As of April 30, 2020, all of the 100 companies listed on the SSE STAR Market (the “STAR companies” for short) had released their 2019 annual reports or disclosed the main operating statistics in announcements as required, after overcoming the adverse effects of the COVID-19 pandemic. It is worth mentioning that the two companies registered in Wuhan, Wuhan Xingtu Xinke Electronics Co., Ltd. and Cabio Biotech (Wuhan) Co., Ltd., also announced their annual reports on schedule despite the difficulties. Overall, the performance results of the STAR companies in the first year of listing meet market expectations, and show the distinctive features of science and technology innovation.
First of all, the STAR companies achieved a stable performance while securing progress at the same time. The 2019 annual reports show that the STAR companies maintained good momentum of development in the first year of listing. A total of RMB147.115 billion in operating income was recorded, with an increase of 14% year-on-year. The net profit attributable to the owners of parent company amounted to RMB17.812 billion, up by 25% year-on-year. The net profit attributable to the owners of parent company after deducting non-recurring gains and losses stood at RMB15.898 billion, a year-on-year increase of 11%. In addition, the quality of earnings has steadily improved, with the net cash flow of operating activities at RMB19.708 billion, a year-on-year increase of 75%. Specifically, 70% of the companies achieved double-digit growths in both revenue and net profit, 80% of the companies posted increases in both revenue and net profit, and 90% of the companies were profitable after deducting non-recurring gains and losses.
Secondly, major industries realized balanced development. All of the major industries on the SSE STAR Market achieved different levels of growth. The companies in the next-generation information technology and the "new infrastructure" represented by artificial intelligence and cloud computing showed strong momentum of growth, with operating income and net profit increasing by 15% and 42% respectively. Benefiting from the continued increase in medical demand, the operating income and the net profit of the companies in the biomedicine industry grew by 28% and 14% respectively. The companies in the industries of energy conservation and environmental protection, new materials and high-end equipment manufacturing also maintained rapid growth, with the operating income swelling by 30%, 17% and 6% respectively, and the net profit growth expanding 25%, 23% and 10% respectively.
Thirdly, obvious characteristics of innovative economy emerged among STAR companies. The SSE STAR Market has gathered a large number of companies in high-tech industries and strategic emerging industries, whose financial indicators in the annual report show obvious characteristics of "new economy". The first characteristic was asset-light business models. At the end of 2019, the average percentage of fixed assets in total assets was only 11%. The companies’ core competitiveness was more reflected in the factors of new economy such as intellectual capital, client relationships and data resources that were not indicated in the financial statement. The second characteristic was the high gross profit margin and high net profit margin. In 2019, the gross profit margin stood at 54% on average, with the net profit margin at 22% on average, showing a significant difference from other sectors and strong market competitiveness. The third characteristic was the high rate of return on equity (ROE). In 2019, the average ROE was close to 20%, meaning that the input-output ratio was more economical and the capital utilization efficiency was higher.
Fourthly, the R&D investment continued to increase. In 2019, the total amount of R&D investment reached RMB11.7 billion, an increase of 23%. The proportion of R&D investment in operating income averaged 12%, showing continued momentum. Among the companies, the R&D investment of Shenzhen Chipscreen Biosciences Co., Ltd. and Sino Medical Sciences Technology Inc. accounted for nearly 50% of their operating income, and the proportions of R&D investment exceed 20% at 11 companies including Advanced Micro-fabrication Equipment Inc. China. Five companies including ArcSoft Corporation Limited recorded a proportion of more than 30% in R&D investment for three consecutive years, and 22 companies including Beijing Kingsoft Office Software, Inc. post more than 15% for two consecutive years. In addition, the STAR companies have formed stable scientific research teams, with R&D personnel accounting for more than 30% of the total number of employees, and more than 200 professionals at each company on average, a year-on-year increase of 10%. A total of 19 companies implemented an equity incentive plan after going public, with more than 3,000 employees involved, which helps to stabilize the research team to share scientific and technological achievements.
Fifthly, scientific and technological innovations were encouragingly achieved. High R&D investments resulted in more scientific and technological innovations. In 2019, the STAR companies saw a total of more than 2,500 patents newly added, including more than 1,100 invention patents. On average, each company had a total of 75 invention patents and 62 software copyrights, and 13 companies won the National Prize for Progress in Science and Technology. In particular, the project of “key technology and its application for designing and manufacturing high-performance MEMS devices” with China Resources Microelectronics Limited involved was awarded the second-class National Prize for Progress in Science and Technology. The tungsten polishing slurry of Anji Microelectronics Technology (Shanghai) Co., Ltd. has been applied to the advanced 3DNAND process, with the product line expanded from logic chips to memory chips. Ningbo Solartron Technology Co., Ltd. has grown into a world leading enterprise in the sub-industry of optical reflective film, and has completed the full import substitution for reflective films.
