Rolling out a red carpet for VIP share sales

China’s stock market regulator may be opening a new fast track for the public share sales of startup companies with a value of at least US$1 billion to support what the government views as high-profile innovators.

Startups with a value of US$1 billion or more are called “unicorns,” a reference to their statistical rarity.
In his report to the 13th National People’s Congress on March 5, Premier Li Keqiang told deputies that the government will support the public financing of high-quality, innovative companies.

At the end of last year, there were some 220 “unicorns” with an aggregate value of US$763 billion in China, according to CB Insights. The list includes Didi Chuxing, Xiaomi, China Internet Plus Holding and Lu.com.

The more relaxed stance of the China Securities Regulatory Commission toward their initial public offers was highlighted earlier this month when Foxconn Technology Group, the world’s largest contract electronics manufacturer and the fourth-largest information technology company by revenue, won approval for its Foxconn Industrial Internet Co subsidiary to be listed on the Shanghai Stock Exchange.

The approval process took only 36 days, and the company may list as early as next month. The speedy green light compares with an average 15 months for listing approval last year, and up to three years or longer before that.

The government has decided to shorten approval time for the IPOs of “unicorns” in four sectors: biotechnology, cloud computing, artificial intelligence and high-end manufacturing. It will also loosen the profitability requirements for listing of such companies, according to regulatory commission.

IPO reform is at the top of the regulator’s priorities, according to commission Vice Chairman Jiang Yang.
Xiaomi Inc, a Chinese electronics and software company, is also in the preparatory stages of going public in a pending share sale that is drawing considerable attention of investors.

Xiaomi was valued at US$46 billion in 2014, becoming the world’s fourth most valuable technology startup after it received US$1.1 billion in outside funding from investors. The company is targeting a valuation of US$80-$100 billion.

After Baidu, Alibaba, Tencent and JD.com, the top technology companies in China, chose to go public overseas, Chinese regulators have pondered policy changes to ensure that the next round of technology IPOs list in China.

Regulators are also helping US-listed Chinese companies create Chinese depositary receipts to tap trillions of dollars in domestic savings.

Chinese depository receipts are certificate issued by a Chinese bank that represents a pool of foreign equity traded on local Chinese exchanges. The receipts can be used by foreign companies to allow both Chinese institutional and private investors to buy their stock.

Li Daokui, a professor at Tsinghua University and member of the national committee of the Chinese People’s Political Consultative Conference, said supervisory regulations must be improved to attract innovative companies to list in China’s A-share market.

“Chinese depositary receipts and the sectors supported by the government reflect policies that are inclined to encourage high-tech and emerging industries,” said Gao Ting, a chief strategic analyst at UBS Securities China. “The policies are promoting industrial upgrading. I think it will be a gradual process, with some technical obstacles, but regulators will make early preparations.”

Although the IPO of Xiaomi still remains a matter of speculation at present, expectations are rising that Xiaomi is considering the addition of an A-share listing to its global float. That has boosted the share prices of unicorn-related stocks on Chinese exchanges since March 1.

“As far as I know, many ‘new economy’ enterprises listed overseas are willing to return to the A-share market, and I believe more well-performing technology companies will do so in the future,” said Zhou Hongyi, chairman of Qihoo 360 Technology Co, the first Internet company to return to an A-share listing from New York.

The chief executives of companies such as Baidu, Sogou, JD.com and Lenovo have all shown some willingness to return to A-share listings if their path is smoothed by regulators.

Regulators will help “build the road” to encourage that return, but whether or not the companies actually decided to come back remains to be seen, said the stock regulator’s Jiang.