China’s Nasdaq-style Star Market fast losing momentum as stretched valuations, IPO pipeline weigh on investor sentiment
- Average daily turnover has slumped by more than 60 per cent since trading started in July
- Combined market capitalisation of the 34 companies on the Star board has fallen 22 per cent from its peak of 690.2 billion yuan
The appeal of China’s new Nasdaq-style technology board has been waning since its launch three months ago.
The Science and Technology Innovation Board, or the Star Market, has lost more than a fifth of its market cap from its all-time high and the average daily turnover has slumped by more than 60 per cent since trading started in July.
While institutional investors have been steering clear of the board because of its lofty valuations, most of the nation’s individual traders, who like to place speculative bets on smaller companies with volatile price swings, cannot access the market due to a minimum trading account balance of 500,000 yuan (US$70,646).
“Stretched valuations and a possible surge in IPOs on the Star board are weighing on sentiment,” said Ken Chen Hao, a strategist at KGI Securities in Shanghai. “For the board to come back, investors need to see a clear sign of China’s transformation of its economic structure, particularly growth driven by technology and innovation.”
The absence of trading interest in the Star market, which was mooted by President Xi Jinping in November last year, is frustrating for policymakers, as China wants to tap the board to support its home-grown technology industry against the backdrop of a drawn-out trade war with the US and to test a market-based registration system for initial public offerings.
The 34 companies trading on the Star board have a combined market capitalisation of 539.4 billion yuan currently, down 22 per cent from its peak of 690.2 billion yuan recorded in August, according to data from the Shanghai Stock Exchange.
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Average daily turnover stood at 5.85 billion this week, accounting for only 39 per cent of the daily average since the inception of the board.
Even after the pullback, the Star board traded at an average 68 times earnings, almost five times the multiple for the benchmark Shanghai Composite Index, the data showed. At its peak in early August, the board was valued at 102.9 times earnings.
“It’s an inevitable result of valuations going back to normal,” said Chen Long, an analyst at Zhongtai Securities. “With a steady increase in new listings, we’ll see a gradual entry of long-term funds into the market.”
Last week, the Shanghai exchange said that it was postponing the launch of an index tracking the Star board, citing only a few listings and the small size of the market. It did not say when the gauge will be introduced.
As of last week, 42 companies had completed the IPO registration procedures and another 162 had filed IPO applications, it said.
