In Depth: Debate Over New High-Tech Board Centers on What It Means to Be High-Tech
It has been nearly five months since the first companies started trading on Shanghai’s Nasdaq-style high-tech board, known as the STAR Market, but a debate continues to rage over just how “high-tech” a company should be to list there.
As the number of companies listed on the STAR Market continues to grow steadily — hitting 66 as of Tuesday — some experts and industry insiders worry that the squishy criteria for qualifying to list on the new board could push some high-quality companies away.
When the final rules for the board were announced in March, regulators laid out the financial requirements for companies to list, but didn’t exactly define what it means to be high-tech. Since then, some have questioned whether applicants that don’t spend a lot on research and development (R&D) count as innovative companies developing advanced technology.
The STAR Market has a long-term mission of pioneering reforms of China’s stock markets, including registration-based listings, looser restrictions on price movements and broader use of short selling and margin trading, China Securities Regulatory Commission (CSRC) Vice Chairman Fang Xinghai said in July. The board’s long-term success will hinge on whether it can attract star companies to list, said a person close to regulators.
The high-tech board was designed to support not only companies developing new technologies or working in emerging industries, but also high-quality enterprises with new business models favored by investors, according to a Shanghai Stock Exchange news release in March.
Multiple investment banking sources have told Caixin that several companies looking to list on the high-tech board have found it difficult to establish their “high-tech” bona fides.
Concerns have also emerged that if the high-tech board focuses too much on a company’s advanced technological capabilities, it might miss out on companies with high potential, such as Hong Kong-listed Meituan Dianping, an online on-demand service specialist. “If the board doesn’t consider innovative internet-based companies or those that employ the new generation of information technology and only considers semiconductor- or chip-makers for listings, the Shanghai Stock Exchange will never get to host companies like Amazon, Alibaba or JD.com,” said the head of investment banking at a major securities firm.
The brokerage source said that it is easier for manufacturers or biomedical companies to prove their science and technology chops. However, for companies with a major business focus on big data, the internet or innovation in applications of the latest information technology, it is hard for them to demonstrate how much revenue actually comes from applications of their core technologies, patents or other intellectual property, he said.
For example, mobile-phone maker Shenzhen Transsion Holdings Co. Ltd., which has listed on the STAR Market, is a company that some in the market don’t exactly see as high-tech. Yet the company still got the go-ahead to list because of its outstanding business. Caixin has learned that authorities were a bit hesitant about Transsion, but still let it pass the stock exchange’s screening and get registered with the CSRC for listing.
In the first three quarters this year, Transsion booked 16.9 billion yuan ($2.4 billion) in revenue, up 6.7% year-on-year, according to its third-quarter report (link in Chinese). In the same period, its net profit attributable to shareholders after deductions of nonrecurring gains and losses rose 58% year-on-year to 1.1 billion yuan, the report shows.
Transsion isn’t a big name in China, but it’s almost a household name in Africa. Its mobile phone shipments reached 124 million devices in 2018, accounting for 7% of the global market share, the fourth largest in the world, the company said in its prospectus (link in Chinese), citing statistics from data research firm IDC Research Inc. Its share of the African market reached 48.7%, making it the continent’s largest mobile-phone maker, the prospectus said.
Before Transsion’s listing, the stock exchange questioned its core technology because it spends less on R&D than its competitors. In 2018, R&D accounted for 3.1% of the company’s revenue, while Samsung Electronics Co. Ltd., Apple Inc. and Xiaomi Corp. earmarked 7.7%, 5.4% and 3.3% of their revenue for R&D, respectively, according to Transsion’s reply (link in Chinese) to the exchange.
James Liu, CEO of Sailing Capital Management Co. Ltd., a private equity firm, told Caixin that a company’s innovation in business models is just as important as its “high-tech” bona fides, especially in a country like China that has a large customer base. The more important thing is for regulators to spot companies that “falsely advertise” themselves as high-tech, he said.
Contact reporter Timmy Shen (firstname.lastname@example.org, Twitter: @timmyhmshen) and editor Michael Bellart (email@example.com)
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