Frenzied debut of China's Nasdaq-style board adds $44 billion in market cap

[July 22, 2019]  By Andrew Galbraith and Samuel Shen

SHANGHAI (Reuters) - Trading on China's new Nasdaq-style board for homegrown tech firms hit fever pitch on Monday, with shares up as much as 520% in a wild debut that more than doubled the exchange's combined market capitalization and beat veteran investors' expectations.

Sixteen of the first batch of 25 companies - ranging from chip-makers to health care firms - increased their already frothy initial public offering (IPO) prices by 136% on the STAR Market, operated by the Shanghai Stock Exchange.

The raucous first day of trade tripped the exchange's circuit breakers that are designed to calm frenzied activity. The weakest performer leapt 84.22%. In total, the day saw the creation of around 305 billion yuan ($44.3 billion) in new market capitalization on top of an initial market cap of around 225 billion yuan, according to Reuters' calculations.

"The price gains are crazier than we expected," said Stephen Huang, vice president of Shanghai See Truth Investment Management. "These are good companies, but valuations are too high. Buying them now makes no sense."

Modelled after Nasdaq, and complete with a U.S-style IPO system, STAR may be China's boldest attempt at capital market reforms yet. It is also seen driven by Beijing's ambition to become technologically self-reliant as a prolonged trade war with Washington catches Chinese tech firms in the cross-fire.

Trading in Anji Microelectronics Technology (Shanghai) Co Ltd, a semiconductor firm, was briefly halted twice as the company's shares hit two circuit breakers - first after rising 30%, then after climbing 60% from the market open.

The mechanisms did little to keep Anji shares in check as they soared as much as 520% from their IPO price in the morning session. Anji shares ended the day up 400.2% from their IPO price, the day's biggest gain, giving the company a valuation of nearly 242 times 2018 earnings.

Suzhou Harmontronics Automation Technology Co Ltd, in contrast, triggered its circuit breaker in the opposite direction, falling 30% from the market open in early trade before rebounding. But by the market close, the company's shares were still 94.61% higher than their IPO price.

Wild share price swings, partly the result of loose trading rules, had been widely expected. IPOs had been oversubscribed by an average of about 1,700 times among retail investors.

The STAR Market sets no limits on share prices during the first five days of a company's trading. That compares with a cap of 44% on debut on other boards in China.

In subsequent trading sessions, stocks on the new tech board will be allowed to rise or fall a maximum 20% in a day, double the 10% daily limit on other boards.

Regulators last week cautioned individual investors against "blindly" buying STAR Market stocks, but said big fluctuations were normal.

Shanghai Party Secretary Li Qiang (centre L) and China Securities Regulatory Commission (CSRC) Chairman Yi Huiman (centre R) attend the listing ceremony of the first batch of companies on STAR Market, China's new Nasdaq-style tech board, at Shanghai Stock Exchange (SSE) in Shanghai, China July 22, 2019. REUTERS/Stringer

Looser trading rules were aimed at "giving market players adequate freedom in the game, accelerating the formation of equilibrium prices, and boosting price-setting efficiency," the Shanghai Stock Exchange (SSE) said in a statement on Friday.

The SSE added that it was normal to see big swings in newly listed tech shares, as such companies typically have uncertain prospects, and are difficult to evaluate.

The exchange cited big fluctuations in IPOs shares on Nasdaq and the Hong Kong stock exchange, in particular singling out recently listed electric car firm Nio Inc and Chinese start-up Luckin Coffee.

SSE said that an index tracking the STAR Market would be launched on the 11th trading day following the debut of the 30th company on the board.

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MAIN BOARD DRAG

Investor focus on the STAR Market in the short term could weigh on the main board in terms of liquidity and attention, said Zhu Junchun, chief analyst with Lianxun Securities.

That effect was clear on Monday, with the benchmark Shanghai Composite Index falling 1.27%, and the blue-chip CSI300 index ending 0.69% lower.

Dual-listed China Railway Signal & Communications Corp Ltd clearly illustrated the gap in investor enthusiasm. Its STAR Market shares more than doubled from their IPO price, even as its Hong Kong shares dropped 11.7% following worse-than-expected preliminary results.

Huang at Shanghai See Truth suggested rational investors wait on the sidelines and observe the market for a month, before making purchasing decisions.

Some investors, nevertheless, hailed the debut of the board that Beijing hopes will propel investment in the sector and help the country innovate and compete globally.

Yang Tingwu, vice general manager of Tongheng Investment, a hedge fund house in Fujian province, said he viewed 80% of listed companies as "cannon fodder", but the chance of the remaining 20% producing China's next Tencent or Huawei [HWT.UL] made the market turmoil worth it.

"The STAR Market opens a new chapter for China's stock market. Toast to the Chinese dream in our capital markets!" he said.

(Additional reporting by Luoyan Liu and Winni Zhou; Editing by Jacqueline Wong and Sam Holmes)

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