Chinese regulations hit the technology sector hard this year, but companies have pivoted to meet the new requirements and are reporting positive growth. The technology sector within China has a lot of potential for growth, particularly as stocks rebound in the sector and the STAR Market harnesses some of the highest growth within Chinese technology.
KraneShares’ investment strategist Henry Greene and cultural analyst Xiabing Su recently discussed the role that the STAR market has within China and the opportunities to capture exposure to the growth potential with the KraneShares SSE STAR Market 50 index ETF (KSTR).
The STAR Market is designed to function similarly to the Nasdaq in U.S. markets, with less stringent requirements for companies to be listed on it, allowing up-and-coming technology companies to gain access to markets and obtain vital investments to fuel their growth. With the growth potential for technology within China, it’s an avenue for these up-and-comers to access capital through public markets and fuel the growth of the industry with innovation.
The STAR Market currently has about $100 billion in market cap, according to Greene, and because listing requirements mean that companies only need to meet one of the five requirements, companies that are pre-profit can list on the STAR Market. Those requirements are either profitability, minimum overall revenue, minimum operating cash flow, minimum R&D spending, and/or being considered to have a level of importance that is considered strategic, as determined by the government.
As of 10 years ago, less than a quarter of the Chinese population had access to the internet, and its growth has been exponential to today, explained Xiabing. There has been inclusion of AI into daily lives with facial recognition tech being utilized by Alipay, cloud computing applications into biomedicine that have fostered growth and stability, as well as 5G becoming more accessible to rural areas.
The STAR Market contains some of the largest promising technology companies in China, such as Ronbay Technology, which specializes in nickel batteries, a vital component used in EV cars. This company has major EV makers such as BYD, Samsung, and LG partnering with it to supply batteries for their vehicles.
Another major technology company listed on the STAR market is Kingsoft, better known as the “Microsoft of China”, Xiabing said, because of its expansive use as office software across the country. This company provides software and services to companies, individuals, and the government, and as of March 31, 2021, it supplied products to 494 million people, showcasing an 11% growth year-over-year.
Capturing China’s Technology Rebound and Growth With KSTR
The KraneShares SSE STAR Market 50 Index (KSTR) invests in the top 50 companies listed on the STAR Market. As it is a newer, technology-heavy index, Greene cautions to anticipate volatility and to use a long-term investment horizon when seeking to gain exposure.
Standard A-share portfolios based on legacy Chinese economics invest in energy, industrials, financials, and materials, and therefore tend to have a bias toward more value. KSTR, however, is focused heavily on growth with a tilt toward technology.
The fund has a sector allocation of 57.93% to information technology, healthcare has a 13.66% allocation, industrials 12.42%, materials 8.30%, and consumer discretionary has a 7.36% allocation.
KSTR tracks the Shanghai Stock Exchange (SSE) Science and Technology Innovation Board 50 Index, a benchmark of the 50 largest companies listed on the STAR Market. To be eligible for inclusion in the index, stocks must meet certain market capitalization and liquidity screens, and have been trading for at least 11 days.
KSTR includes Beijing Kingsoft at a 7.57% weight and Ningbo Ronbay at 4.84% weight. The fund has an operating expense of 0.88%.
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