On March 8, Foxconn received A-share after a record speed of 36 days of proceedings. As regulators continue to send favorable signals for domestic listing and trading, more unicorn companies are likely to enter A-share.
In February 2018, there were 230 unicorn companies distributed among 23 countries, and China ranked second with 62 unicorns. China International Capital Corporation Limited (CICC) showed that Chinese unicorns combine emerging technologies such as the internet in a more efficient way to satisfy users and explore growing consumer demand in cultural entertainment, education, gaming, travel, logistics, and more.
While Foxconn may have set an example, an Essence Securities Company Ltd. team does not believe that all unicorns will be able to embark on the fast track, as a number of existing laws and regulations are still restrictive.
Comparison of Chinese and U.S. unicorns.
According to the list of global unicorns released by CB Insights, China and the United States has become unicorn giants. The 230 global unicorn companies in February 2018 have a total market capitalization of $801.9 billion. These companies are distributed among 23 countries, and seven countries have three or more unicorns. The U.S. has 113 unicorns, accounting for 49 percent of the world’s unicorns, followed by China with 62 unicorns. U.S. unicorns are distributed among 23 industries, of which the internet service and finance industries have the highest number of companies. Chinese unicorns are distributed among 18 industries, with the highest number of unicorns in e-commerce and internet services.
According to CICC, if there is a difference between the unicorns in China and those in the United States, it is that Chinese unicorns value consumption while U.S. unicorns value technology. Chinese unicorns combine emerging technologies such as the internet in a more efficient way to satisfy users and to explore growing consumer demands in cultural entertainment, education, gaming, travel, logistics, and more. 60 percent of Chinese unicorns are in the consumer and business services sector, while 60 percent of U.S. unicorns are in innovative technologies, such as artificial intelligence, big data, cloud computing and health care.
China’s unicorns’ financing capabilities are growing rapidly. China’s unicorns have raised a total of $26.4 billion in 2017, according to CICC. Compared with the previous year’s IPOs in major global stock exchanges, this scale is only lower than that of the New York Stock Exchange. IPOs in the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and Shenzhen Stock Exchange raised $17.2 billion, $16.4 billion, and $15.1 billion, respectively, in 2017. Thus, the valuation of Chinese unicorns are up 62 percent in 2017.
Analyst Chenming Liu believes that Chinese enterprises have strong advantages in the “internet+” business model, and in some areas, they are even stronger than their counterparts in Europe and the U.S. Unicorns in the U.S. and China are concentrated on internet and e-commerce, indicating that the two countries have the “internet+” competitive advantage over other economies.
Who are the Chinese unicorns?
According to the Hurun Research Institute, there were 120 unicorns in China in 2017, including 29 in high-end manufacturing, cloud computing, artificial intelligence and biotechnology. In the “internet+” field, there are many familiar large-scale unicorns.
According to Essence Securities, the total market valuation of the 120 Chinese unicorns is estimated at nearly $474 billion (3 trillion yuan). Internet companies occupy a dominant position in the unicorn list. Unicorns in the top three industries of internet service, e-commerce and internet finance accounted for 50 percent of the total number of unicorns.
In terms of regional distribution, Beijing held a unique role in China’s new economic landscape with more unicorns than any other city in 2017. Its 54 companies accounted for 45 percent of China’s unicorns in 2017. Shanghai and Hangzhou ranked second and third, with 28 and 13 unicorns, respectively. Shenzhen and Guangzhou ranked fourth and fifth, with 10 and three unicorns, respectively.
Chinese unicorns in Beijing have more market value than those in any other city. The total value of the 13 unicorn enterprises in Hangzhou exceeds the value of the 28 companies in Shanghai, ranking second. Shanghai, Shenzhen and Guangzhou rank the third, fourth and fifth places.
The 29 unicorns in the four industries of high-end manufacturing, cloud computing, artificial intelligence and biotechnology account for 25 percent of all unicorns. Among them, the valuation of high-end manufacturing enterprises is the highest. They are distributed in Beijing (11), Shanghai (seven), Shenzhen (three), and Hangzhou (three). Some of these unicorn enterprises are preparing for the listing of A-shares. In the future, these four industries will have more room for growth.
Foxconn’s IPO was faster than market expectations, thanks to significantly shorter than normal feedback and wait times. On February 9, Foxconn disclosed that it only took 14 days to pass the feedback stage, far less than the average of 409 days. On March 8, 2018, the company reviewed the IPO and successfully received the permit in 13 days, compared to the average review time of 143 days.
It only took Foxconn a month to complete the prospectus and the disclosure of update. An Essence Securities Company Ltd. team does not believe that all unicorns will be able to embark on the fast track, as a number of existing laws and regulations are still restrictive.
In order to be listed on the main board, first, the company’s net profit must exceed $4.7 million (30 million yuan) for three consecutive years. It is difficult for unicorns to fulfill this requirement. (In fact, U.S.-listed JD.com and Tesla are not profitable.) Second, the variable interest entity structure needs to be dismantled in the A-share listing, and the corresponding exit route for capital needs to be clarified. Third, the upper limit of the existing laws and regulations needs to be raised for the IPO of companies with more than 200 shareholders. Fourth, it is necessary to consider amendment to the internal rules concerning different rights and conflicts between laws and unicorns.
In addition, will listing on A-shares affect the capital volume of the market? This raises concerns about the liquidity of the company. According to CICC analyst Hanfeng Liu, the market values of China Concept Stocks and Hong Kong Stocks are $890 billion and $810 billion, respectively. When including the unicorns, the valuation totals to $2.3 trillion. If these companies are expected to land in the A-share market through the Chinese Depository Receipt or other listing system reforms, the static estimation of potential financing will be around $300 billion (2 trillion yuan).
Even if these companies land in the A-share market in the next three to five years, or bring certain financing pressure, the unicorns will reduce scarcity of the high-quality growth stocks, promote the survival of growth stocks and differentiate their performances. Lowering financing obstacles for competitive innovation enterprises will also promote the transformation of the economic and market structure. In the next three to five years, the proportion of the new economy is expected to rise by 50 percent or more in the A-share market.