Battery giant CATL's IPO approved: Unicorns on the way home

China’s securities regulator has approved an IPO application from a leading battery company CATL in record time, and more Chinese unicorns are expected to be on fast track for domestic listing. The move signals Chinese regulator’s support for innovative enterprise fund raising within the domestic capital market.

The China Securities Regulatory Commission (CSRC) approved Contemporary Amperex Technology Co Ltd (CATL)’s 13.1-billion-yuan initial public offering (IPO) at a meeting on April 4, creating a new record setting IPO approval by completing the whole process in just 24 days after the IPO was pre-disclosed, according to Xinhua.

The result came several days after a pilot program to support innovative companies' domestic listing and issuance of China Depositary Receipts (CDRs) was unveiled.

The pilot scheme will cover companies in high-tech or strategic emerging industries such as internet, big data, cloud computing, artificial intelligence, software and integrated circuits, as well as high-end equipment manufacturing and biological medicine.

According to the guidelines released by China’s State Council on March 30, the pilot program will apply for three categories of innovative enterprises, including overseas-listed firms who are registered overseas but operate in the Chinese mainland with a market value of no less than 200 billion yuan (about 31.7 billion U.S. dollars). Innovative companies who have not listed overseas will be the program candidates if they have posted a revenue of at least 3 billion yuan for the past year and are valued at 20 billion yuan or above. Thirdly, innovative companies who have not listed overseas and fall short of the revenue and valuation requirements, will be on the candidate list if their business income registers fast expansion and they have developed independent and advanced technologies.

CATL, by all means, meets all the requirements. The leading battery maker in China is a supplier to both domestic and international carmakers, including SAIC, Geely, BMW and Volkswagen. In terms of battery sales volume, it was among the top 3 for three consecutive years in power companies all over the world and it even ranked the first in 2017. It was valued at about 20 billion dollars by a recently released report, equaling to Bytedance, a fast-growing tech company.

The breaking news of CATL and the new domestic listing as well as the CDR issuance scheme system excited many. The swift reform and action are far more than welcoming to domestic high-tech firms in particular.

Competition

It is, to be precise, a competition for new economy in the global capital market.

Spotify Technology, a music, podcast, and video streaming service provider, started trading on the New York Stock Exchange (NYSE) on April 3, 2018, conducting a direct listing. It bypassed all those traditional regulatory obstacles without selling any new shares to the public. This listing method was specially designed for Spotify by NYSE, implying that NYSE would love to spare no efforts to embrace unicorn companies.

Singapore has also joined the competition. In January, 2018, Singapore Exchange Limited (SGX) announced that they would provide dual-class shares (DCS) structure for new economy companies, by which shares are divided into two categories and some share owners have greater voting rights than some others after the rule of “one share, one vote” has been broken.

The Stock Exchange of Hong Kong Limited (SEHK) had speed up its reforming pace since Alibaba went to NYSE, skipping Hong Kong because of the VIE structure (Variable interest entity, meaning that a firm sets up another branch abroad as a main body for future listing or financing and eventually lands in its original country as a foreign-invested enterprise through a series of investment activities) and some other problems. SEHK has relaxed requirements for innovative corporation profitability indicators.

Participation

Over the years, new economic leaders in China such as Tencent, Alibaba and JD.com had to go overseas for listing forming a pattern of “earning money from home but materializing dividends abroad”, a practice that makes numerous investors toss and turn restlessly in the middle of the night.

Fortunately, more good news is coming.

Zhang Shenfeng, assistant to the chairman of the China Securities Regulatory Commission (CSRC), said in January that in order to pave way for the construction of a powerful capital market country, more reforms will be pushed forward when considering for the huge gap between China’s capital market and emerging economies.

At present, the CDR system has already been validated, in which profitability is no longer a rigid requirement and the VIE structure is also accepted. The new act shows China’s determination to make improvements.

So, what is CDR? For instance, company A listed in the US now deposits 100 million shares in a bank B based in North America. Bank B is then able to issue 100 million shares of depository receipts in the mainland and use RMB to trade after listing. The biggest benefit of this mode is that company A could avoid being restricted to complex legal requirements such as profits and equities in A-share market.

How long will it take before the system takes effect? It is reported that unicorn companies in four areas including cloud computing and biological medicine are given privileges to have their applications undergo immediate review as soon as they hand them over, according to the regulation department.

Transformation

This time the government’s transformation speed is faster than expected. It only took one month to kick off the trial program since the new policy of the IPO was widely discussed.

There is no need to say that there still exists a gap between China’s capital market and foreign mature capital markets. The announcement made by CSRC and China’s State Council is only a general framework. On the other hand, however, it should be regarded as a big step in the process of transformation.

As for market structure, the largest share of market value in the current A-share industrial structure is finance (23.8%) and industry (16.59%); the largest share of U.S. stocks is information technology (22.68%) and finance (16.86%). The proportion of the new economy in China’s capital market is significantly lower than that of other countries such as the United States. At the end of 2017, the new economy’s market value of the A-share market accounted for approximately 35.42%, which is far below the proportion of the US share market (57.36%).

In the future, the return of unicorn companies to the A-share market will increase the proportion of the new economic industry in the capital market, and facilitate the simultaneous development of the upstream and downstream industries. It will be the major trend that the proportion of new economy enterprises in the A-shares increases.

Dominant Position

The deep reason hidden in the fight for new economy is that everyone wants to occupy the dominant economy position. After all, in modern times, it is those who own the new economy that will have a brighter future.

The announcement made a clarification that innovative enterprises will be encouraged to list in the domestic capital market to promote the development of China’s high-tech and strategic emerging industries.

Specifically, this trial program "is targeted at companies that have core competitiveness and a high degree of market recognition, especially those innovative firms in internet, big data, cloud calculating, artificial intelligence, biological medicine, software and integrated circuit as well as high-end equipment manufacturing and more."

Recently, a list of unicorns including Alibaba, Tencent and Baidu allegedly picked up by the Ministry of Science and Technology were highly sought after by the secondary market, indicating the people’s expectations for tech companies.

But according to three types of candidates chose by CSRC, it seems that reform plans will be gradually implemented. In addition, it also should be noticed that “unicorn” is merely a popular term, with its market valuation going up and down from time to time. A firm which is considered as a unicorn does not necessarily mean low investment risks and more reliable quality.

Some companies also do not perform very well although they have come back to A shares from U.S. stocks or Chinese concept shares. For example, Qihoo 360, whose market value had soared to 420 billion yuan for some time after returning to A-share market, is now only valued at 282 billion yuan. These losses are obviously paid by investors who are chasing the market.