COR1306 Capital Markets in China
Class Section: G1
Instructor: Wang Jiwei
Topic 3 - The New Tech Board in Shanghai
A deep lens into the impact and challenges of STAR market on China’s
capital market reform: Case study on Montage Technology
Group 1
Date of Submission: October 2023
Name
Matriculation Number
Bai Chengyao
01443738
Law Bing Lun
01372053
Liu Wenqi
01485682
Nguyen Phuong Ha Nhung
01454058
Samuel Thong
01372742
Number of Pages: 20 (for contents only)
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Contents
Executive Summary ....................................................................................................................................... 4
Overview and importance of research question....................................................................................... 5
Thesis statement ....................................................................................................................................... 5
1. Introduction .............................................................................................................................................. 6
1.1. Overview of STAR board ..................................................................................................................... 6
1.2. Features of the STAR Market different from domestic markets ........................................................ 6
1.2.1. Inclusive listing rules ................................................................................................................... 6
1.2.2. Registration mechanism .............................................................................................................. 6
1.2.3. Stringent delisting requirements ................................................................................................ 7
1.2.4. Information disclosure and independent audit .......................................................................... 7
1.2.5. Weighted voting rights ................................................................................................................ 8
1.3. Development of the STAR Market ...................................................................................................... 8
1.3.1. Listed companies and market values by 2023 ............................................................................ 8
1.3.2. STAR Market has outperformed other domestic markets in China ............................................ 8
2. Impact of STAR market on companies ...................................................................................................... 9
2.1. Capital and resources ......................................................................................................................... 9
2.2. Flexibility and autonomy .................................................................................................................. 10
2.3. Responsible and efficient IPO application process and time ........................................................... 11
2.4. Corporate performance and IPO returns ......................................................................................... 12
3. Case Study of Montage Technology of its transition to list on STAR market .......................................... 13
3.1. Introduction of Montage Technology............................................................................................... 13
3.2. Reason for delisting on NASDAQ ...................................................................................................... 13
3.3. Performance before listing on STAR market .................................................................................... 14
3.4. Performance after listing on STAR market ....................................................................................... 14
3.5. How did Montage Technology benefit from STAR market? ............................................................. 15
3.5.1. Stock incentive system .............................................................................................................. 15
3.5.2. Pre-IPO inquiry transfer system ................................................................................................ 16
3.5.3. Increased ability for R&D .......................................................................................................... 16
3.6. Impact of STAR market on the stakeholders of Montage Technology ............................................. 17
3.6.1. Investor protection.................................................................................................................... 17
3.6.2. Investor access .......................................................................................................................... 18
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4. How does STAR market reflect China’s industrial policy priorities and strategic goals in the high-tech
sectors, such as Made in China 2025? ........................................................................................................ 19
4.1. Made in China 2025 (MiC2025) ....................................................................................................... 19
4.1.1. Phase 1 - Basic Industrialization and Smart Manufacturing (2015-2025): ................................ 19
4.1.2. Phase 2 - Complete Industrialization and Indigenous R&D (2025-2035): ................................. 19
4.1.3. Phase 3 - Tier-1 Manufacturing Leader with Advanced Technology (2035-2050): ................... 19
4.1.4. Advanced Micro-Fabrication Equipment China (AMEC) ........................................................... 20
5. Challenges and Risks of Listing on STAR Market ..................................................................................... 20
5.1. Stringent Delisting Requirements .................................................................................................... 20
5.2. Volatility Management ..................................................................................................................... 21
5.3. High Valuation Pressure ................................................................................................................... 21
6. Suggestions and Recommendations to STAR Market Regulators............................................................ 22
6.1. Lowering the Individual Investor Access Threshold ......................................................................... 22
6.2. Cautious Relaxation of Trading Threshold ........................................................................................ 23
6.3. Flexibility and Internationally Accepted Trading Mechanisms ......................................................... 23
6.4. Encourage Sponsor Institutions and Shareholding Reduction ......................................................... 23
7. Conclusion ............................................................................................................................................... 23
References ................................................................................................................................................... 25
Appendix ..................................................................................................................................................... 28
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Executive Summary
The STAR market is a new exchange board in China that aims to support innovation and
technology development. It has several distinctive features, such as inclusive listing rules,
registration mechanism, stringent delisting requirements, information disclosure and
independent audit, and weighted voting rights. These features enable the STAR market to provide
more capital and resources, flexibility and autonomy, responsible and efficient IPO application
process, and higher IPO returns to its listed companies. Through the several features of STAR
Market, they are more attractive to tech giants, resulting in some companies listed overseas to
delist and return to China.
A case study of Montage Tech, a semiconductor company that delisted from NASDAQ and listed
on the STAR market, shows that it achieved a substantial IPO return, improved its stock incentive
system, adopted the pre-IPO inquiry transfer system, and increased its ability for R&D. However,
there are also key challenges and risks for companies listed on the STAR market, such as market
volatility, regulatory uncertainty, and investor protection. To improve the STAR market, some
measures that can be taken are lowering the individual investor access threshold, increasing the
foreign investor participation, encouraging the sponsor institutions, and regulating the
shareholding reduction.
The STAR market in China offers opportunities and challenges, requiring continuous
improvement. Recommendations for regulators from two experts include lowering investor
access thresholds, cautious relaxation of trading thresholds, introducing flexible trading
mechanisms, and encouraging sponsor institutions. These recommendations aim to maintain
market integrity, expand its investor base, and enhance its global prominence. The STAR Market,
as it nears its fifth year, is at a critical juncture and serves China's high-tech sector development
goals. It is essential for regulators and businesses to adapt to the evolving marketplace dynamics.
