Small investors likely to steer clear of Star Market ETFs as bubble concerns grip China’s Nasdaq

22-Sep-2020 Intellasia | South China Morning Post | 6:02 AM Print This Post

Frank Chen is reluctant to invest in Ant Group and China’s other mega technology stocks, even though the accountant now has an option to bypass the asset threshold that keeps most individual investors like him away from these red-hot companies.

He can access the biggest companies trading on Shanghai’s new technology board, or the Star Market, as four asset-management firms start marketing the first batch of exchange-traded funds (EFT) tracking the board’s most valuable constituents this week. While the minimum subscription is only 1,000 yuan (US$148), Chen is wary of the one-year-old market because of its excessive valuation and wild trading.

“The valuation is too stretched and that’s probably why some mega listings keep falling after the start of trading,” said the 42-year-old Shanghai native. “That’s quite worrisome to me. There seems to be lots of speculative funds playing in this market.”

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The tepid response from Chen underscores a setback for money managers who expect China’s 170 million small investors to be exposed to the 2.9 trillion-yuan Star board through their mutual-fund products. Like Chen, who has a 100,000 yuan stock portfolio, most individual investors are not qualified for trading on the Star market, as direct access to the tech board needs at least 500,000 yuan in dedicated stock accounts.

China Asset Management, E Fund Management, ICBC Credit Suisse Asset Management and Huatai-PineBridge Investments will accept subscriptions to the EFTs linked to the Science and Technology Innovation Board 50 Index on Tuesday. The cap for each fund is 5 billion yuan and the subscription will last for only one day.

Initiated by President Xi Jinping in 2018, the Star Market has been in the limelight since its inception in July 2019. The simmering US-China trade war has prompted speculators to chase tech stocks on expectations that replacement of US technologies will boost demand for similar home-made products. The board hosts 175 companies and the most valuable among them is Semiconductor Manufacturing International Corp (SMIC), the biggest chip maker in China. Ant Group, whose listing was approved by the Shanghai exchange on Friday, is set to replace SMIC as the biggest member stock, once it gets listed on the Star board.

The momentum on the Star board 50 index has faltered over the past two months after surging 51 per cent in the first seven months of the year. The 50-member gauge has fallen 1.4 per cent so far this month, extending a 5.9 per cent decline in August, as pre-IPO investors trim their holdings on the expiry of lock-up periods and easing of trading restrictions on Shenzhen’s technology-heavy ChiNext board pulls capital. Even after the decline, the measure is valued at 80.5 times earnings, more than four times the multiple of the benchmark Shanghai Composite Index.

“It’s in a bubble stage and the stocks are overvalued,” said Chen Li, chief economist at Soochow Securities in Shanghai. “There will be some correction on the high valuation with the increased supply of new stocks under the registration-based system.”

Star board stocks’ big premium over their Hong Kong-traded shares is another reason that spooks small investors.

Jacky Jia, a software engineer in Shanghai, pointed to the more than 200 per cent price gap between SMIC’s two classes of shares as to why he would avoid buying the Star Market EFTs for now.

“The stock prices on the Star Market are a bit expensive now and I will buy such EFTs in appropriate time,” he said. “I am bearish on the Star Market in the short term, but bullish in the long term.”

SMIC fell less than 0.1 per cent to 57.69 yuan on Friday in Shanghai, extending its decline to 32 per cent from its peak set in August. The chipmaker’s Hong Kong-traded shares closed at HK$20.60.

Still, not everyone is pessimistic. Investors should view the valuation of the Star board from the development perspective, according to Guosheng Securities.

“Short-term valuation and profitability is not an issue,” said Zhang Qiyao, an analyst at the brokerage. “Room for growth potential in the medium and long term is the key. The Star board is expected to become an important incubator for China’s technology, lead China’s technology innovation and drive the economic transformation and upgrade.”

Others are also upbeat, overwhelmingly raising price targets on many stocks. SMIC will probably rise 22 per cent to 70.59 yuan in the following 12 months, according to estimates by seven analysts tracking the company in a Bloomberg poll. Beijing Kingsoft Office Software, the second-largest weighting on the Star Market, has a share-price estimate of 407.74 yuan, implying a 22 per cent gain from its last close, Bloomberg data showed.

For fund managers such as Wang Zheng, Shenzhen’s ChiNext board may be more appealing than the Star Market at this stage because of more listings and diversified industries. The ChiNext now applies almost the same listing and trading rules that allow a wider daily band as the Star board after a revamp last month.

“It’s not worthwhile playing long on the Star Market,” said Wang, chief investment officer at Jingxi Investment Management in Shanghai. “Given its current rich valuation, it’s only suitable for skilled day traders.”

Chen, the accountant, meanwhile is biding his time for stocks to fall further and the hype around the Star board to ebb.

“I wouldn’t say how much the Start Market will need to drop before I can step in,” he said. “Maybe when fewer people are talking about it, it will be a good opportunity to jump in.”


Category: China

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