The maturation of an industry, especially one as dynamic as technology, is often mirrored in the gradual shaping of its market environmentJust as great tech companies rise through years of hard work and innovation, so too do they thrive within a robust ecosystem that supports growthIn this environment, every venture undertaken is an investment into tomorrow’s possibilities.

Taking a closer look at China’s capital markets, the establishment of the Science and Technology Innovation Board (STAR Market) on June 13, 2019, marked a watershed momentThis board represents a significant reform initiative geared towards providing streamlined access to financing for small and medium-sized technology enterprisesSuch firms are fundamental as they possess the innovative potential necessary to drive rapid industrial modernization and technological advancementConsequently, at its inception, many perceived the STAR Market as "China’s Nasdaq," a symbol of hope for fostering innovation and upgrading the country's industrial framework.

To understand the significance of such a development, one must look back at Nasdaq itself, founded in 1971. Initially, Nasdaq was set up to serve as a financing platform for emerging and smaller companies that did not meet the listing requirements of the New York Stock Exchange (NYSE). Over the years, it matured into a nurturing ground for many prominent technology firms, evolving into one of the most vital global marketplaces for tech stocks.

As Nasdaq grew, so did its influenceThe NASDAQ Composite Index, often referred to as the “Nasdaq index,” was launched the same year and now stands as one of the most critical indicators of the health of the technological sector worldwideIt encompasses all stocks listed on Nasdaq, effectively reflecting the evolution and performance of leading tech companies globally.

In the years following the establishment of the STAR Market, new indices were also introduced, such as the Sci-Tech 50, Sci-Tech 100, and Sci-Tech 200, which aimed at categorizing its listed companies based on performance metrics

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However, it wasn't until the beginning of this year that the Shanghai Stock Exchange, in collaboration with the China Securities Index Company, presented the STAR Composite IndexThis index is poised to provide the most comprehensive representation of the board's overall performance, paralleling the essential role that the Nasdaq index plays for its market.

When examining the current state of the Nasdaq index, it has significantly ascended to approximately 19,791 points, encompassing around 3,399 sample stocksThis includes a mix of established giants like Apple, Microsoft, and Amazon, alongside high-growth startupsIn stark contrast, the companies listed on the STAR Market often exhibit high growth potential and substantial research and development investment, yet they are primarily in their developmental phases.

Time emerges as a crucial variable in this dynamicNotably, many of the constituents in the Nasdaq index—referred to colloquially as the "Magnificent Seven"—have been thriving for over two decades, with most having undergone several decades of substantial growth and consolidationIn contrast, many tech firms in China, particularly those on the STAR Market, are still in their formative years.

For example, the STAR Composite Index boasts 565 components, out of which more than 505 companies were founded after the turn of the centuryFurthermore, even those firms commanding significant weight in the index are typically under ten years oldWhen we compare these nascent companies with the valuations of the "Magnificent Seven," it becomes evident that the Chinese tech landscape is still in its rapid expansion phase, harboring immense developmental prospects for the future.

However, amid this backdrop, the achievements of these emerging companies, particularly given their relatively short histories and the intricate geopolitical and market conditions facing them, are quite remarkableThe success of the larger players within the STAR Composite Index, which have made formidable strides in their respective sectors, underscores not only their resilience and innovative capabilities but also hints at an encouraging trajectory ahead.

Consider, for instance, Semiconductor Manufacturing International Corporation (SMIC), the largest constituent by market capitalization on the STAR Market, which has rapidly climbed to become the third-largest semiconductor foundry in the world, trailing only behind TSMC and Samsung Electronics

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Another prominent player is Haiguang Information, described as the "domestic CPU champion," whose first and second-generation CPUs meet international standards, positioning it as a leader in the domestic arena.

Likewise, Cambricon Technologies, a pioneering Chinese firm in the AI chip sector, is recognized for its early entrance into the marketplaceIt has carved out a profitable niche, with its initial products and technologies adopted by various renowned manufacturers, bolstering its portfolio of practical experience.

Overall, the STAR Market is not only developing more swiftly than the A-shares but is also experiencing remarkable growthRecent data suggests that the STAR Composite Index is projected to achieve a compound annual growth rate (CAGR) of over 41% in its net profits attributable to parent companies over the next two years, significantly outpacing mainstream broad-based indicesIn the short term, the stock market can be viewed as a voting mechanism; however, over the long haul, it serves as a weighing scale, wherein the long-term returns hinge on corporate profitabilityThis reality poses a favorable outlook for companies equipped with robust profit-generation capabilities, enhancing their potential to deliver substantial returns to shareholders.

The impressive growth trajectory within the STAR Market is underpinned not just by individual enterprise efforts but also by a supportive policy environment and a burgeoning pool of talentSince the beginning of this year, regulators have initiated varied measures to revitalize the merger and acquisition market, with expectations for STAR Market activity anticipated to warm up in 2024. The push for mergers and acquisitions aims to encourage tech enterprises to integrate and bolster their supply chains while enhancing core technologies.

On October 18, 2024, during a leadership survey, it was emphasized that accelerating modernization in China will necessitate prioritizing scientific and technological advancements

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The leadership reiterated that technological innovation must pave the way for growth, calling for an energetic commitment, reminiscent of "how many times can one take risks in life." As a hub for hard technology, the STAR Market is expected to receive sustained support from these directives.

In terms of research and development investment, as of year's end 2023, R&D expenditure on the STAR Market accounted for 10.0% of total revenue, far exceeding the 4.7% on the ChiNext and 1.8% on the main boardFurthermore, the proportion of R&D personnel on the STAR Market is at 24.3%, further highlighting its leading position compared to the ChiNext's 17.0% and the main board's 9.2% share.

Amid a changing global narrative impacted by geopolitical tensions, there is a pronounced shift towards domestic self-innovation within the technology sectorThe demand for "domestic substitution" effectively signals the gradual release of scale potential within the domestic marketToday, Chinese technology firms are not only benefiting from favorable policies but are also adapting to the trends of domestic substitution and industry evolution, forming a tripartite investment logic with distinctly articulated development pathways.

In response to external challenges, Chinese tech companies are progressively fortifying their focus on autonomous innovation, leading to impressive breakthroughs in technology and market penetration, solidifying their foundations for long-term progressThis dual-engine dynamism not only nourishes corporate expansion but also paints a promising picture for the future of the broader Chinese technology industry.

The STAR Composite Index stands as a testament to the growth and maturity of China's technological prowess, poised to reflect the transition of Chinese enterprises in the global tech arena from a position of following to one of competing, and eventually, to leading.

As the Chinese economy pivots towards high-quality development, it is anticipated that "hard technology" will become a pivotal engine for future economic growth

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