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Overview and importance of research question
Our research topic aims to understand the transformation, significance, and implications of the
STAR Market within the broader sphere of China's capital market reforms through the lens of
the listed firms and its stakeholders, taking Montage Technology as a case study.
The establishment of the STAR Market represents one of China's most significant steps in capital
market reforms. The STAR Market addresses historical challenges like stringent listing criteria and
length IPO waits. It signifies China’s push towards global financial standards and offer domestic
companies an attractive platform to raise capital. Since its launch in 2019, the STAR Market has
rapidly evolved. It has seen a surge in listings, including many from companies that might have
previously chosen overseas exchanges. The market's regulatory framework has also matured,
reflecting lessons learned from its operations and addressing challenges encountered. This
evolution is not just about numbers but about the qualitative growth of the market, including its
ability to adapt to changing economic environments and its resilience in the face of market
volatilities.
The STAR Market is a microcosm of China's broader ambitions to revitalise its capital market. By
understanding its nuances and impacts, one can get insights into China's larger reform trajectory.
Through case studies like Montage Technology, provides tangible insights into the real-world
effects and benefits of listing on the STAR Market.
Thesis statement
The STAR market is indeed a very significant step in the country’s capital market reform and
innovative drive, especially in the narrative of listed firms on the board and its stakeholders.
However, investigating from this perspective, firms do face risks and challenges when being listed
on the board, with volatility management, high valuation pressure and regulatory uncertainty
being the most significant. With that being said, the path towards improvement is feasible and
with defined directions.
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1. Introduction
1.1. Overview of STAR board
STAR market emphasizes on high-tech sectors, including emerging industries like new-generation
IT, new energy, and advanced materials. The integration of the SSE STAR Market is intended to
bolster its capacity to support technological innovation, foster China's economic growth, and
facilitate market-oriented reforms within the country's capital market.
Under the registration system, the STAR Market is a favoured choice for Chinese tech-centric
companies. As of July 20, 2023, there have been 546 listed companies on the STAR Market, with
a total market value of A-shares reaching RMB 6.47 trillion yuan.
1.2. Features of the STAR Market different from domestic markets
1.2.1. Inclusive listing rules
In contrast with the Shanghai and Shenzhen stock exchanges, the financial requirements of the
STAR Market are less focused on assets, cash flow and net income meaning even unprofitable
companies are eligible (EY Greater China, 2022).
Applicants will need to meet one of the five criteria in order to qualify for listing in the STAR
market, with the smallest estimated market capitalization of RMB 1 billion. Instead of focusing
on net profits, the STAR Market's criteria prioritise market capitalization and consider factors like
R&D share, operational cash flow, and revenue. The profitability requirements are further
relaxed for companies with larger market capitalization (Shanghai Stock Exchange, 2019).
1.2.2. Registration mechanism
On 1 March 2019, the CSRC issued documents1, establishing foundational rules for the listing and
trading on the star market (Shanghai Stock Exchange, 2020). Subsequently, the CSRC and the SSE
released a series of regulatory guidelines for the STAR Market, signalling a major shift in China’s
capital market laws. The biggest change in the reform comes from the adoption of the
“registration-based” IPO system.
The registration approach differs in three key ways from the earlier approval system (Lu, 2020).
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“Sci-tech innovation board initial public offering share registration administrative measures (trial implementation)” and “Scitech innovation board listed companies’ continuous supervision measures (trial implementation)”
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1. Companies have the economic right on issuing securities providing that they fulfil the
information disclosure.
2. The responsibility of scrutinising information has been transferred to a diversity of bodies
including the stock exchange, law firm, accountancy firm, and investment bank.
3. Whether an IPO is successful depends on the complicated gaming between various
market players including issuers, underwriters, legal professionals, accountants, and
investors instead of reliant on the securities regulator.
1.2.3. Stringent delisting requirements
The STAR Market implemented stricter delisting criteria to attract high-quality companies and
enhance the confidence of investors. Companies that meet the financial delisting threshold in
the first year will receive a warning. If they hit this benchmark for two successive years, they face
delisting (EY Greater China, 2022).
Delisting thresholds include fraudulent offering, material information disclosure, quantitative
threshold for stock turnover, price, market cap, and number of shareholders. Qualitative
threshold for incapable of continuing as a going concern and failing to disclose financial reports
on time (STAR Market, n.d.).
As China’s registration structure evolves, profit is no longer the only criteria for measuring the
value of a company. The delisting system moved beyond the initial single indicator of net profit
and operating income and incorporated a comprehensive financial indicator. The updated
delisting guidelines aim to pinpoint genuine underperformers in the capital market, such as firms
that have not pursued their primary business for an extended period. This reduces concerns over
the potential risks of stock delisting (Chen & Fu, 2022).
1.2.4. Information disclosure and independent audit
It implements the requirements of building a concise and friendly system of rules by reducing the
cost of information disclosure for market entities and clarifies the arrangements for exemption
and voluntary disclosure.
Firstly, the need for tailored information disclosure in crucial systems was put into action,
specifically in areas like delisting, equity incentives, continuous monitoring, data sharing, and risk
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warning for STAR Companies. These adjustments were made to align with the actual conditions,
leading to improvements in disclosure requirements.
Secondly, the information disclosure rule system was enhanced by integrating rules from the
main board and adapting them to different types of information disclosure tasks in the SSE Star
Market. This simplification aimed to make the rules more concise and accessible.
