The STAR Market – China’s NASDAQ

The STAR stock exchange, officially known as the Shanghai Stock Exchange Science and Technology Innovation Board, was conceived in 2018 for the purpose of supporting advanced technology and innovative enterprises that align with China’s national strategies. The newly listed companies had to hold core or breakthrough technologies, in order to list on the new STAR market and obtain a higher degree of market recognition in raising capital. In July 2019 the first set of companies launched IPOs on the STAR market. STAR has been touted as Shanghai’s equivalent to America’s Nasdaq due to its focus on fast growing technology start-up companies. By the middle of 2020, it had become Asia’s most valuable stock market, valued at more than $400 billion USD. Several Chinese companies, like SMIC, previously listed on US stock exchanges, delisted there in order to list on the STAR market and attracted more capital.

Figure 2 graphically shows the type of companies currently on the STAR market, which include semiconductor, biotech, IT, new materials and alternative energy start-ups. The statistics of listed, pending listings and rejections are shown on the right pie chart of Figure 2. While less regulation is associated with the STAR market than other exchanges, it is registration based, there are still companies that fail to complete the IPO process. ANT Financial is a high-profile example of this. ANT initially listed as a technology-based Fintech company, but at the last moment, the Chinese banking regulators pulled the IPO, citing that ANT should have filed as a financial institution, not a tech company. The ANT IPO may now take another year of preparation to successfully launch.

The general rules for filing on the STAR market are given below (source: https://star.sse.com.cn/en):

STAR Market Offering Requirements

1. The company has been in continuous operation for at least 3 years

● The issuer is a limited company established by law and has been in operation for no less than 3 years with a sound and well-functioning organization. Relevant institutions and personnel are able to perform their duties in accordance with the law.

● Where the issuer is a joint-stock company converted from a limited liability according to the original book net asset value, the duration of continuous operation may be calculated from the date of the establishment of the joint-stock company.

2. The company has sound accounting criteria and internal control rules

● The company has sound accounting criteria and is issued a standard unqualified audit reports by a certified public accountant.

● The internal control system is sound and effective, and is issued an unqualified internal control report by a certified public accountant.

3. Business integrity

● The issuer enjoys asset integrity and independence of business, personnel, finance and institutions. The competition with the controlling shareholder, the actual controller, etc. does not pose a significant adverse effect on the issuer, and there is no relevant transaction that seriously affects independence or that is significantly unfair.

● In the last 2 years, no major adverse changes have occurred in the main business and directors, senior managers and core technical personnel. The ownership of the controlling shareholder and the shareholder controlled by the controlling shareholder and the actual controller are clear. The actual controller has not changed in the last 2 years, and there are no major ownership disputes that may result in possible changes in control.

● There are no major ownership disputes with major assets, core technologies, trademarks, etc., or other matters that have a material adverse effect on its continuing operation.

4. The issuer's operation is compliant with relevant laws and regulations

● The issuer, its controlling shareholders and actual controllers have not committed any criminal offences, fraudulent issuances, major disclosure violations or other major violations involving the five major security areas in the last 3 years.

● The directors, supervisors and senior executives of the issuer have not been subject to administrative punishment or investigation by the CSRC or judicial authorities in the last 3 years. Nor is there any case of unclear conclusion.

There are now more than 175 companies listed on the STAR market. Table 1 shows some of the companies that are in the semiconductor, sensing and IoT market space.

The market value of these Chinese tech companies grew dramatically in 2020 as trade tensions and government funding of technology infrastructure increased. As an example, after delisting from the NYSE and listing on STAR, SMIC, China’s largest IC wafer foundry, with some surface micromachining MEMS capability, saw its valuation soar past rival TSMC’s market value. By the end of 2020 this STAR run-up in share price growth had moderated to some extent. The recent ANT Financial IPO problems has also given investors some pause.   Investors outside of China can tap into the STAR market. For example, ICBC Credit Suisse Asset Management and Huatai-PineBridge Investments have EFTs linked to the STAR Science and Technology Innovation Board 50 Index. As with all equity investments, this can be risky so Due Diligence and allocation moderation is highly recommended.   Look for the STAR market to help fund many emerging technology companies in China going forward.