(Yicai Global) March 8 -- The launch of a science and technology board under China's Shanghai Stock Exchange has entered its final preparatory stages. Multiple securities joint ventures in the country are exploring opportunities to provide investment services for potential listers. In terms of direct investment on the board, foreign players have adopted a wait-and-see approach so far.
The sci-tech board will be independent of the current main markets and aims to provide a simpler way for the country's innovators to go public. The supervisory rules and those for listing will be quite different from those of other bourses in the country.
Foreign-funded securities brokerage firms have been active in participating in investment bank services for the board and they have more experience than domestic players when it comes to the board's registration-based listing system, especially in terms of price inquiry mechanisms, valuations and pricing. They remain cautious regarding taking part directly in investments, however, Yicai Global has learned.
"JP Morgan Chase is actively applying for a securities brokerage license in the Chinese mainland and has plans for participation in the capital market, including the sci-tech innovation board," Huang Guobin, chief executive of the New York-based firm's global investment bank division in China, told Yicai Global recently.
Intermediaries Have The Edge
"Setting up the sci-tech board offers more options for tech firms to list and the next key step is system-related innovations and reforms that enable [the board] to become a place where market-oriented operations truly take place on an executive level," Huang added.
The sci-tech board can form supplementary effects with the Hong Kong and US markets, Huang said, adding that firms will have more diversified options for them to decide where to go public after its launch. For instance, those that have listed on the Nasdaq may decide to list in Hong Kong, while those that have gone public on the sci-tech board could list again in Hong Kong or the US. This will bring significant opportunities for investment banks that possess their own advantages in the cross-border domain, Huang said.
Assigning appropriate and precise valuations is not an easy thing for new-economy and sci-tech innovation companies, Zhang Chun, executive dean of Shanghai Advanced Institute of Finance, told Yicai Global, adding that foreign institutions usually tend to include business models, techniques for sci-tech innovations and other factors in valuations, but it is very technically demanding work.
After the rise in the level of marketization, investment banks, law firms and other intermediaries will obtain a greater deal of autonomy and assume bigger responsibilities, Zhang said. Stocks underwritten by Morgan Stanley, Goldman Sachs, JP Morgan Chase and other investment banks are easier to gain subscriptions from investors, he added.
The ability of foreign investment banks to judge the suitable timing of a listing also reflects their competitiveness, Qian Jun, executive dean at Fudan University's Fanhai International School of Finance, told Yicai Global. Take Goldman Sachs, one of the world's largest investment banks as an example, it charges relatively more fees for underwriting IPOs and it also needs to make a commitment to firms that the minimum financing will be met within certain time periods, so it will pay extremely close attention to the timing.
Foreign Funds Wait and See
Compared with intermediary services, it may be still too early for foreign funds to directly take part in investments in the sci-tech board.
BlackRock, the world's largest asset management organization that has been active in the A-share market for a while, will pay more attention to major policy adjustments and few players from the sector will get involved in investments early on, according to Lu Wenjie, the firm's China investment strategist. "Various details of the sci-tech board are still unclear, which companies are to list? How to decide the pricing? So a certain period of observation is necessary before investment," he added.
Lu remains most focused on the level of marketization for listings and the pricing mechanism of the new board, he said. The likelihood of foreign funds' participation in investment depends on the type of companies that list. A target firm will be less attractive to foreign investors if its market capitalization is small and liquidity is weak.
Science and technology innovation has always drawn a lot of attention from foreign investors, however. Four key investment-related themes that emerged from Yicai Global's interviews are rising consumption, science and technology innovation, structural reforms and industrial upgrades.
The sci-tech innovation board is a pilot for future reforms, according to Lu Jie, head of Research China at Robeco. Investors hope to see vital changes, including the provision of more flexible listing requirements for high-quality tech firms, restrictions on the market's single-day gains and decline and the establishment of stricter delisting institutions, he said.