Thirdly, information disclosure requirements became more straightforward. Guidelines that do
not pertain to the SSE Star Market are irrelevant, and for well-established practices like board
resolution announcements, there is no mandatory disclosure format, allowing companies to refer
to templates provided by the SSE Star Market business management system for guidance (SSE
Star Market, 2019).
1.2.5. Weighted voting rights
Due to the nature of technology and innovative business models, most of the companies often
adopt dual-class shares with weight voting rights to help business founders maintain the control
of their businesses even if they only have a minority of shares.
This legal arrangement is extremely beneficial for the founder and management team of tech
companies (Angest, 2019). Dual-class shares are prohibited in most Chinese capital markets, but
they are allowed in the latest star market, subject to sufficient risk warning and explanation in
the listing prospectus.
1.3. Development of the STAR Market
1.3.1. Listed companies and market values by 2023
As of July 20, 2023, the STAR Market has accepted 934 businesses, of which 546 have successfully
listed, garnering RMB 858.2 billion yuan through their IPOs. Their A-shares collectively represent
a market value of RMB 6.47 trillion yuan. The STAR Market boasts a roster of firms that have not
only disrupted foreign monopolies but also demonstrated robust independent innovation
prowess. These include industry leaders and flagship enterprises in their respective sectors.
1.3.2. STAR Market has outperformed other domestic markets in China
In 2021, Star Market firms saw a 37% boost in sales revenues to 844 billion yuan and a 27%
increase in R&D expenses to 84 billion yuan. By mid-2022, their share prices had risen by 107%
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over three years, compared to the Shanghai Composite Index's 9% gain. The Star Market has
supported hard-tech companies with steady cash flow, fostering R&D and growth. UBS Securities
reported these firms achieved a 40% profitability in Q1, outpacing main board companies' 4%
and ChiNext firms' 16% loss (STAR market, 2022).
2. Impact of STAR market on companies
2.1. Capital and resources
There has been a market uptick in IPO applications on the STAR Market with an 8.9% increase in
the IPO approval rate (Figure 5 and 6). The higher IPO pass rate will help healthy development of
the securities market and promote healthy competition among high-quality enterprises. As the
registration system reforms eased listing prerequisites, companies have displayed a heightened
eagerness to go public (Chen & Fu, 2022).
A registration-based system can heighten listing efficiency, allowing companies to initiate their
public offerings once they meet disclosure and regulatory standards. In contrast, an approvalbased system has extended wating time and long delays can hinder securing funds for fast
growing companies. Hence, the STAR Market's adoption of a more accessible entry threshold and
expeditious processing is likely to encourage a greater number of companies to opt for listings.
The STAR market and Shenzhen ChiNext became the main drivers of the A-share IPO market. In
terms of volumes, they will be the top two, accounting for about two-thirds of A-share IPO
volume. The STAR market will rank first for value of funds raised, with more than RMB 230 billion.
The STAR market and Shenzhen ChiNext will account for nearly 70% of total fundraising. Among
the top ten IPOs of A-shares in 2022, seven are on the STAR market and one on Shenzhen ChiNext
(PwC China, 2022).
One of the reasons why STAR Market has a higher IPO pass rate is due to the lax in company
structure requirements for IPO countries. STAR Market has been accommodating towards
Chinese companies once listed overseas. They welcome red chip companies, allowing them to
list in China via Chinese Depositary Receipts (CDR) without changing their foreign corporate
structure.
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This means Chinese investors can invest in these companies if they list in China. Traditionally,
foreign-registered Chinese companies couldn't list on major Chinese stock exchanges, pushing
many, especially tech firms, to list in favourable tax countries like the Cayman Islands, Singapore,
or the British Virgin Islands. The STAR market overturns this, allowing red-chip companies to list
there.
Furthermore, red-chip companies often use Variable Interest Enterprises (VIEs), complicated
offshore financing structures, to skirt Beijing's foreign ownership restrictions. Although VIEs are
generally banned from the main board of the Shanghai Stock Exchange, exceptions are made for
the STAR market. Listing rules demand complete transparency from red-chip businesses using
VIEs and indicate that these structures are now permissible on the New Tech Board. However,
each VIE-based company will undergo meticulous individual review, hinting at a cautious
regulatory approach.
Highlighting this shift, Segway-Ninebot became the first red-chip company with a VIE structure
to list on the A-share market, a significant marker of greater openness in China's stock market.
However, their listing process was intricate, taking over a year for approval.
With eased regulations regarding company structures on the STAR market, more businesses will
be enticed to list there. This will enable more companies to secure capital and leverage the
market to foster their growth.
2.2. Flexibility and autonomy
The STAR Market permits companies to use a dual-class share structure/ weighted voting rights
(WVR). This means founders or key stakeholders can maintain control over company decisions
even if they do not hold most of the total shares.
Dual-class shares have a longer history in the U.S., and many tech companies have adopted this
structure. The U.S. markets have been open to dual-class share structures for some time2, Asian
markets like HKEX and the STAR Market have only recently warmed up to the idea, allowing their
2
Alphabet has three classes of stock (Class A, B, and C), with Class B shares having 10 votes per share, enabling its founders and
chairman to control most of the voting power.
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home-grown tech giants to list locally while maintaining founder control. The introduction of
these structures in newer markets represents a significant shift in recognizing the desire of
founders to retain decision-making power in the companies they have built.
