China’s new Nasdaq-style tech board could become a hotbed for companies to spin off and list units domestically, something that hasn’t been much of an option until now.
At least nine companies listed in Hong Kong and mainland China have decided to or are considering spinning off parts of their businesses on the freshly launched SSE STAR Market. One of them, Western Metal Materials Co., surged by the 10% limit for two days in a row after disclosing its plans in early April. Lepu Medical Technology Beijing Co. climbed 13% over a similar time-frame.
The Shanghai and Shenzhen stock exchanges have been inundated with investor queries about spinoffs on the new board, where the first listing is expected in the next two months. The bourse is in part aimed at stemming an exodus of listings by innovative Chinese firms. Suzhou HYC Technology Co. is the first to start an initial public offering there, filing a preliminary prospectus this week.
Investors and companies were encouraged by the China Securities Regulatory Commission saying earlier this year that companies of a certain scale would be able to list qualified subsidiaries separately on the tech board, though it didn’t elaborate. The CSRC, which has historically been reluctant to approve spinoffs at home, didn’t immediately respond to a request for comment.
“The regulators didn’t encourage domestic spinoff listings in the past, as there were concerns it might spur speculation or problems such as financial misbehavior or corporate independence issues,” said Ge Shoujing, a Beijing-based senior analyst at the Reality Institute of Advanced Finance. “With the launch of the tech board, which introduces a registration-based IPO system, the regulatory mindset has changed to loosen control and allow the market to decide which companies should be listed.”
Domestic spinoffs appeal as they’d give investors on the mainland fresh buying opportunities in China, while parent companies can potentially streamline operations and have seen boosts — at least in the short term — to their share prices. The nine companies that announced spinoff plans all rose in subsequent days.
“Spinoff listing on the tech board is definitely an attractive investment theme for the stock market, given these subsidiaries are expected to enjoy higher valuations and better branding thanks to the huge attention on the tech board right now,” said Fu Lichun, an analyst at Northeast Securities Co. “The potential number and scale of spinoffs is expected to be very large.”
The tech-heavy ChiNext Index trades at around 20 times forward earnings, while Hong Kong’s Hang Seng Index is at 11 times. Both gauges have had a rough few months as the trade dispute with the U.S. escalated, but they’ve still posted gains year-to-date despite slipping from April highs: the ChiNext is up 18% in 2019 and the Hang Seng has added 9.8%.
The newly named SSE STAR Market has attracted attention in part because of its simpler listing process, including waiving restrictions on how companies are priced, theoretically making it less onerous for applicants. It hasn’t all been clear sailing though: the Shanghai exchange has complained that many filings lacked sufficient details and contained too much jargon.
While there’s no real precedent, the new board’s simplified approval process and improved delisting mechanism should help soften the regulator’s stance on domestic spinoffs, said Peng Hai, an analyst at Lianxun Securities Co.
“Compared with listing spinoff units in Hong Kong, companies may enjoy higher valuations on the tech board, given the higher valuations of the A-share market,” Peng said. “The vetting process would also be simplified given it will have to be reviewed only by the domestic regulator.”