科技创新委员会：开启未来之门（入门篇）

1、By: Steven Sun (S1700517110003)Equity ResearchReportMarch HYPERLINK / Opening the door to the future a primera be a be &reportbepartWhy read this reportIts a primer on the Science and Technology Innovation Board, a new board on the Shanghai StockExchangeWe explain how it is different from Chinas big

2、 stock markets in many ways, including listing criteria, IPO pricing mechanism, investor eligibility, and delistingrulesand why, if this bold experiment is executed well, the new board will represent a major step forward for Chinas broader A-sharemarketFocus chartsScience and Technology Innovation B

3、oard new rules, new structureSource: CSRC, Shanghai Stock Exchange, HSBC Qianhai SecuritiesSci-Tech Innovation BoardChinas multi-layered capital marketSci-Tech Innovation BoardSource: Wind, HSBC Qianhai Securities*By end of January 2019The long road to a new innovative boardSource: HSBC Qianhai Secu

4、ritiesHigher turnover rates for small caps after the launching of ChiNext in October 2009Turnover rate7Turnover rate6543210Jul-09Aug-09Sep-09Oct-09Nov-09Dec-09Jan-10Feb-10Mar-10CSI500/CSI300SME/SHCOMPSource: Wind, HSBC Qianhai Securitiesas well as for performanceRelative perf.Index performanceRelati

5、ve perf.Index performance7000260001.55000140000.530000200009-Jul09-Aug09-Sep09-Oct09-Nov09-Dec10-Jan10-Feb10-Mar10-AprAxis CSI500/CSI300 SME/SHCOMPSME(RHS)Axis SHCOMP(RHS)CSI500(RHS)CSI300(RHS)Source: Wind, HSBC Qianhai SecuritiesContents HYPERLINK l _bookmark0 Why readthisreport1 HYPERLINK l _bookm

6、ark1 The next bigstepforward5 HYPERLINK l _bookmark2 Welcome onboard10 HYPERLINK l _bookmark3 Innovation isthe key28 HYPERLINK l _bookmark4 Appendix39 HYPERLINK l _bookmark5 Summary of rules for the Sci-Tech HYPERLINK l _bookmark5 InnovationBoard HYPERLINK l _bookmark6 Disclosureappendix46 HYPERLINK

7、 l _bookmark7 Disclaimer49The next big step forwardIf this bold experiment is executed well, the Science and Technology Innovation Board will represent a major step forward for Chinas broader A-share market. The new board for tech companies is very different from the big stock markets in Shanghai an

8、d Shenzhen in many ways, including listing criteria, IPO pricing mechanism, investor eligibility, and delisting rules.Regulators are cutting red tape to resolve longstanding inefficiencies and distortions in the existing markets. If rolled out to the broader market, we believe this could prove to be

9、 theboldest reform yet in Chinas capital markets and help to attract more institutional investors. We also think that the short-term impact on market liquidity will be limited.A bold new experiment in ShanghaiReform is being driven by greatest of all motivators competitionChina was a late starter in

10、 the world of stock markets. Despite rapid progress, it still lags far behind developed countries when it comes to capital markets that are rules-based and free of distortions. But given the scale of the A-share market and its growing importance to global investors, the need for greater transparency

11、 has never been greater.Reform is being driven by the greatest of all motivators competition. For example, in neighbouring Hong Kong, the listing rules were simplified last year to attract new economy companies. It is against this backdrop that Chinas regulators have drawn up plans to open a new cha

12、nnel for investing in equities. China Securities Regulatory Commission (CSRC) released nine consultation paper at the end of January 2019, and soon released the 10 official documents on 2 March, right after the consultation period ends. It is the fastest release in the history of Chinas capital mark

13、et regulation; we it new a in late- The Science and Technology Innovation Board (Sci-Tech Innovation Board), launched on the Shanghai Stock Exchange (SSE), will focus on hard technology companies and we think the first batch of new listing will likely be launched in the next fewmonths.is in the of b

14、y be aitisnototo so in We it is ofinofThe new board will promote technological innovationSuch an ambitious project also comes with risksFrom the regulatory point of view, listing has never been easierThe new Nasdaq-like board will promote technological innovation in areas such as integrated circuits

15、, biomedicine, artificial intelligence, big data, cloud computing, software, internet, the Internet of Things, 5G technology, aeronautics and astronautics, marine engineering, robotics and automation, new materials, autonomous driving and new energy cars.Our economists have written extensively about

16、 how high-tech industries are the new growth engine of Chinas economy (see HYPERLINK /R/10/tgpQdcQ Chinas smart move, 11 September 2017, and HYPERLINK /R/10/GgnpWSk China HYPERLINK /R/10/GgnpWSk innovation, 10 October 2017). The problem is that many start-ups find it difficult to raise funds and oft

17、en burn through cash before they start to become profitable. The new board in Shanghai can help solve that problem.In our view, the impact of this new board could go well beyond raising funds for and facilitating the growth of a select number of high-tech companies. The new board is very different f

