When the Shanghai Stock Exchange (SSE) recently unveiled its list of nine companies that had been approved to file initial public offerings (IPO) on the proposed Science and Technology Innovation Board (STIB), one stuck out.

Suzhou-based semiconductor manufacturer Hejian Technology is remarkable because it is the only company on the list that has yet to turn a profit. It reported a net loss of RMB 146 million (around $21.7 million) in 2018, and has run at a loss for three years, according to its prospectus (in Chinese) filed to the exchange.

China’s two stock exchanges, also known as the A-share markets, have a series of stringent entry requirements that allow only profitable companies to list. For example, to file for an IPO on the SSE, an applicant must record net profits for the last three years which total more than RMB 30 million. The same rule applies to the Shenzhen Stock Exchange (SZSE).

If Hejian Technology passes all of the regulatory reviews, a process expected to last as long as six months, and lists on the STIB, it would be the first loss-making company to launch an IPO on mainland China’s two stock exchanges, Dong Dengxin, director of the Financial Securities Institute at the Wuhan University of Science and Technology, told TechNode.

Other companies on the list included three electronic equipment makers, three high-end equipment manufacturers, and two companies from emerging industries such as new materials and biology.

In the past, strict listing criteria have forced China’s biggest tech firms including Tencent, Alibaba, Baidu, and JD to list on exchanges overseas. Tencent is listed in Hong Kong while Baidu, Alibaba, and JD are registered in New York.

Now, China is significantly lowering the listing threshold for the new board. This signals the country’s most recent attempt to attract Chinese technology companies to IPO on home stock markets. The STIB’s registration system allows companies to go public if they satisfy one of the five sets of financial indicators, including one that stipulates revenues but not profit. The financial indicator Hejian Technology chose requires applicants to be valued at not less than RMB 3 billion and to have generated revenues of not less than RMB 300 million in the most recent year.

“By choosing Hejian Technology, the regulator is signaling that the STIB will be different from the main board and embrace promising high-tech firms that are not able to generate profits in the short run,” Dong said.

Lower barriers

Before the STIB, China has tried several times to lower its stock market threshold.

The SZSE established the ChiNext board in 2009 to serve China’s high-growth enterprises. The ChiNext board has a relatively low barrier for entry, requiring applicants to have generated profits of more than RMB 10 million for two consecutive years combined.

The relatively low standard doesn’t make the ChiNext a first choice of high-tech firms, as it is still an approval-based IPO system where applicants have to go through a lengthy vetting process before listing.

China also set up a National Equities Exchange and Quotations (NEEQ) system for trading shares of public limited companies that are not qualified to be listed on either the Shenzhen or Shanghai stock exchanges.

The NEEQ doesn’t have a profitability requirement for listing, but retail investors with less than RMB 5 million of financial assets to invest are not allowed to trade. Partially because of the barrier set for investors, the NEEQ is facing a problem of low trading volume: local media (in Chinese) reported that the cumulative trading volume of NEEQ in 2018 was RMB 88.8 billion, down more than 60% compared with that of 2017.

Retail investors that want to trade on the new Shanghai bourse will also have to show that they have at least RMB 500,000 in investment capital and two years of equity trading experience.

According to the Shanghai Stock Exchange Statistical Annual (2018), the number of accounts owned by natural persons with RMB 500,000 in investment capital in the exchange was 5.7 million, representing 14.4% of the total accounts.

“The difference is that retail investors are allowed to indirectly participate in trading on the STIB through financial products provided by securities brokerages,” said Dong.

The SSE also stated that the investor access system was not meant to keep retail investors out of the STIB.

Mobilizing capital

Hejian Technology is one of the three chipmakers that are on the new board’s list. The other two are: Shanghai-based TV box chipset manufacturer Amlogic, whose clients include Sony, Xiaomi, and Alibaba; and Shandong-province based Raytron Technology, which is a micro-electro-mechanical systems (MEMS) sensor maker.

“The semiconductor industry is part of the new generation of the information technology sector, which ranks first on the China Securities Regulatory Commission’s list of recommended sectors for the STIB,” said Fang Jing, an analyst at the China Merchants Securities. Policy initiatives around the STIB and targeted sectors leave little doubt that the state is vigorously backing the semiconductor industry, he added.

The list reflects the 10 priority sectors highlighted by Made in China 2025, a government-led industrial program at the center of the contentious US-China trade dispute. The plan maps out China’s roadmap to surpass western technological prowess in advanced industries by using subsidies and pursuing intellectual property acquisition.

In addition to vast subsidies, loans and bonds, private capital is the latest resource being mobilized to meet the Made in China 2025 goal. “By launching the new board, the state is in fact providing venture capital with a smooth exit option, and stimulating more funds to flow into the high-tech sectors,” Dong said.

Wei Sheng

Writing about semiconductors and telecommunications.

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