UCloud Information Technology is the first applicant with a dual-class share structure or WVR
structure whose application has been approved by securities regulator. As stated in UCloud's
prospectus, those holding Class A shares would own voting rights that are five times greater than
those of individuals holding Class B shares. Within this framework, the founders and upper
management can maintain control over the decision-making processes. The company’s three cofounders currently hold nearly 27% of UCloud’s shares but would retain control through their 65%
of voting rights.
The fact that Chinese technology firms wanted to list in overseas stock exchange was mainly due
to their openness to WVRs. The choice by these companies to go public abroad prompted some
introspection among Asian stock exchanges to further open their policies. The STAR Board’s
approval of WVRs would play a pivotal role in positioning Shanghai to compete more effectively
with Hong Kong and New York in terms of attracting technology firms.
2.3. Responsible and efficient IPO application process and time
Companies aiming for an IPO on the STAR Market benefit from data-drive audit and more control
over their listing time. As per the "Shanghai Stock Exchange Science and Technology Innovation
Board Stock Issuance and Listing Audit Rules,", the SSE commits to an initial review within 20
working days and makes an issuance decision within three months of receiving application. This
duration excludes the time taken for issuer responses which is capped at three months. Similarly,
according to the "Registration System Implementation Opinions," the CSRC adheres to a 20 day
window for registration approvals.
In general, STAR board applicants can anticipate SSE’s decision within 3-6 months. Post – approval,
the timeframe required from application to successful registration ranges from four to seven
months. Past IPO records on STAR Board Yantai Ruichuang, Huaxing Yuanchuang, and Tianhuai
Technology completed this in under three months, while the main board averages a 15-month
cycle. (Treasury China, 2019)
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To ensure the quality of companies listed on the STAR Market, it enforces strict information
disclosure and audit standards to protect investors. This has encouraged companies to hire
dependable third-party auditors to inspire investor trust.
More companies are adopting data-centric due diligence which requires examination of business,
operational and financial data which is compared against third-party metrics for a holistic
business view. An example of auditing of an internet-based company would be to take
information mentioned above and use metrics like monthly active users (MAU) and daily active
users (DAU) trends in user behavior, monthly income fluctuations, and the volume of
advertisements. This information is critical for analysis and discrepancies are rigorously explored.
(EY Greater China, 2022)
2.4. Corporate performance and IPO returns
In view of some Chinese companies opting to delist from foreign exchanges and returning to
China, it is essential to compare the metrics of China’s STAR boards to other domestic boards due
to their significant impact on firms.
Based on IPO’s P/E ratio in figure 8, Table 2 shows that the STAR market’s IPO PE ratio is much
higher than those of other stock markets. This is because most boards adhere to CSRC’s regulation
capping the P/E ratio at 23 (Chen, 2023). This is due to the nature of science and technology
sectors where higher P/E ratio reflects greater investment risks and future return expectations.
In terms of the IPO performance indicator, the first day returns for the Shanghai mainboard
market, SME market, and ChiNext all stand at 44.0 percent, aligning with the first day price cap.
In contrast, the first-day return for the STAR market is an impressive 128.8 percent, signaling
strong initial performance following the lifting of the first-day price cap regulation.
In referencing to efficiency ratio ROE, ROA, and EBIT Ratio, all of them have suggests that STAR
board has outperformed other boards in terms of profitability. Moreover, debt ratio data show
that the companies in STAR market have significantly less debt than other stock markets. Liquidity
indicators including current and quick ratio show that the firms listed on the STAR market have a
better liquidity position than those listed on other markets.
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In terms of corporate governance, STAR aligns closely with other boards, adhering to existing
standards. Both uphold the CSRC’s mandate that boards have a third of independent directors.
The dominant shareholder ownership, averaging 32% also mirrors other markets.
However, STAR market has the highest CEO – to – revenue compensation ratio. This is because
private-owned companies are dominant in the STAR market, taking up about 94.2% of the
companies whereas state-owned enterprises offer a lower CEO salary (due to a two – tier
compensation system applied in 2013). This also suggests that STAR CEO compensations are more
market-driven.
3. Case Study of Montage Technology of its transition to list on STAR
market
3.1. Introduction of Montage Technology
Montage Technology is a company that produces integrated circuits (IC) for computers and other
devices. Montage Technology focuses on providing IC solutions for cloud computing and data
center markets, which are areas that need high-performance and low-power devices. Montage
Technology is one of the leading companies in the field and has experience being suppliers for
Samsung, Dell, Alibaba, etc. Montage Technology’s competitive advantage is its ability to offer
DDR memory interface solutions for both x86 and ARM platforms, which are essential for the
advancement of high-performance computing, artificial intelligence, cloud computing and other
emerging domains. Montage Technology is among the few global players that have this capability
in the DDR4/5 memory interface market (Platonov, 2020). Montage Technology was among the
first batch of technology companies that listed on Star board right after its inception in July
2019.
3.2. Reason for delisting on NASDAQ
Montage Technology failed to comply with NASDAQ Listing Rule 5250(c)(1) because it did not
submit its annual report on Form 10-K for the year ended December 31, 2013, and Form 10-Qs
the period ended March 31, 2014 and June 20, 2014 to the Securities and Exchange Commission
(“SEC”) on time (Montage Technology Group Limited, 2014).
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The company's merger/acquisition by Shanghai Pudong Science & Technology Investment a
Chinese State-owned asset manager, was another factor that led to its delisting from NASDAQ.
The agreement stated that Montage Technology’s share would be bought for USD 22.60 dollars
per share, representing a 14.3% premium from its latest closing price at USD 19.78 dollars. After
the deal was closed, Montage’s total equity was valued at USD 693 million dollars (cite here).