18、rom the big stock markets in Shanghai and Shenzhen in many ways, including listing criteria, IPO pricing mechanism, investor eligibility, and delisting rules.If rolled out to the broader market, the reforms that are proposed for the Sci-Tech Innovation Board have the potential to reduce the amount o

19、f inefficiencies and distortions that currently exist and attract more institutional investors to the A-share market that are traditionally the preserve of the retail investment community.That said, such an ambitious project comes with risks. For example, both sell-side and buy-side institutions nee

20、d to develop fresh valuation frameworks and methodologies to work out how to invest in these high-tech but also high-risk early-stage companies. It also remains to be seen how regulators will respond to increased market volatility in a market with fewer rules and restrictions. In this report, we:Exp

21、lain how the new board means that, from the regulatory point of view, listing has never been easier, and share reduction and delisting have never been stricter inChina.Discuss why we dont think the Sci-Tech Innovation Board will have much impact on liquidity in the broadermarket.Look at how using a

22、registration-based IPO system will help reduce the importance of shell companies.Highlight the nine major differences the new board offers (seebelow).Identify the risks associated with this ambitiousproject.Present two stock screens of listed A-share companies that can benefit from Sci-Tech Innovati

23、on tradingconcepts.Nine major differences and upgradesListingcriteriaFrom the regulatory point of view, listing has never been easier. There are only four general requirements and five sets of listing criteria for the new board. Any company with a history of at least three years, proper internal con

24、trols and operational capacity and which is being run legally by the issuer and relevant parties is eligible. By comparison, the existing IPO and listing rules stipulate 23 general requirements, and there are 10 for the ChiNext board in Shenzhen. There is much less focus on current profits and the m

25、inimum market cap is RMB1bn. For the Sci-Tech Innovation Board, far more emphasis is put on the anticipated listing market cap and revenue generation.Individual investors need a minimum brokerage account balance of RMB500,000We believe the introduction of a registration-based IPO system represents a

26、 big step forward.There will be no daily price limit for the first five trading daysIPO pricingmechanismSince the resumption of A-share IPOs in 2014, more than 1,000 stocks have listed in China. With less than 10 exceptions, all of them have capped their IPO valuations at no more than 23x trailing p

27、rice-to-earnings (PE). The reason behind this regulatory “guidance” is to ensure that stocks are fully subscribed. However, the unintended consequence is that few investors care about the quality and true value of IPOs. Their primary concern is to get an allocation as the price of the stocks rises r

28、apidly in the days after they hit the market. We think this is going to change when the new board launches and the market will play a pivotal role in setting the IPO price. For instance, it is hard to calculate a PE ratio for listing candidates that are unprofitable.Investor eligibility andcompositi

29、onTo invest on the Sci-Tech Innovation Board, individual investors need a minimum brokerage account balance of RMB500,000 and at least two years of stock market experience. According to the Shanghai Stock Exchange, over 85% of individual investors had less than RMB500,000 in their brokerage accounts

30、 at the end of 2017. This eliminates the majority of individual investors, which in our view is the right approach as it will strike the right balance between market liquidity and potential risk.Under the existing rules, if the subscription of online individual investors exceeds 150 x, the maximum o

31、ffline institutional allocation cant be over 10% of IPO issuances. In another words, over 90% of the allocation goes to individual investors. Its just the opposite for the new board. The maximum allocation to online (or individual) investors is capped at 20% of public offerings (excluding strategic

32、allocations), while over 80% will go to offline institutional investors and strategic investors. Also, no less than 50% of the offline issuance will be primarily allocated to mutual funds, Social Security Fund, pension funds and insurance funds. This will allow the IPO price to be set primarily by i

33、nstitutional investors, rather than the arbitrary level of 23x PE.Registration-based IPOsystemWe believe the introduction of a registration-based IPO system represents a big step forward. Under the current approval-based IPO system, companies have to go through a stringent application process before

34、 they receive approval from the regulator to list. The system for the new board is both faster and more transparent.It will work like this. The Shanghai Stock Exchange will be in charge of approving listings, a process which can take around 6-9 months. Once approved, the China Securities Regulatory

35、Commission (CSRC) will approve the IPO registration within 20 working days. Whats more, the whole registration and approval process will be made transparent to the general public.The existing IPO approval system run by the CSRC focuses on “authenticity, accuracy and completeness” in terms of informa

36、tion disclosure. But it tends to be backward looking based on companies profitability and growth potential. This makes it vulnerable to any abrupt deterioration of profitability and growth. In contrast, the Sci-Tech Innovation Board approval process focuses on the “adequacy, consistency, and compreh

37、ensibility” of information disclosure. The issuer and sponsors are held responsible for the “authenticity, accuracy and completeness” of the information supplied. More importantly, the evaluation on future profitability and growth prospects rests with market participants, not with the SSE and CSRC.D

38、aily pricelimitsThere will be no daily price limit for the first five trading days, and the daily price limit is 20% from the sixth trading day. For existing A-share IPOs, the maximum upside for the first trading day is 44% and 10% from the second trading day. In addition, listed companies will be e

39、ligible for margin trading and short selling from the first trading day (its currently three months for A- share stocks). The aim is to improve the price discovery process in the secondary market.There are plenty of delisting rules the problem is that implementation is rather lax, but it is stricter

