This week, China will be launching a groundbreaking new secondary market and trading platform that hopes to help smaller technology companies attract investment in domestic IPOs.
Small & Medium Sized Enterprises (SMEs) are the mainstay of the Chinese economy, as they provide the largest employment base as China moves towards a more enterprise-based economy. However, smaller companies have found it difficult to raise funding, as the large commercial banks concentrate on state owned enterprises.
Shenzen-based ChiNext, which is being hailed as a Nasdaq-style trading board, will begin trading on Friday 30th October in the hope that traded entities will be able to take advantage of excessive liquidity, especially in retail investment markets. It is believed that investors will be attracted to new opportunities to stake a claim in up and coming tech startups, but also by the more relaxed trading environment, as companies listed on ChiNext will not face the Byzantine rules that are applied to A & B class share issues in Shanghai.
“The launch of ChiNext represents a milestone in the development of China’s financial markets and is an important part of the government’s plans to boost support for small and medium-sized firms,” said Jing Ulrich, Managing Director of China equities at JP Morgan, Hong Kong. “The board will provide an additional source of financing for younger companies while broadening the options available to investors.”
More importantly, it is expected that ChiNext will also draw in private equity and venture capital firms, which are critical to helping startups gain a foothold in global markets. According to Jackson Wong from Tanrich Securities, these investment vehicles will be more likely to take part, since they have more routes to cash out on their investments, with an avid pool of retail investors ready to speculate.
“The launch of the growth enterprise board is an important step towards implementing the national strategy on promoting innovation,” Shang Fulin, chairman of the China Securities Regulatory Commission, said last week. The first 28 companies to list on the board, ranging from software to medical equipment makers, have raised 16 billion yuan (US$2.3 billion) in their initial public offerings — more than double initial forecasts.
Well known China investor Jim Rogers (he of the dickie bow) according to this report from CCTV is watching the new bourse with great interest, although he hasn’t invested in any of the companies that will IPO this week, any move he makes in the near future is bound to be followed by Sinophile investors.
So far, more than 9 million people have opened trading accounts with ChiNext, fuelling fears that there may be some price fluctuations in the offing. According to CCTV.com, the average price-earnings ratio for the 28 companies due to list on Friday is 56, which is a hefty premium on the average 25 encountered on comparable listings on the Shanghai A list.
Wang Yiwen, GM of Shanghai Deding Investment Management said,
“The IPO prices for those firms have been set very high. This will cause pricing and trading issues for the secondary market. Take the SME board at the A-share market as an example. When the SME board starting trading in June 2004, 8 firms got listed. Their share prices all opened and ended higher on that day. But prices soon started declining after 5 to 10 trading days, with some losing nearly half their values.”
So it would seem that we will see some initial decay, but all in all, this is an exciting move for China’s retail investors individually and global investors as a whole. Hopefully ChiNext will give some small domestic companies a financial springboard which will allow them to accelerate growth before performing secondaries in Hong Kong and on the NASDAQ and NYSE in the future.
From a personal point of view, I've been slowly seeding into the The Claymore/AlphaShares China Small Cap Index ETF (HAO) for some time this year, enjoying above 50% growth so far.
With the pullbacks over the last 5 days, I am watching the launch of ChiNext with quiet expectation, my impression being that if ChiNext manages to launch without too many issues, this could well be a nice fillip for HAO in the near term.
Disclosure: long HAO