3.3. Performance before listing on STAR market
Before listing on the Star Market, Montage Technology had a history of raising funds from private
investors. In 2006, the firm received funding of USD 10 million from AsiaVest Partners, a
Taiwanese Venture capital firm, and Intel Capital, the investment division of Intel.
Montage Technology started its listing on NASDAQ under ticker ‘MONT’ on September 26, 2013,
selling 7.1 million shares at USD 10 dollars apiece (Platonov, 2020). After the listing, the company
reported USD 35.4 million in total revenue for the last quarter of 2013, which represents a growth
of 17.9 percent from the previous quarter's USD 30.1 million, and a growth of 49.5 percent from
the same quarter of the previous year's USD 23.7 million (Montage Technology Group Limited,
2014). The company's gross profit in Q4 2013 amounted to USD 22.1 million, representing 62.4
percent of its revenue. This was an increase from the previous quarter, when the gross profit was
USD 19.1 million, or 63.7 percent of the revenue. In Q4 2012, the gross profit was USD 13.3
million, or 56.3 percent of the revenue (Montage Technology Group Limited, 2014).
3.4. Performance after listing on STAR market
The decision to IPO on Star board brought a spectacular year to Montage Technology. In 2019,
the company sold its shares at CNY 71.61 (USD 10.23) each. Before the IPO, the company’s shares
were worth CNY 24.80 (USD 3.55) each. The value of the company’s shares and its overall market
capitalization rose by nearly 300% because of this decision. Montage Technology became one of
the first companies to list on Star board, through their successful IPO, its trading price value
soared. This can be largely attributed to the overhype of the Star platform at the time (Platonov,
2020).
The high market cap value helped Montage’s listing surpass its competitors. Montage raised USD
400 million from its listing, and it had a market capitalization of USD 55 billion dollars while its
direct competitor IDT was acquired by Renesas, a Japanese semiconductor company, for USD 6.3
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billion dollar and Rambus had a market capitalization of USD 6.07 billion dollars. Montage took
advantage of the funding, and it boosted its spending on innovation drive significantly (Platonov,
2020). The R&D expenses for the first nine months of 2019 amounted to CNY 196.94 million (USD
28.01 million), which was an increase of 18.21% compared to the same period last year (Platonov,
2020). The R&D expense increased exponentially from USD 47.9 million dollars in FY2019, to USD
74.5 million dollars for FY2022. Therefore, the R&D growth represented a 13.9% average increase
per year.
After listing on Star board, Montage Technology has achieved significant growth in its revenue
and gross profit. According to its financial reports, revenue has increased from USD 1.7 billion
dollars in FY2019 to USD 2.7 billion dollars in FY2022, representing 14.7% average annual increase
per year. Gross profit has grown 36.1% from USD 1.2 billion dollars in FY2019 to USD 1.7 billion
dollars in FY2022. From an investor’s point of view, earnings per share also witnessed a healthy
increase from 0.88 to 1.15.
The impressive performance of Montage Technology after listing on the Star Market can be
attributed to several factors. First, the company has benefited from the strong demand for
memory interface chips and server CPUs in China and abroad, especially amid the COVID-19
pandemic that boosted the demand for cloud computing and data center services (Platonov,
2020). Second, the company has maintained its technological leadership and innovation
capabilities in its core products, such as DDR memory interface chips and hybrid safety memory
modules (Platonov, 2020). Third, the firm has benefited from the favorable policies and market
recognition of the Chinese government and investors, as it is a trailblazer in the Star Market and
a crucial actor in the national strategy of advancing the semiconductor industry.
3.5. How did Montage Technology benefit from STAR market?
3.5.1. Stock incentive system
The STAR Market has benefited companies like Montage Technology through the STAR Market
Restricted Share Incentive Scheme. The introduction of Class II restricted stocks has remarkably
enhanced the flexibility of stock incentive programs for listed companies as it comes with fewer
trading restrictions, enabling employees to exercise their stock options more freely (Gao, 2021).
Over the past few years, Montage Technology has launched three distinct phases of stock
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incentive plans which allowed them to adapt their incentive strategies based on market dynamics,
ensuring that the programs remain competitive and appealing to employees. One of the standout
achievements of these incentive plans has been the impressive comprehensive coverage rate,
exceeding 95% (“The Vibrant STAR Market Yields Fruitful Outcomes”, 2023). This rate indicates
the large proportion of employees who have been included in the stock incentive program,
ensuring that a vast majority of the workforce can benefit from the company's growth and
success. Employees, now having a stake in the company's future, are more inclined to contribute
their best efforts, fostering a collaborative and innovative work culture.
3.5.2. Pre-IPO inquiry transfer system
The innovative pre-IPO inquiry transfer system introduced by the SSE STAR Market has brought
significant benefits through establishing a market-based pricing constraint mechanism. While
share transfer is a fundamental right for shareholders, it can impact the rights of other
shareholders and the trading order. To mitigate these potential issues, the CSRC, SSE, and
Shenzhen Stock Exchange have refined the shareholding lessening system (“SSE detailed
implementation rules”, 2020). They have imposed restrictions on the pace, proportion, and size
of pre-IPO shares sold through the secondary market. This approach ensures a balanced game
between buyers and sellers, promoting a fair and reasonable price discovery mechanism. By
limiting non-public transfers to specialized institutional investors with professional knowledge
and risk tolerance, the system creates an environment conducive for pricing functions to come
into play which optimizes the investor structure, fostering a healthy trading environment, and
promoting orderly transitions between early-stage and long-term investors. Through the inquiry
transfer system, Montage Technology has conducted multiple transactions with a cumulative
turnover of approximately RMB 8.7 billion yuan (“The Vibrant STAR Market Yields Fruitful
Outcomes”, 2023). This system has played a pivotal role in sustaining the financial health of
Montage Technology through optimizing the investor structure.3.5.3. Increased ability for R&D
The influx of funds through its initial public offering (IPO) allowed them to invest heavily in R&D.
