The share price of Zhongji Innolight, a Chinese optical transceiver maker that domestic investors purchased most heavily in the Hong Kong stock market over the past two months, plunged following the introduction of a U.S. Senate regulatory bill. While Chinese-Listed Retail Investors (domestic retail investors investing in companies listed in the Greater China region) are shaken, the National Pension Service, which participated in cornerstone investment before the listing, is locked in by lock-up restrictions and cannot sell its shares until January next year.
On the 25th (local time), U.S. Republican Party Senators John Cornyn and Dave McCormick, along with Democratic Party Senators John Fetterman and Ruben Gallego, introduced a bipartisan bill titled the "National Security Systems Protection from Chinese Optical Transceivers Act," which would exclude Zhongji Innolight and Eoptolink, a company listed on the ChiNext board of the Shenzhen Stock Exchange in China, from federal government national security system procurement. Zhongji Innolight closed trading at 1,028 Hong Kong dollars on the 28th, its first trading day after the bill's introduction, down 12.21% in the Hong Kong stock market. This marked the largest drop since its listing on July 30.
Although the bill includes a five-year implementation grace period after enactment, the market reacted faster than the pace of institutional application. Citi analyzed in an investment note that while the impact of this bill's introduction on Zhongji Innolight's short-term performance is limited, political and policy risks need to continue to be tracked.
59.1 Billion Won 'Top Pick' in Two Months… 'Shaken' by Largest Post-Listing Drop
According to the Securities Information Portal Savro of the Korea Securities Depository (KSD), domestic investors, including retail and institutional investors using the KSD settlement network, had a net purchase of Zhongji Innolight shares totaling 43.457791 million dollars (59.1 billion won) from July 30 to September 28 (based on settlement date). This ranked first in net purchases among Hong Kong stock market stocks settled through the KSD during the same period. It is 3.4 times that of the second-place CSOP Samsung Electronics 2x Leveraged ETP (Exchange Traded Product; net purchase of 12.86 million dollars). Since the KSD compiles trading statistics based on the settlement date (two business days after the trade date), this figure reflects trades up to September 24 based on actual trade dates.
Zhongji Innolight is a company that manufactures optical transceivers, components that convert electrical signals into light for transmission via fiber optics, for AI data centers. Its revenue share from the United States reached 61.7% as of the first quarter last year. However, it has been considered a regulatory target due to U.S.-China AI competition, including being designated as a Chinese Military Company (CMC), which is prohibited from participating in procurement projects by the U.S. Department of War, before its listing on the Hong Kong stock market. Nevertheless, domestic investors continued net purchases, likely expecting the growth potential of the optical transceiver industry driven by demand for AI infrastructure.
Zhongji Innolight rose to 1,322 Hong Kong dollars intraday on September 22, ahead of the U.S.-China summit, recording a 34.9% increase compared to its initial public offering price. However, it fell for five consecutive trading days through the 28th, including the closing price on that day. Among the closing prices over the 43rd trading days from the listing date to September 28, only nine days had closing prices lower than the closing price on the 28th. Investors who purchased at price levels formed for a significant period after the listing are highly likely to have entered an unrealized loss zone.
National Pension Service 'Unable to Sell' Until January Next Year Due to Lock-Up
The National Pension Service, the largest institutional investor in Korea, also invested in Zhongji Innolight on July 20, before its listing on the Hong Kong stock market, through a cornerstone (pre-listing pre-allocation of shares) method. According to the investment banking industry and the KSD, unlike general institutional investors such as securities firms, the National Pension Service does not use the KSD settlement network. Consequently, Korea's total investment in Zhongji Innolight, including domestic pension assets, may exceed the figures aggregated by Savro.
The National Pension Service is realizing a 4.9% unrealized gain based on the initial public offering price of 980 Hong Kong dollars and the closing price on the 28th (1,028 Hong Kong dollars). However, it cannot finalize its returns until January 29, 2027, due to the lock-up period associated with the cornerstone investment.
Controversy arose over geopolitical risk perception as the National Pension Service participated in Zhongji Innolight's Hong Kong stock market IPO (initial public offering) 42 days after its CMC designation. In the National Assembly, before U.S. Senate legislation, Kim Yong-tae, a member of the People Power Party, stated to Ministry of Health and Welfare Minister Chung Eui-kyung regarding the National Pension Service's investment in Zhongji Innolight, "Geopolitical risks, such as the possibility of share prices plunging due to cascading U.S. sanctions or exposure to secondary sanctions like restrictions on financial transactions within the United States, should be formally addressed in the Investment Review Committee." Jeong (Minister) responded that they would review investment principles.
A National Pension Service official, when asked by this newspaper whether they would implement CMC list filtering during the investment decision-making process, stated, "We are basically reviewing it as a matter requiring a resolution by the Fund Management Committee," adding, "The judgment of the Fund Management Committee will be necessary."
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