The Star Market, a new board aimed at revolutionising China’s onshore stock market and drawing technology firms back to the country, opened with a boom on Monday. While it is normal for a company’s stock price to pop on its debut, the performance of some of the maiden stocks on Star was a whole different story.
By the end of the first trading day, the 25 names experienced an average stock price increase of 140%. The top gainer, Anji Microelectronics, spiked at a jaw-dropping 400% from its offering price. Even the company with the smallest jump, Harbin Xinguang Optic-Electronics Technology, boasted a 84% increase in its share price.
This would have been less shocking had these companies listed on China’s main A–share market, where offering prices have been capped at 23 times earnings by the China Securities Regulatory Commission since 2014.
With no such limits on the Star, the stocks on the bourse are in no way cheap. At the time of pricing, some investors were spooked by the issuers’ high price to earnings ratios. The 25 IPOs were priced anywhere from 18.86 times earnings for state-owned China Railway Signal and Communication to a lofty 170.75 times earnings for semiconductor manufacturer Advanced Micro-Fabrication Equipment. On average, the PE ratio reached 49.16 times.
It is natural to expect limited upside growth for Star companies given their high valuations. Analysts both onshore and offshore expected most stocks to rise 20%-40%, with a turnover of around 35%-65%.
But they underestimated institutional investors’ willingness to practice, and succeed in, what they repeatedly do in the A–share market — push stock prices high and sell them to hungry retail investors and funds that did not get any pre-IPO shares.
Monday’s performance spoke volumes. One company halted trading after one minute after its price increased more than 30%, and six more halted trading within five minutes for the same reason. But as stock prices kept rising throughout the day, institutional investors started selling.
By the end of Monday, the average turnover of the 25 stocks reached 78%, meaning most investors with pre-IPO shares sold them in the market. At least five equity traders and asset managers told GlobalRMB or the local media that they would not return anytime soon. The accumulated market cap of the Star board reached Rmb538.8bn ($78bn) and four dollar billionaires were born, although most of them will likely lose that title fairly soon.
Tuesday was a slightly different story though. Twenty-one of the 25 stocks saw their prices drop. Fourteen slumped by more than 10%, and the average turnover rate shrank to 36%.
The regulators have few choices now. They have made promises, time and again in the 259 days since Chinese president Xi Jinping first brought up the idea for a tech board, to make the Star Market fully market driven with a transparent price discovery process. Currently, the Star board has no daily limits for the first five days and after that has a more lenient 20% daily limit gain or drop, compared with 10% for the A–share market. It also allows investors to short-sell on the first day of trading, a practice forbidden elsewhere in the country until three months after a stock’s debut.
The feverish excitement seen among Star investors so far is unsustainable. To avoid getting their fingers burnt, a less opportunistic approach would be wise.
More importantly, this week’s two hectic days of trading provided an important lesson. Having a mature market with less stringent rules is one thing, but equally necessary is having a mature investor base. China’s Star Market needs to be able to walk before it can run.