Sixthly, the vitality of private and mixed-ownership enterprises was constantly unleashed. Among the STAR companies, private and mixed-ownership enterprises account for more than 90% of the total, and served as the main force in fundraising, as their total financing during the IPO process amounted to nearly RMB100 billion. After the listing, their vitality was further unleashed. The annual reports show that in terms of value creation, private and mixed-ownership enterprises contributed 60% of the total operating income and 70% of the total net profit, paid 60% of the total taxes, and offered 70% of the total jobs. Regarding the scientific and technological innovation, the enterprises invested 80% of the total R&D expenditures and obtained 70% of the total invention patents. Among the STAR companies that realized import substitution for core products, 90% were private and mixed-ownership enterprises.
Seventhly, information disclosure was more effective. On the one hand, emphasis on risk disclosure was enhanced. The number of the risks disclosed in the annual reports of the STAR companies was close to 10 on average, covering various aspects such as the core competitiveness risk and operating risk, and the disclosure was more specific and direct. On the other hand, the disclosure requirements of the registration-based IPO system on consistency and comprehensibility were implemented. The STAR companies generally paid attention to the disclosure of the company’s products, technologies and other information through clear and comprehensible statements, and attached importance to disclosing the progress of the major events mentioned in earlier documents such as prospectuses. For example, companies such as Suzhou Zelgen Biopharmaceuticals Co., Ltd. and Bio-Thera Solutions, Ltd. provided in the major risk alert section special warnings about the losses based on the industry characteristics, reasons for not being profitable, and the impacts on the company's cash flow, etc. On the basis of the application scenarios, Qingdao Haier Biomedical Co., Ltd. described the company's products and services in terms of users, storage type, storage temperature, etc., which was relevant and easy for investors to understand.
Eighthly, the companies featured by IPOs with negative earnings, red chips and special voting rights showed good development momentum. With the more inclusive listing criteria of the SSE STAR Market, there listed already three enterprises with negative earnings (two of which adopted the fifth set of listing standards), one red-chip enterprise, and one enterprise with special voting rights. Under the previous listing criteria, it would be impossible for these companies to go public in the mainland market. The annual reports show good prospects of the above five companies, with their capacity for scientific and technological innovation further improved. Specifically, the biosimilar drug of adalimumab developed by Bio-Thera Solutions, Ltd. was the first of its kind in China obtaining the marketing approval. Suzhou Zelgen Biopharmaceuticals Co., Ltd. completed the Phase III registered clinical study for the Donafenib Tosylate tablets used in the first-line treatment of advanced hepatocellular carcinoma, with the application for the marketing of the new drug submitted. National Silicon Industry Group Co., Ltd. achieved the 28nm technology in the mass-produced silicon wafer products. At present, the market value of each of the five companies has exceeded RMB10 billion.
Ninthly, the proportion of cash dividends remained high. According to the annual reports, while maintaining the efforts in R&D, the STAR companies also provided substantial return for the investors based on the companies’ conditions and development stages. Among the companies meeting the criteria for dividends, 88 submitted plans for cash dividends, with an average dividend ratio of 36%, and those with a dividend ratio of more than 30% accounted for 84% of the total. A total cash dividend of RMB7 billion was planned to be distributed, with 12 companies to pay more than RMB100 million in dividends each. Specifically, China Railway Signal & Communication Corporation Limited recorded the highest dividend payment, which amounted to RMB2.1 billion in total.
Tenthly, the companies generally attached importance to investor relation management. During the disclosure of the annual reports, the STAR companies effectively interacted with investors in various ways. In addition to the conventional communication methods, the chairpersons of nearly 10 companies made a special interaction with the investors in the annual report through the "Chairperson's Letter to Shareholders". For example, the chairperson of Hangzhou Anheng Information Technology Co., Ltd. reviewed the business results and explained the development philosophy and direction through a "letter home" to shareholders. During this year's online briefings on the performance of STAR companies, the "critical few" such as chairpersons, chief executive officers and chief financial officers of more than 50 STAR companies were present, who directly answered investors' questions and interacted with investors, with effective communication results so far.
While releasing the 2019 annual reports, the STAR companies also disclosed the reports for the first quarter of 2020 on schedule. Statistics show that due to the COVID-19 impact, the performance results of the STAR companies were differentiated in the first quarter of 2020. The total operating income amounted to RMB26.114 billion, down by 9% year-on-year. The net profit attributable to the owners of parent company stood at RMB2.844 billion, up by 14% year-on-year. The net profit attributable to the owners of parent company after deducting non-recurring gains and losses totaled RMB2.199 billion, down by 13% year-on-year. In terms of revenue, half of the companies recorded increases while the other half recorded decrease. Regarding profit, 20% of the companies posted an increase of more than 50% in the net profit attributable to the owners of parent company, but at the same time nearly 50% of the companies registered drops, with 21 companies suffering losses. In addition, performances among different industries were highly differentiated. The overall performance of the pharmaceutical industry was excellent in the first quarter, with double growths achieved in operating income and net profit. The industry of next-generation information technology presented strong resistance to risks and the overall performance was stable. Affected by the pandemic, the high-end equipment manufacturing industry postponed its reopening while also affected by reduced downstream orders, and its operating income and net profit fell by 30% and 24%, respectively.