April 28, 2020 / 5:29 AM / a month ago

Breakingviews - Stars align for China tech’s stay-at-home project

A sign for STAR Market, China's new Nasdaq-style tech board, is seen after the listing ceremony of the first batch of companies at Shanghai Stock Exchange (SSE) in Shanghai, China July 22, 2019. REUTERS/Stringer ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT.

HONG KONG (Reuters Breakingviews) - Bad news in the United States is good news for a Chinese stay-at-home project. Controversial facial recognition startup Megvii Technology is considering going public on Shanghai’s recently opened STAR Market, the South China Morning Post reported last week. On Monday, state media announced plans for a U.S.-style, registration-based system that will better position ChiNext, Shenzhen’s $187 billion growth board, for new listings. It’s good timing given the suspicion U.S.-listed Chinese firms are falling under. Backers face longer lockups and capital controls, but they should get better valuations.

Foreign appetite for Chinese companies is waning. The U.S.-China trade war, combined with recent scandals involving Luckin Coffee and TAL Education, have dented confidence. Megvii, for its part, has an image problem after being placed on a human rights blacklist by the United States. It failed to win approval for a Hong Kong listing in November and later let its application lapse. With private fundraising slowing to a trickle, capital-raising options for Chinese startups are dwindling.

Many Chinese tech companies have shunned local exchanges. Long waiting times for listings, profitability requirements, limits on pricing initial public offerings and capital controls have made them unpopular venues for companies and their private equity backers. But regulators have experimented with STAR to ease many of these restrictions. Now ChiNext is rolling out similar changes, which could ultimately be extended to the whole market. 

There are caveats. Shareholders are subjected to much longer lockup periods of up to 36 months once companies list on the STAR Market, compared to up to six months in New York. Foreign investors need government approval to repatriate money out of China once they’ve cashed out, and that approval can be slower than usual during times of economic stress.

But the valuations that companies and their backers stand to fetch are more attractive than those in New York. Roughly 100 companies have listed on the STAR board since it started and they currently trade at over 90 times historical earnings. ChiNext is up 8% year-to-date, outperforming domestic benchmarks, even as markets around the world have tanked. China’s fledgling exchanges are fast becoming a more hospitable fundraising option.

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