Tech companies come home to roost in the STAR

As SMIC becomes the fifth Hong-Kong-listed Chinese tech company to trade in the STAR Market, Jiemian News investigates why domestic tech companies are“ coming home” and what they can expect to find there.

By KE Da


Stocks in Semiconductor Manufacturing International Corporation (SMIC), China’s biggest chip maker, rose fast on debut in Shanghai Stock Exchange debut on July 16. Shares leaped 246 percent to 95 yuan on opening and closed at 82.92 yuan, the market capitalization reached nearly 600 billion yuan (US$85 billion). SMIC is now the most valuable company in the Science and Technology Innovation Board, or STAR Market, Shanghai’s Nasdaq-style technology board that was launched exactly a year ago.

The IPO was the biggest in mainland China in a decade and the largest so far in the STAR Market. With it, SMIC became the latest technology company to opt for a secondary listing in Shanghai. Another half dozen companies that have already completed secondary listings and are scheduled to be also listed in the STAR Market. This, in the view of many market watchers, may become a long-term trend.

East, West, home’s best

The SMIC listing was approved with unprecedented speed. The shares started trading only two months after the company first filed the application. This is perhaps a signal that homegrown technology companies will be encouraged to list in the mainland, as China tries to set up the STAR market to compete with Nasdaq.

“The STAR Market is part of a strategy to build a strong domestic technology sector. Plenty of support is given to companies that are seen as strategically important,” said Wang Yiyue, of Huatai Securities.

SMIC is crucial to developing a self-reliant domestic chip-making industry, especially as domestic companies face tight US sanctions.

Analysts agree that for local technology companies, “homecoming” may soon be de rigeur. Technically speaking, rigorous IPO reviews in Hong Kong take some due diligence burden off secondary listings, expediting approval. On the other hand, by listing in the mainland market, companies tend to receive higher valuations than in Hong Kong or abroad.

“Some domestic companies lack recognition and fail to find investors overseas,” security analyst He Nanye explained. “If the STAR Market becomes a friendly environment where good companies are fairly valued, Hong Kong listed companies will be more than willing to explore opportunities.”

Policy incentives aside, market considerations dominate corporate decisions on listing. Favorable valuations and regulatory certainties are only part of the draw. High openings on the first day of trading and the credibility granted by the “STAR Market” tag will raise investor enthusiasm for future rounds of fundraising.

Shine bright, like Nasdaq

STAR Market stocks in general trade at higher PE ratios than those on the Hong Kong Stock Exchange and also have a higher price to book ratios than peers in Hong Kong or Shanghai, especially among recent secondary offerings.

These kinds of valuation premiums are unlikely to last, according to He Nanye. The valuation gap between the mainland and Hong Kong markets will close as capital flows more freely between the two. Executives are required to hold their shares for longer before cashing out in the mainland market, which might be another deterrent for some companies.

Premium valuation at listing provides scant profit opportunities in the secondary market.

“There might be opportunities when a stock is first listed in the STAR Market,” said Sun Jianbo of Zhongyue Capital. “When the price stabilizes, the shares of the same company will perform similarly in the STAR Market and Hong Kong Stock Exchange.”

Sun went on to explained that the two markets trade off the same fundamentals,  so arbitrage profits through short-term, idiosyncratic fluctuations are unlikely to be substantial.  Cross-border and cross-market trading is not completely open.

As for SMIC’s remarkable STAR debut, Sun believes the high opening is only a reflection of short-term expectations. In the longer run, performance will depend on how the business performs, as well as how the still quite new STAR Market withstands the buffets of economic storms, trade tensions, and ever-quirky investors.

The journey to becoming the next Nasdaq could still be a very long one.