companies into China so they have a more sustainable, reliable financial ecosystem. They’ve done this by offering a number of advantages to the new STAR market, although it’s certainly not easy to get listed. IPO thresholds are more stringent than Nasdaq, though the minimum value of shares to be issued at STAR is CNY 7.5 million (USD 1.1 million). 

Many huge tech companies like Xiaomi and Alibaba are in the sights of the Chinese government to join the market, as will be explored later. The market launched in July 2019 where 25 companies were initially listed. Among these stocks, gains of 80% to 400% were realized upon closing of day 1. The STAR market gained 140%, and the world took notice.

Prior to the launch, the story was all too familiar and predictions were mostly skeptical. China has made several attempts in the past at launching such a market: all were unsuccessful. In 2009 they launched ChiNext and in 2013 they launched New Third Board. Both failed to get off the ground and picked up little attention. Now though, the STAR market appears rock solid, as the key requirements are a little different than the Main Boards. In some respect, they are robust and difficult, but importantly, being listed on the market doesn’t need government approval, unlike the other Main Board exchanges.

Companies that you can find in the STAR markets

First companies to start trading on the STAR market

The first day of trading saw 25 companies to be listed and kick things off. Below is a pie chart of the different industries that the 25 companies were in, with computer and communication leading the way.

• Anji Microelectronics Technology
  • Anji is the only domestic company that can produce 8 and 12-inch Chemical Mechanical Polishing products, which has meant that China is no longer dependent on importing them. 
  • Anji Microelectronics Technology soared by 400% from its initial price and continues to be one of the best performing STAR stocks.
• Western Superconducting Technologies
  • One of the largest R&D centers for titanium in China.
  • Ranked second in the IPOs on the first day of trading with a 266% increased price.
• Montage technology
  • Montage is a leading fabless semiconductor firm that serves the IC-based solution for AI markets.
  • The firm has 46% of the global memory chip market and has a branch in Silicon Valley

The STAR market is also set up to lure valuable Chinese companies such as Alibaba, Baidu, and Xiaomi back to mainland China. The more tolerant rules are aimed to strengthen China’s bargaining position in recapturing the belief of their biggest tech firms.

STAR market performances and expectations

Despite a roaring start, the STAR market has faded since. The first day truly impressed and garnered a lot of attention, but since then activity has reduced. More than 140 tech firms had signed up to join the new board, but this has since stagnated. Only 5 more companies have sold shares since then. 

The picture being painted by China was that this was a laissez-faire vetting process, but it seems this isn’t the case. An official at the STAR market has allegedly avoided approving companies that will cause problems for the reputation of President Xi Jinping.

Another under-delivered promise that has caused the fade is that the exchange was aimed to pack the board with tech companies of the highest quality, with no “fluff valuations”. This doesn’t quite stand up, as Cnano Technology is a barely known company whose price soared 176% with price-to-forward earnings multiple, which is 8 times greater than the Shanghai market’s average.

“Everything boils down to issuance quality, and if Beijing persists with its tech [venture capital] vision, where every entrepreneur sees a unicorn in the mirror, then Star will ultimately follow ChiNext” Brock Silvers claims, who is managing director at Kaiyuan Capital.

Forecasts

It seems that the STAR market hasn’t impressed since its early-days gains. In fact, market capitalization remains pretty much the same, but the volume is down. Some claim that it is too early to judge, given it has only been a couple of months. However, there are warning signs of their previous failures, ChiNext and the Third Board. 

Currently, the market is retail-driven because of the hype and soaring prices upon opening. Chasing new flows means it may be volatile, although there appears to be a 20% daily limit that will be introduced.

President Xi’s autocratic hold on the commercial landscape of China is both- its biggest strength and its biggest weakness. Other than a much better start, not a lot seems to have changed. The market does not appear enticing enough to attract Alibaba and the like, and until it does, it will certainly remain in the unmentioned shadows of Nasdaq.

Is STAR Market for you? How far are you willing to go in diversifying your portfolio. Is the Chinese Stock Market an option for your future investments? Let us know in the comments.