Promoted as China’s version of NASDAQ, the ChiNext Market aims to provide investors with access to new and fast-growing Chinese technology enterprises. So how is it doing so far?
The ChiNext Market of the Shenzhen Stock Exchange (SZSE) is approaching its 13th birthday. Designed to help “galvanise growth in emerging industries of strategic importance”, this high-tech board was originally proposed by the Chinese government in 1999 and launched 10 years later, on Oct 23, 2009.
Given the strides made by Chinese tech companies in recent years, here are five key ChiNext highlights:
1: ChiNext’s recent reforms get the thumbs-up from tech startups
In its first decade of operation, the ChiNext Market made fairly good gains, growing from 113 company listings in 2010 to 849 by August 2020, a CAGR of 22%.
This pace has accelerated over the past two years since the introduction of a registration-based IPO system in August 2020. The reforms, involving enhanced information disclosure, improved audit processes and market pricing of new share sales, have been welcomed by tech startups as enabling more financial opportunities. In the past two years alone, 331 new companies have successfully listed, bringing the total to 1,180 as of August 2022 (see Chart 1).
See also: DARE+ accelerates StarHub’s transformation for a new era of digitalisation
2: ChiNext accounts for a big share of China’s (and the world’s) IPOs
ChiNext is one of the world’s biggest IPO markets. Together with the similarly technology-heavy STAR market (registered on the Shanghai Stock Exchange), these two bourses now account for the vast majority of China’s IPO financing. According to the Securities Association of China, the two markets accounted for three quarters of the country’s total IPOs in 2021. For the ChiNext, 199 IPOs managed to raise CNY149.4 billion (approximately US$23.1), accounting for 25% of the total raised by IPOs during the year.
In the first nine months of 2022, ChiNext again came in as the second largest IPO market globally, ranking behind STAR but ahead of Hong Kong. ChiNext’s IPOs so far this year have reached 177 and raised a total of US$20.54 billion, according to Refinitiv data.
See also: Keep cash on the sidelines, but get a better return on it: Moomoo Singapore
The ChiNext Index has a higher allocation to new-age industrials, healthcare and information technology sectors than other China indices.
3: ChiNext is home to a large number of strategic companies
The ChiNext Market has over 100 specialised sectors with many of the companies coming from so-called “strategic emerging” industries such as next-generation infotech, bio-pharmaceuticals, advanced industrials, high-end manufacturing and new-economy sectors. These breakdown into subsectors, which include the innovation subsectors listed in Table 1.
4: ChiNext companies show good profitability
As at August 2021 (the first anniversary of the reformed ChiNext Market), over 80% of ChiNext’s 1,014 listed companies made a profit and 70% saw their earnings grow, despite Covid challenges.
A SZSE report has found that on average, net profits of ChiNext-listed companies increased by over a third y-o-y in August 2021. Of these, 395 companies achieved a net profit growth of more than 50%, while 55 companies made profits of more than CNY500 million (approximately US$77 million).
It is notable that among the 16 largest companies — those with a market cap of CNY100 billion — nine companies saw their net profits increase by more than 100%. This suggests that reaching a critical size can help boost high-tech company profitability.
For more stories about where money flows, click here for Capital Section
5. The ChiNext Index has a low correlation to global indices
The ChiNext Index is the benchmark and flagship index of the ChiNext Market. It comprises 100 of the largest and most liquid A-shares listed on the ChiNext Market. The index has a higher allocation to new-age industrials, healthcare and information technology sectors than other China indices (see Table 2).
This high exposure to new technologies and China focus means that the ChiNext Index tends not to move in the same direction as major country, regional and global equity indices. This low correlation (as shown by the correlation coefficient numbers in Table 3) allows investors to achieve a good level of diversification by including the index into existing portfolios. Exposure to the index is possible by investing in an exchange traded fund (ETF) or actively-managed fund that uses the ChiNext Index as its benchmark.
The ChiNext Index has fallen by 31.1% year-to-date along with other growth indices but is expected to recover once the threat of a global recession recedes. It has positive three-year and five-year annualised returns of 12.04% and 4.16% respectively (according to CNI Index, ChiNext Index Performance, October 2022).
The ChiNext Market was created as a source of private capital financing for China’s up-and-coming tech companies. In turn, the high volume of tech-based IPOs in China over the past few years has seen the market expand and strengthen.
Important Notice & Disclaimers:
This publication shall not be copied or disseminated, or relied upon by any person for whatever purpose. The information herein is given on a general basis without obligation and is strictly for information only. This publication is not an offer, solicitation, recommendation or advice to buy or sell any investment product, including any collective investment schemes or shares of companies mentioned within. Although every reasonable care has been taken to ensure the accuracy and objectivity of the information contained in this publication, UOB Asset Management Ltd (“UOBAM”) and its employees shall not be held liable for any error, inaccuracy and/or omission, howsoever caused, or for any decision or action taken based on views expressed or information in this publication. The information contained in this publication, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available and reflects prevailing conditions and our views as of the date of this publication, all of which are subject to change at any time without notice. Please note that the graphs, charts, formulae or other devices set out or referred to in this document cannot, in and of itself, be used to determine and will not assist any person in deciding which investment product to buy or sell, or when to buy or sell an investment product. UOBAM does not warrant the accuracy, adequacy, timeliness or completeness of the information herein for any particular purpose, and expressly disclaims liability for any error, inaccuracy or omission. Any opinion, projection and other forward-looking statement regarding future events or performance of, including but not limited to, countries, markets or companies is not necessarily indicative of, and may differ from actual events or results. Nothing in this publication constitutes accounting, legal, regulatory, tax or other advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person. You may wish to seek advice from a professional or an independent financial adviser about the issues discussed herein or before investing in any investment or insurance product. Should you choose not to seek such advice, you should consider carefully whether the investment or insurance product in question is suitable for you. This advertisement has not been reviewed by the Monetary Authority of Singapore. UOB Asset Management Ltd. Company Reg. No. 198600120Z