In 2021, the Company invested a total of RMB 370 million in R&D, increasing by 23.33% over the
previous year, as indicated in Figure 11. The total R&D investment accounted for 14.44% of the
revenue and has remained at around 15% for many consecutive years (“2021 Corporate Social
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Responsibility Report”, 2022). The company diversified its focus, leveraging the newly acquired
resources to fuel innovative research and development initiatives. As a result, Montage
Technology transitioned from producing memory interface chips to also developing an AI chip
solution, which aims to solve the bottlenecks of AI computing in inference applications with high
data throughput (“2021 Corporate Social Responsibility Report”, 2022). The STAR Market has not
just elevated individual companies like Montage Technology but has contributed significantly to
China’s technological advancement and global competitiveness. With a newfound status as a
leader in data processing and chip design, Montage Technology stands as a testament to the STAR
Market’s commitment to nurturing innovation and driving the growth of visionary enterprises.
3.6. Impact of STAR market on the stakeholders of Montage Technology
Since its debut on the STAR Market, Montage Technology has remained steadfast in its dedication
to safeguarding the interests of stakeholders, emphasizing both investor protection and
facilitating enhanced investor access.
3.6.1. Investor protection
Investor Protection involves measures taken to ensure the rights and interests of investors are
safeguarded when participating in financial markets. Montage Technology offers corporate
governance training for its directors, supervisors, and senior executives. This training covers the
supervision of information disclosure, the continuous regulatory principles of the STAR market,
and understanding of new delisting rules. ("2021 Corporate Social Responsibility Report”, 2022).
This knowledge equips them to adhere to stringent governance practices, ensuring accurate and
timely information dissemination to shareholders and investors. Transparent information
disclosure is fundamental to investor protection, as it allows investors to make informed
decisions.
Additionally, Montage Technology has in place an Internal Audit System where the Internal Audit
Department plays a crucial role in investor protection by ensuring the integrity of the company's
operations. Their responsibilities include reviewing internal monitoring mechanisms, assessing
the appropriateness of the organizational structures and procedures, and safeguarding assets
(“2021 Corporate Social Responsibility Report”, 2022). By identifying significant risks and
facilitating robust risk management efforts, the department enhances transparency and
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operational integrity. Investors benefit from this assessment, as it instils confidence in the
company's reliability and ethical practices, thereby safeguarding their investments.
Finally, given the industry of the STAR market, Montage Technology greatly values information
security and data privacy protection. They have initiated an information security management
system which focuses on four main objectives: Network partition management; Information
security of R&D department; Security protection for user terminals; And standardized
management of internet and VPN access (“2021 Corporate Social Responsibility Report”, 2022).
These strong information security protocols help prevent data breaches, which could lead to
unauthorized data access or financial fraud. By minimizing the risk of breaches, investors are
protected from potential financial losses and reputational damage.
3.6.2. Investor access
Montage Technology has greatly embraced the concept of Investor access through facilitating
effective communication with medium to small investors. They have held performance exchange
meetings, media interviews and shareholder meetings, all with the purpose of allowing investors
to clear any enquiries or doubts they may have so that they will have a boost of confidence in the
vision of Montage Technology. These engagements with investors have increased from having 38
such sessions in 2020 to 66 sessions in 2021, and the number of institutions participating in each
session increased dramatically from 627 in 2020 to 3806 in 2021, as shown in Figure 12. These
numbers are a testament to the value that Montage Technology places on investor relations and
highlight the company's commitment to fostering trust and transparency.
Another important aspect of investor access is to ensure that investors gain access to accurate
and timely company information for investors to make informed decisions. Montage Technology
exemplifies this through their Information Disclosure System whereby information goes through
many reviews by the board to ensure that announcements disclosed are “truthful, accurate,
complete, timely, fair, concise, clear and understandable” (“2021 Corporate Social Responsibility
Report”, 2022). Hence, investors can be assured that they will be able to access company
financials and other information in a timely and accurate manner so that they are able to
strategize their trades and investments effectively. Furthermore, their system ensures that the
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number of insiders that have access to unpublished inside information is kept to the minimum,
which also contributes to investor protection.
4. How does STAR market reflect China’s industrial policy priorities and
strategic goals in the high-tech sectors, such as Made in China 2025?
4.1. Made in China 2025 (MiC2025)
Launched in 2015, MiC2025 seeks to elevate China into a manufacturing powerhouse by the midcentury, following a three-step plan (Settelen, 2023).
4.1.1. Phase 1 - Basic Industrialization and Smart Manufacturing (2015-2025):
In this initial stage, China aims to achieve basic industrialization while making substantial progress
in smart and green manufacturing. Key goals include integrating advanced technologies into
manufacturing processes to enhance efficiency and sustainability. This aligns with the global push
for eco-friendly manufacturing. The STAR Market plays a crucial role in this phase by providing a
platform for high-tech and innovation companies. It encourages the integration of advanced
technologies, promoting efficiency and sustainability, thus supporting China's goal of
environmentally conscious manufacturing.
