Bullish about Shanghai's new technology board

An investor checking stock price movements at a securities company in Shanghai. Chinese firms and investors are lining up to take part in Shanghai's new Nasdaq-style tech board, with a groundswell of patriotic support surging further after the US' bl
An investor checking stock price movements at a securities company in Shanghai. Chinese firms and investors are lining up to take part in Shanghai's new Nasdaq-style tech board, with a groundswell of patriotic support surging further after the US' blacklisting of telecoms firm Huawei inflamed trade tensions. PHOTO: AGENCE FRANCE-PRESSE

SHANGHAI • Chinese companies and investors are lining up to take part in Shanghai's new Nasdaq-style tech board, with a groundswell of patriotic support surging further after the US' blacklisting of telecoms firm Huawei inflamed trade tensions.

In the two months since the application period began, 120 firms - many in industries such as semiconductors, artificial intelligence and biotech - have sought permission to list, aiming to raise a combined US$16 billion (S$22 billion).

By comparison, initial public offerings (IPOs) on Shanghai's main bourse last year raised US$11.7 billion while those on the Shenzhen exchange raised US$8 billion, according to Refinitiv data.

On the investment side, there has been a rush to launch tech-focused mutual funds, with about 100 seeking approval, data from the China Securities Regulatory Commission shows. Since late May, 12 such funds targeting the new board, each with a fundraising cap of 1 billion yuan (S$197 million), have been launched.

The first mainland China exchange-run board to not make profitability a listing requirement, Shanghai's Sci-Tech Innovation Board was announced suddenly by President Xi Jinping in November and is widely seen as Beijing's latest move to become self-sufficient in core technologies such as chips.

Those ambitions, highlighted by the "Made in China 2025" campaign launched four years ago, have assumed added urgency as the trade war with the US and anxiety about its impact escalate.

"The trade war is no longer simply about China importing more soya beans, or reducing trade deficits," Mr Shi Donghui, director of the Shanghai Stock Exchange's Capital Market Institute, told a financial forum last month after US-China trade talks collapsed.

"It's essentially a tug of war around industry supply chains and core technologies," he said, adding that as the two economic powers vie for tech supremacy, exchange staff were working day and night seven days a week to make the new board a success.

Washington's ban last month on US firms doing business with Huawei without government approval highlighted gaps in China's tech prowess and has fuelled patriotic enthusiasm for the board.

If the new board can foster internationally competitive technologies, US President Donald Trump "will no longer be able to choke us", said Mr Zhou Xiangyong, manager of Guotai Asset Management.

"China must turn external pressure into internal drive," said Mr Pan Jiang, CEO at private fund manager Shanghai V-Invest Co, which recently launched eight funds targeting the new board.

China Galaxy Securities estimates domestic mutual fund houses alone could pump over US$40 billion into the board, with about a third of that coming from new funds launching over the next six months. In addition to allowing loss-making firms to list, the new board is doing away with paternalistic guidance from regulators on IPO pricing and timing - developments that have some bankers and investors calling it China's boldest market reform yet.

A formal launch date has not been announced but investment bankers expect it to start up either late this month or in early July.

For Mr Yuan Guowei, founder and CEO of big data start-up Shanghai HyperS Data Technology, being able to list while still loss-making is an opportunity not to be missed.

"We see US companies which keep expanding aggressively despite losses. We couldn't do that in the past," he said.

Compared to the US, stock market investment in China's tech sector has been low, in part due to stricter listing requirements around profitability.

Tech firms account for roughly 11 per cent of total market value in China's stock markets, which are heavily weighted towards the financial sector, according to China Securities Index. In contrast, IT firms account for nearly 30 per cent of the S&P 500's market capitalisation, Refinitiv data shows.

Channelling investor money into homegrown technologies via the tech board could help defuse US criticism over the opaque shareholding structure of some Chinese firms and massive state subsidies for the tech sector, analysts said.

But foreign investors are not expected to have much initial involvement in the new board. There are as yet no plans for it to be part of the cross-border Connect scheme, while overseas investors participating in the QFII investment scheme for mainland stocks tend to buy blue-chip shares due to their limited research capabilities in China.

The big unknown, however, is just how successful the new board will be in the long term.

China's other start-up boards have mostly languished despite a wellspring of excitement in their early days. Often, speculation sent prices soaring, but those prices later collapsed spectacularly, souring investor sentiment to a point from which it never recovered.

The new tech board "is being propelled directly by China's top decision-makers, so it has to succeed. It cannot afford to fail", said Mr Fu Ziheng, economist at China Fortune Securities. "But there's a lot of uncertainty ahead..."

High-profile firms planning to list on the new board include Beijing Kingsoft Office Software, China's biggest provider of office software controlled by Xiaomi founder Lei Jun, as well as chip firm Advanced Micro-Fabrication Equipment.

Excitement over prospective candidates is so high that venture capitalists interested in pre-IPO financing say they need to move quickly on due diligence or lose out to the competition, particularly in strategic industries such as chips.

"When companies conduct pre-IPO financing, you may have to make decisions in 1-2 weeks, which is very demanding for the investment team. Previously, such decisions were made over 1-2 months," said Mr Feng Sicheng, an investment manager.

REUTERS

A version of this article appeared in the print edition of The Straits Times on June 12, 2019, with the headline 'Bullish about Shanghai's new technology board'. Print Edition | Subscribe