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New technology board: great expectations

November 30,2018

   
   

It doesn’t have an official name yet, but the new technology innovation board on the Shanghai Stock Exchange already has gravitas.

Once up and running, it will allow startups to raise funds through share offers and connect with almost 100 million Chinese stock investors. Tech firms and capital markets are already abuzz about it.

The new board, announced by President Xi Jinping at the China International Import Expo early this month, will support Shanghai’s development as an international financial center and as a hub for science and technology.

At present, the Growth Enterprise Market in Shenzhen is the biggest existing stock market for startups. However, it has faced controversies over the years because of what are considered unreasonably high valuations and a lack of innovative companies because of its easy entry thresholds.

The new board is expected to open as soon as the first quarter of 2019, with about 20 listed firms in the first group of initial public offerings.

Speculation about the first score of listings has helped boost the share prices of venture capital stocks and related listed firms. Some have doubled their share price in the past two weeks, helping domestic stock markets rebound.

The high anticipation comes despite lack of details about the new board. It is known, however, that the board will adopt a registration-based system for initial public offerings ­— a departure from the current practice where regulators vet and approve listings.

Some tech firms, especially local startups, aren’t worried about the fine print. They are already signaling that the new board will be their destination of choice because of its expected low entry thresholds, lack of volumes of application materials and absence of long approval queues.

“In the past, main company factors such as land and infrastructure will be replaced by determination of technology, talent, brand and trademark,” said a report from Chuancai Securities.

The board will target key areas such as integrated circuits, artificial intelligence, biomedicine, aerospace and new energy vehicles — offering new opportunities for so-called “unicorns,” or private firms with market value of US$1 billion or more, according to Shanghai Party Secretary Li Qiang, who has led government promotion of the board among top city officials.

Li and other officials have visited and surveyed 20 technology companies, including eight artificial intelligence companies, four bio-pharmaceutical companies and three semiconductor companies.

A new service center to help startups in the Yangtze River Delta region has made its debut this month. The joint venture of the Shanghai Stock Exchange and the Pudong New Area government. will offer information on share listing guidelines, communication with investors and channels for promoting technologies and brands. It will grant them a “fast pass” in going public, said the center.

 

Candidates for new board

Government officials in the neighboring provinces such as Anhui and Zhejiang are also lining up candidates for the new board.

Most companies are reserving judgment until details of the new board are published, but some companies are already expressing interest.

Shenzhen-listed ASD, a home appliance maker, said it wants to spin off its smart manufacturing in a listing on the new board. The company recently acquired an industrial robot firm.

Companies like Shanghai Intoway Automation Engineering, an automotive automation and robot integration firm, is also looking at a possible listing.

“It would be our first choice because of lower entry thresholds and its location of Shanghai,” Chen Jie, Shanghai Intoway’s general manager, told Shanghai Daily.

In 2018, the company’s net profit is expected to hit up to 7 million yuan (US$1.01 million), up almost 50 percent from a year ago. But those figures still fall short of listing requirements on the mainstream Shanghai and Shenzhen exchanges, where annual profit needs to exceed 20 million yuan, Chen added.

Listed firms that include Qingdao Eastsoft Communication Technology Co and Shanghai Jiaoda Onlly Co also said in statements that they are being courted to explore listing possibilities. Their prices surged after the statements.

Also in the speculation pool spreading online are some of China’s most valued private startups, like Didi Chuxing, ByteDance and SenseTime.

Individual investors, who make up the bulk of shareholders on domestic markets, hold mixed opinions about the new board.

One Shanghai investor, who identified himself only as Martin, said his shareholding lost 40 percent of its market value by October this year. He cut his losses and even made some money this month because of shares he holds in the Zhangjiang Hi-Tech Park Development Co. The share prices of venture capital and technology parks that stand to benefit from the new board doubled in two weeks.

But Martin said he is worried that the new board may siphon liquidity from existing markets already facing a shortage of capital.

“I don’t know what will happen to existing shares when the new market debuts, unless there is new money injected,” Martin said.

Other individual investors have expressed concerns about the need for measures to protect existing shareholders on the Shenzhen and Shanghai exchanges.

Ahead of the new board, shares in venture capital-related stocks are already surging in anticipation, especially those companies involved in investment or operation of technology parks, like Shanghai Shibei High-Tech Co, Zhangjiang Hi-Tech, Shanghai Dazhong Public Utilities Group and Qianjiang Water Resources Development. All of them surged by the daily limit of 10 percent for consecutive days.

Not all possible board prospects are rushing to the fore. Among the early denials are online education platform Hujiang, online steel trading platform Zhaogang and online radio firm Qingting.

Those companies have adapted structures to seek IPOs in offshore markets like Hong Kong, which would make it impossible for them to return to the domestic markets, said one official who declined to be identified.

Technically, it would not be a problem to switch boards, said Stella Yuan, China central leader of the Transaction Advisory Services of EY, a corporate services firm that helps companies adapt structures to comply with the entry requirements of different stock markets.

“In the end, it’s the attitude of institutional investors that decides most things,” Yuan added.

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