40、 on the new boardClearly, it also means there with be greater market volatility and higher risks associated with price movements.ShareholdingreductionsOn the new board, the controlling shareholders will have a 36-month lock-up period, and their shares cannot be brought back by the company. Core tech

41、nicians cannot transfer their shares in 12 months after the IPO and 6 months after leaving the company, and within four years after the restricted period, each year, only 25% of total shares can be sold. For pre-profit companies, the restricted period is three years for major shareholders and key te

42、chnicians. In the fourth and fifth year, only 2% of total shares can be sold by controlling shareholders. By comparison, the existing regulations are much morerestrictive.Stock-based incentiveplansThe aggregate stock options can be a maximum of 20% of the total outstanding shares for companies liste

43、d on Sci-Tech Innovation Board. This is double the 10% cap for existing A-share companies. Companies on the new board can also issue up to 10% of IPO shares for senior management and core employees through strategic allocations into the designated employee stock ownership plans (ESOPs).The listing o

44、f red chips, VIE-structured and dual share-classcompaniesFor historical and regulatory reasons, the majority of established high-tech and innovative companies have adopted red-chip and variable interest entity (VIE) legal structures. They have chosen to list in either the US or Hong Kong, and some a

45、lso have a dual share-class structure. In 2018, the China Securities Regulatory Commission (CSRC) encouraged these types of companies to issue Chinese Depository Receipts (CDRs) in the A-share market. The Sci-Tech Innovation Board will welcome companies that use these legal structures, which should

46、also enhance the chances of CDRs being issued.Variable interest entity is a legal business structure used by a company listing overseas (usually in the US) through a parent offshore company (usually in British Virgin Islands or the Cayman Islands), to avoid restrictions on capital due to currency an

47、d other issues. US-listed Chinese companies, or those which issued American Depository Receipt (ADRs), starting from Sina (SINA US) in 2000, have all adopted this structure.2 of a in inifitIt has been relatively loosened from the RMB3bn operating income and estimated market value of RMB20bn from the

48、 previousnotice.DelistingrulesThe A-share market has plenty of delisting rules and regulations. The problem is that implementation has been rather lax. Since 1990, when the Shanghai Stock Exchange was founded, an average of only 2.7 companies have been delisted from the exchange each year. In our vi

49、ew, this figure is far too low. The new board adopts a multi-dimensional approach to delisting, covering financial metrics, trading indicators and major legal violations.The main targets are companies that commit financial fraud or engage in other illegal activities, and those whose business operati

50、ons are so weak that they are at the risk of becoming a shell company. Trading- related delisting indicators include turnover, the closing price and market capitalization. The delisting process is also a lot simpler as underperforming companies are granted no opportunities to have suspensions lifted

51、, resume trading or reapply for listing.Welcome on boardThis new board for high-tech companies represents a step forward in twoareasthe reform of the system for initial publicofferingsand giving small technology companies greater access tocapitalA strategic board, an experimental plotThe market is h

52、eavily towards big, mature companiesChinas equity market is entering its third decade, but it is still a relative new-born compared to developed capital markets. And while it has come a long way, there is still much work to be done, especially in the area of high-tech companies that need access to f

53、inancing.The Science and Technology Innovation Board, announced by President Xi during his keynote speech at the China International Import Expo in Shanghai in November 2018, is an important reform initiative that can help meet this need. This new board for high-tech companies represents a step forw

54、ard in two areas the reform of the system for initial public offerings and giving small technology companies greater access to capital. It will operate independently from the main Shanghai Stock Exchange (SSE) through a pilot registration system. Right after the consultation period, SSE released 10

55、official documents on 2 March midnight, with a few changes in share reduction and market making, and also added detailed listing requirement for red-chip companies. We expect more details to be launched and the first batch of listings to be announced in the next few months.The healthy development of

56、 Chinas capital marketChina is home to some of the greatest technology companies in the world. Alibaba, Baidu, Tencent Holdings, Xiaomi and many others earn the bulk of their earnings in China but raised their capital in offshore markets. This means overseas investors hold the bulk of their shares.T

57、his highlights one of the challenges facing Chinas stock markets, which are subject to capital controls and are dominated by large (and often inefficient) state-owned enterprises (SOEs). The market is heavily skewed towards big, mature big companies with stable earnings and solid financials (banks f

58、or example). Their scale and SOE background mean that they have a number of competitive advantages. But in our view, its time for a change. China needs a vibrant capital market that attracts many different types of companies.This isnt Chinas first attempt to launch a technology board. In 2004, SME b

59、oard was established in Shenzhen. In 2009, the authorities established the ChiNext on the Shenzhen Stock Exchange to help innovators and start-ups raise capital. Almost a decade later, there are more than 700 companies listed on the board. Transactions, however, were less than 7% of the value of sha

60、res that change hands on the Shenzhen bourse, and less than 5% of trading on the larger Shanghai exchange.Meanwhile, the National Equities Exchange and Quotations (NEEQ) was launched in 2012 on a street full of computer-related companies in Beijing. It is an over the counter (OTC) market thathas att