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This article is written based on public information and is for information exchange purposes only and does not constitute any investment advice.

One of the hottest topics in the capital market recently is the Beijing Stock Exchange.

According to official news, the Beijing Stock Exchange will be transformed from the selected layer of the original New Third Board. The companies with the selected layer may no longer struggle with whether to transfer the board, but will become listed companies on the Beijing Stock Exchange. This is like an old actor who has been performing on a grassroots stage for a long time, appearing on the Spring Festival Gala and gaining the attention of the whole country.

Since the announcement of the establishment of the Beijing Stock Exchange, the entire range of selected stocks on the New Third Board has soared, and there has even been a company with a market value of more than 50 billion yuan - Beiteri (NQ: 835185). As of the close of September 17th, Beiteri's total market value has reached 72.2 billion yuan.

For a long time, the liquidity and attention level of companies in the New Third Board have not been high. Can the establishment of the Beijing Stock Exchange enable veteran actors to regain their dreams, and what remains to be explored beyond the theme behind the sharp rise in the market value of Beiteri?

To answer the above questions, first start with the original intention of the establishment of the Beijing Stock Exchange.

Figure 1: Top 15 List of Selected Layers on the New Third Board This Year, Source: Oriental Wealth

01

Three Key Words of Beijing Stock Exchange

On September 2nd this year, the highest level announced in a speech at the 2021 China International Service Trade Fair Global Service Trade Summit that it would continue to support the innovative development of small and medium-sized companies, deepen the reform of the New Third Board, establish the Beijing Stock Exchange, and create a main position for serving innovative small and medium-sized companies.

This section will start with three key words in the speech: small and medium-sized companies, service innovation, and reform.

1. The new stage for small and medium-sized companies

It is undeniable that small and medium-sized companies, as the main body of the market economy, are an important force that cannot be ignored in supporting the rapid growth of China's economy, and are also the main force in promoting technological innovation in China. China has been firmly encouraging and supporting the development of small and medium-sized companies for many years, but the financing and listing difficulties of small and medium-sized companies have not been thoroughly resolved.

Although China has established two major exchanges since 1990, the Shanghai and Shenzhen Stock Exchanges mainly face large and medium-sized companies, which have a high threshold for their listing. Most domestic small and medium-sized companies cannot meet the listing conditions, so the Shanghai and Shenzhen Stock Exchanges have relatively limited use for promoting the development of small and medium-sized companies.

The Beijing Stock Exchange is positioned to promote the development of small and medium-sized companies. It will explore, formulate, implement, and improve institutional norms that conform to the development characteristics of small and medium-sized companies in combination with the development laws of small and medium-sized companies. At the same time, it is conducive to strengthening the interconnection of multi-level capital markets. The establishment of the Beijing Stock Exchange is undoubtedly a key step forward in the reform and development of China's capital market.

Figure 2: Proportion of small and medium-sized companies in China's economy, source: National Bureau of Statistics

2. Encourage "specialized and innovative" companies

More specifically, the Beijing Stock Exchange aims to create a special stage for small and medium-sized companies that are "specialized, specialized, and new", with the focus on supporting small and medium-sized companies that are "specialized, specialized, and new". This also explains why the Beijing Stock Exchange will be transformed from the original selected layer of the New Third Board, as the selected layer is the leader of small and medium-sized companies.

The starting point of the national strategy is clear, encouraging internal innovation, guiding and supporting companies to enter the high-tech field. As we all know, in high-end manufacturing fields such as photolithography machines, chips, mobile radio frequency devices, medical imaging equipment components, China is particularly faced with the "stuck neck" problem. In the future, the country should not only support leading companies, but also support small and medium-sized companies with R&D and innovation capabilities, and develop a group of specialized new "little giants" companies, even more urgent.

Figure 3: Policy History of "Specialization, Specialization, and Innovation", Source: Zheshang Securities

3. Deepening the registration system: the market becomes more market-oriented

In addition to supporting small and medium-sized companies, the Beijing Stock Exchange also has a special mission to promote the registration system. If the pilot registration system of the Science and Technology Innovation Board has opened a precedent for the registration system in China, the establishment of the Beijing Stock Exchange will be an important milestone in the comprehensive implementation of the registration system in China.

The implementation of the registration system not only lowers the listing threshold for small and medium-sized companies, but also allows more outstanding companies to remain in the domestic capital market. At present, the GEM is also starting to pilot a registration system, and it can be expected that the entire market will gradually implement a registration system in the future.

The establishment of the Beijing Stock Exchange has made important attempts in terms of access threshold, listing review, issuance process, and continuous supervision, and has put forward new requirements for the comprehensiveness, effectiveness, and innovation of supervision. At the same time, the Beijing Stock Exchange has borrowed from the system of the NASDAQ to clarify a stricter delisting system - "lenient entry and strict exit", strictly controlling the quality of the companies, promptly eliminating companies with poor operations, and ensuring a virtuous cycle of the survival of the fittest in the market.

