On Friday, Suzhou HYC set off on a roadshow for a landmark IPO: the very first to take place on Shanghai’s technology board for innovative companies, also known locally as the Star market.
How does this differ from any other mainland Chinese listing? Principally through the process of price discovery. Normally, there is a ceiling on a domestic IPO price – set by the China Securities Regulatory Commission (CSRC) – of 23 times earnings. That ceiling won’t apply on the tech board, and so a genuine price discovery process will take place from June 21 to 24, with pricing on June 25.
Also, most A-share listings are dominated by retail investors. Since the price has been held low by the CSRC rule, and mainland retail tend to adopt a pack mentality, the result is that usually any new IPO sees its share price go through the roof, regardless of its merits. On the tech board, only institutional and qualified retail investors will be allowed to take part. The hope is to bring some prudence and reason to the way equities behave in China.
Suzhou HYC will be the first of many. At the time of writing, 124 companies were in the queue to list, which is quite something as the market was only announced in November.
This first deal will be led by Huatai United Securities as sole sponsor, but it’s likely that we’ll start to see foreign banks, through their securities joint ventures, taking part in subsequent deals. These ventures have often been queasy about the conduct of A-share markets generally – pricing, distribution, market practice – but they are more enthusiastic about the new tech board because it promises practices rather closer to those they are familiar with in Hong Kong and elsewhere.
Also, the fees look good: IFR Asia reckons the first deal carries a 7% underwriting fee.
Few will be watching this closer than the HKEx, which is probably the exchange with the most to lose if the Shanghai tech board does well. Companies listing on the new board will be doing so because they want something different to what they can get in the main board in Shanghai, or in Shenzhen: proper valuation and a rational investor base. That used to be the reason they would go to Hong Kong (or Nasdaq).
Still, rationality is a precious commodity in the Chinese capital markets, and don’t be surprised if early tech board listings go through the roof regardless.