Breakingviews – Giants risk overloading China’s growth boards

HONG KONG (Reuters Breakingviews) – China’s tech-focused growth boards are at risk of losing focus. Carmaker Geely wants to raise $3 billion on Shanghai’s hot STAR exchange, part of a surge of mature companies chasing stratospheric valuations on venues built for earlier-stage firms. The trend could water down Beijing’s push to help smaller, cash-strapped companies raise equity.

Shanghai’s STAR market was launched in part to serve young companies that are excluded from the main boards because of strict profitability requirements. China needs to fund its next wave of biotechnology and artificial intelligence upstarts, which burn through cash at light speed but lack collateral for loans.

Besides having looser listing criteria, however, the STAR board also scrapped the semi-official valuation cap of roughly 23 times earnings for companies going public on mainland exchanges. That lured executives at older companies, who correctly concluded that STAR traders would juice their valuations. State-backed chip-making champion Semiconductor Manufacturing International (SMIC), for example, debuted at a price of 109 times 2019 earnings, which yanked up its Hong Kong-listed stock too. On average, companies in the STAR 50 index have seen their shares more than triple since listing, and currently trade at around 90 times historical earnings – six times higher than peers on the main Shanghai board.

So far, most of the companies on STAR are profitable, suggesting well-established entities with adequate access to capital markets have benefitted more than startups. SMIC traded in New York for 15 years before opting for a Hong Kong-STAR dual listing. Geely and the Alibaba-backed Ant Group, which already boast deep-pocketed backers, are eyeing the same setup. Even Dongfeng Motor, a state-owned dinosaur founded in 1969, announced plans to launch a secondary listing almost immediately after Shenzhen’s tech-focused ChiNext board rolled out similar liberalisations to compete with STAR.

Geely and Ant have interesting business models. But letting mature companies dress up as bleeding-edge innovators and climb onto growth boards dilutes their purpose and distorts index weightings. If everyone is special, nobody really is.