4.1.2. Phase 2 - Complete Industrialization and Indigenous R&D (2025-2035):
The second phase aspires to elevate China to a tier-2 manufacturing leader, focusing on robust
indigenous research and development (R&D) capabilities. Reducing dependence on foreign
technology and achieving breakthroughs in key sectors like new-generation information
technology, robotics, biomedicine, and more is the priority. The STAR Market further contributes
by encouraging the development of indigenous R&D capabilities and funding companies in crucial
sectors, aligning with China's aim to become a technology leader in these domains.
4.1.3. Phase 3 - Tier-1 Manufacturing Leader with Advanced Technology (2035-2050):
This final stage sets the ambitious goal of China becoming a tier-1 manufacturing leader with
advanced technology and a well-structured industrial system. The emphasis shifts towards
cutting-edge technology and reducing reliance on foreign technology, emphasizing domestic
intellectual property (IP) development. The STAR Market plays its part by supporting advanced
technology companies, reducing dependence on foreign technology, and fostering domestic
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intellectual property. This promotes innovation and technological advancement, pivotal for
achieving the ambition of becoming a tier-1 manufacturing leader.
4.1.4. Advanced Micro-Fabrication Equipment China (AMEC)
An illustrative example alignment with China's strategic initiatives can be found in AMEC. AMEC
specializes in chip-making equipment and occupies a significant position in the micro-fabrication
sector within China, an industry historically dominated by American corporations (Meemi, 2021).
AMEC's listing on the STAR Market is closely tied to China's goals under MiC2025. This ambitious
plan places a strong emphasis on domestic development in key sectors, particularly in the realm
of chip manufacturing machinery. This machinery is essential for reducing China's reliance on
foreign technology and achieving self-sufficiency.
While AMEC's current product offerings may not be considered global pioneers, its strategic
position becomes clear when considering the support, it stands to receive from the state (Meemi,
2021). As part of the government's strategies to bolster the domestic development of chip
manufacturing machinery, AMEC is poised to benefit from this support, which strongly aligns with
the objectives outlined in MiC2025.
In summary, the STAR Market effectively mirrors China's dedication to its high-tech industrial
policy priorities, notably MiC2025. This platform actively contributes to domestic innovation,
technological advancement, and sustainable manufacturing, while also fostering international
economic cooperation. The STAR Market, therefore, serves as a concrete manifestation of China's
strategic vision and unwavering commitment to becoming a global high-tech leader.
5. Challenges and Risks of Listing on STAR Market
5.1. Stringent Delisting Requirements
The STAR Market enforces strict standards for continued listing, and companies that fail to meet
these standards may receive warnings and potentially face delisting (EY China, 2022). This
presents a constant demand on listed companies to maintain high compliance and performance
levels to avoid delisting. Consequently, companies must allocate resources to consistently meet
regulatory requirements and standards.
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5.2. Volatility Management
Volatility management is another challenge that companies listing on the STAR Market must
address, particularly in the context of technology and innovation companies. The STAR Market is
known for attracting such enterprises, which are often characterized by larger investments and
stock price volatility. In the initial trading period, especially during the first five trading days when
new shares are listed, companies may experience significant fluctuations in their stock prices (EY
China, 2022).
This challenge stems from the nature of technology companies, which can be more susceptible
to market dynamics, investor sentiment, and industry trends. Companies seeking to list on the
STAR Market need effective strategies for managing these stock price fluctuations. While the STAR
Market has implemented a circuit-breaker mechanism allowing for a 20% fluctuation in stock
prices to mitigate volatility, this mechanism only takes effect after the initial five trading days. This
means that during this crucial early period, companies must be prepared to navigate and respond
to potential price swings.
Volatility management is essential for maintaining investor confidence and ensuring that share
prices accurately reflect a company's underlying value. It requires a proactive approach to risk
management and strategies to stabilize share prices during times of market turbulence, making
it a significant challenge for companies seeking to list on the STAR Market (EY China, 2022).
5.3. High Valuation Pressure
Listing on the STAR Market often places overseas companies under the intense scrutiny of high
valuation expectations. Investors anticipate that these firms possess cutting-edge technology and
enjoy government support. This places a significant onus on these companies to not only achieve
lofty valuations but also maintain them over the long term, as investor sentiment can shift swiftly
from optimism to skepticism if expectations aren't met.
An illustrative case in point is Junshi Bio, a biotechnology company that went public on the STAR
Market in July 2020. On the day of its initial public offering (IPO), the stock price witnessed a
staggering 200% surge. This meteoric rise was fueled by investors' optimism, given the company's
prestigious associations with renowned academics and industry experts (Meemi, 2021). However,
sustaining this valuation soon became an arduous challenge. A subsequent report cast doubts on
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the company's research capabilities, exposing a lack of a distinct competitive edge. The report
also unveiled collusive agreements between the company's founders and the high-profile experts
associated with the firm (Meemi, 2021). These revelations triggered a precipitous decline in
Junshi Bio's share price, plummeting by over 60% from its zenith (Meemi, 2021).
The Junshi Bio case serves as a stark reminder of the formidable challenge presented by high
valuation pressure for overseas companies venturing into the STAR Market. While elevated
valuations can bring significant advantages in terms of funding and visibility, they concurrently
carry the weight of expectations for sustained growth and innovation. Hence, overseas companies
considering entry into the STAR Market must place a paramount emphasis not only on achieving
high valuations but, more crucially, on upholding them through consistent performance and
genuine innovation.