Or to use a formula, domestic exchanges, as market-oriented institutions, will become more market-oriented.

Now that the market has emerged as a big stage for small and medium-sized companies, what is the appeal of this new stage? Can it really solve the pain points of small and medium-sized companies? The upsurge in Betray, one of the top picks, may give us some inspiration.

02

The Inspiration of the New Stage: A Case Study of Long Bei Teri

Let's start with a brief history of Betterley.

In fact, Betray was established as early as 2000 (which is why the concept of an old actor has been mentioned in the previous article). From the beginning of its establishment, Betray has been laying out the subdivided field of battery cathode materials. By 2006, Beiteri's market share of negative electrode materials had reached the top in China. Only four years later, in 2010, Beiteri's negative electrode shipments surpassed Japan and became a leading expert company in negative electrode materials. This process took only 10 years.

Figure 4: Important Events in the Development History of Beiteri Source: official website of the company

However, to my surprise, although Betray has long been the leader in negative electrode materials, it has previously been the undiscovered champion in the New Third Board. Specifically, in the three years since Betray's listing at the end of 2015, its stock price has not increased, but has declined by 7.37% compared to the beginning of the listing, even though Betray's important customers at that time have included Panasonic, LG, Samsung, and other international brands.

As soon as the news of the establishment of the Beijing Stock Exchange was announced, the trading volume and turnover of Beiteri began to soar, and Beiteri suddenly became popular in the capital market. The reason for this is that although the New Third Board is a stage for small and medium-sized companies, it is constrained by liquidity, and no one can support even the best actors.

Figure 5: Historical Trading Volume&Turnover Volume of Betray, Source: Wind

What can be used as evidence is the comparison between Betterley and his colleague Putai Lai.

Since 2014, the sales of electric vehicles have continued to soar, bringing rapid development to the lithium battery and material industry. In particular, in the first half of this year, the electric vehicle market ushered in an explosive period, and the demand for lithium battery power increased significantly.

According to Betray's semi-annual financial report, its operating revenue and net profit attributable to the parent company were 4.207 billion yuan and 730 million yuan, with growth rates of 168.83% and 232.45%, respectively. The performance of peer Pu Tai Lai (SH: 603659) was also outstanding: the operating revenue in the first half of the year was 3.923 billion yuan, up 107.82% year-on-year; The net profit was 775 million yuan, up 293.93% year-on-year.

However, the market value of Putai, which has a similar profit volume, is more than twice that of Beiteri.

In fact, the state has been actively promoting the reform of the New Third Board over the years. In October 2019, the New Third Board launched a select layer, which refers to selecting a group of relatively excellent companies from the New Third Board. At the same time, the state has reformed the system of select layers, allowing them to trade publicly like A-shares, and reducing the investor threshold from 5 million to 1 million, thereby greatly increasing the investor base. It is hoped that the selected layer will be given priority to becoming larger and stronger.

So what's the result?

On July 27th, 2020, on the day of the opening of the selected layer of the New Third Board, the first 32 stocks were officially listed on the selected layer, which should have been a very prosperous scene. However, to my great disappointment, as of the close of the day, only 10 stocks in the selected layer had risen, with the highest increase of only 55.4%; Twenty one stocks fell, with the largest decline exceeding 20%. Compared to the opening day of the Science and Technology Innovation Board, the stock prices of the first 25 companies collectively turned red, with a daily increase of over 80%. The stock prices of 16 companies doubled, with a maximum increase of 400%. It can be seen that the selection layer has not completely changed the status quo of the New Third Board.

More clearly, the controlling shareholder of Betray is China Bao'an Group (SZ: 00009), with a shareholding ratio of 68% in China Bao'an. Many investors who were optimistic about Betray in the early stage could not become shareholders of Betray, but chose to invest in Betray's "shadow stock" - China Bao'an.

Until the announcement of the news from the Beijing Stock Exchange, the stock price of Beiteri began to diverge from its parent company. Beiteri went all the way north, and China's Bao'an turned sharply south. Today, the market value of Beiteri has significantly exceeded that of its parent company.

Figure 6: Stock price trend chart of Betray and its parent company, China Bao'an Group. Source: Snowball

In general, the liquidity of the New Third Board is poor and the investment threshold is high, resulting in a lack of popularity on the stage. No matter how well the actors on the stage perform, they will ultimately feel pity for themselves. Now that the Beijing Stock Exchange has arrived, small and medium-sized companies that are not even listed on the New Third Board are finally suitable for their own stage.

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