6. Suggestions and Recommendations to STAR Market Regulators
As mentioned previously the STAR Market has impressive accomplishments since it’s launched in
2019, it is only natural to turn our focus toward its future development and seek expert insights
on further improvements. We will delve into the interviews with leading experts to gain a
comprehensive understanding of how the STAR Market can build on its success and continue to
evolve. These expert perspectives will guide us in refining strategies and ensuring that the STAR
Market remains at the forefront of technological innovation and capital market reforms. By
drawing from their wealth of knowledge and experience, we aim to identify the key areas and
strategies necessary for steering the STAR Market toward an even more promising and impactful
future.
Li Zhan, Chief Economist at the research department of China Merchants Fund and Li Feng,
Deputy Dean of the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University
(SJTU-SAIF), shared insightful suggestions during an interview with Securities Time. These
recommendations encompass:
6.1. Lowering the Individual Investor Access Threshold
Li Zhan suggests that the access threshold of RMB 500,000 yuan for individual investors on the
STAR Market should be moderated (“The Vibrant STAR Market Yields Fruitful Outcomes”, 2023).
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This step would likely attract more individual investors, inject fresh capital, and boost market
activity, trading volume, and liquidity.
6.2. Cautious Relaxation of Trading Threshold
To balance the influx of new investors and the healthy development of the market, Li Zhan
recommends a staged and batched approach for relaxing the trading threshold (“The Vibrant
STAR Market Yields Fruitful Outcomes”, 2023). This strategy involves gradually improving
investors' risk tolerance and knowledge of professional investment selection, with adjustments
made according to market conditions.
6.3. Flexibility and Internationally Accepted Trading Mechanisms
Li Feng suggests introducing more flexible and internationally recognized trading mechanisms
(“The Vibrant STAR Market Yields Fruitful Outcomes”, 2023). By encouraging institutional
investors to participate and offering a wider array of financial products and trading tools, the STAR
Market can enhance liquidity and trading activity.
6.4. Encourage Sponsor Institutions and Shareholding Reduction
The STAR Market should play a more significant role in areas such as co-investment by sponsor
institutions and inquiry transfer for shareholding reduction, as mentioned by an official from the
SSE (“The Vibrant STAR Market Yields Fruitful Outcomes”, 2023). These actions can help
strengthen the market's attractiveness to investors.
Based on insights from two industry experts interviewed by Securities Times, the STAR Market,
as it nears its fifth year and embraces the comprehensive registration system, is at a critical
juncture. Their recommendations underscore the need to maintain market integrity, expand its
investor base, and attract global investments, enhancing its global financial prominence.
Implementing these proposals thoughtfully will further strengthen the STAR Market's role as a
prominent player in the global financial landscape.
7. Conclusion
In conclusion, this research has delved into the intricacies of the STAR Market, shedding light on
its significance in China's capital market reform, as exemplified through the case study of Montage
Technology. The study has addressed critical aspects of the STAR Market, encompassing its
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motivations for launch, a comparison with domestic peers, and the implications it holds for
companies looking to delist from overseas exchanges.
Montage Technology's transition to the STAR Market serves as an enlightening example of the
benefits and challenges associated with this innovative platform. Before listing, Montage
Technology showcased promising performance metrics, and after listing, it experienced
significant improvements in its financial outlook, flexibility, and recognition within the industry.
The STAR Market provided the company with the means to access more capital, make strategic
decisions efficiently, and enjoy a higher valuation, affirming its status as an industry leader.
The analysis has also extended to a broader perspective, linking the STAR Market to China's
industrial policy priorities and strategic goals, such as MiC2025. This market serves as a beacon
of China's ambition to nurture its high-tech sectors and foster innovation, aligning with its
overarching economic objectives. However, there are challenges and risks associated with listing
on the STAR Market, including stringent delisting requirements, volatility management and high
valuation pressure.
Despite the challenges associated with listing on the STAR Market, it is noteworthy that, since its
inception four years ago, it has continued to perform well. Expert opinions have also been sought
to gain insights into potential avenues for further improvement.
In conclusion, this research has provided valuable insights into the transformative impact of the
STAR Market on China's capital market reform, highlighting both rewards and challenges for listing
companies. As the STAR Market continues to shape China's financial landscape, it is imperative
for both regulators and businesses to adapt and innovate in response to the ever-evolving
dynamics of this dynamic marketplace. This study, with its findings and recommendations,
contributes to a deeper understanding of the STAR Market's role in China's capital market and its
implications for high-tech sectors. It offers a foundation for future research and serves as a guide
for those considering the opportunities and risks associated with this innovative market. In
closing, the STAR Market is not only a reflection of China's evolving financial framework but also
a tribute to the unyielding spirit of innovation in its high-tech industries.
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Appendix
Figure 1: Difference between the STAR Market and SSE
Figure 2: Number of Listed companies in STAR Market
Figure 3: Total Market Value (Trillion) of STAR Market
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Figure 4: Market Value of listed companies in STAR Market
Figure 5: IPO pass rate of SSE
Figure 6: IPO pass rate of STAR Market
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Figure 7: IPO application review comparison;
https://www.invesco.com/apac/en/institutional/insights/china/chinas-science-and-technology-innovationboard-a-bold-step-forward-for-capital-market-reforms.html
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Figure 8: Corporate Indicators of STAR Market vs. China’s other exchange based stock market
Figure 9: Overview of Chinese Mainland IPO market - 2021
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Figure 10: Overview of Chinese Mainland IPO Market 2021
Figure 11: Montage Technologies R&D Investment ("2021 Corporate Social Responsibility Report", 2022)
Figure 12: Montage Technologies Number of sessions and institutions ("2021 Corporate Social
Responsibility Report", 2022)
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