Wednesday 1 April 2009

Countdown begins for second board

Regulator unveils listing rules for Shenzhen bourse

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Guanyu said...

Countdown begins for second board

Regulator unveils listing rules for Shenzhen bourse

Daniel Ren in Shanghai and Nick Westra
1 April 2009

Mainland start-ups and investment banks are embracing the news of a soon-to-be-launched Nasdaq-style second board in Shenzhen even though it is still too early to pop the champagne.

The China Securities Regulatory Commission yesterday unveiled finalised listing rules, starting the countdown to the establishment of the long-delayed growth market.

However, the uncertain economic outlook and the volatile main board may still deter thousands of prospective firms from raising much-needed capital on the Shenzhen Stock Exchange.

Many brokerages, fund managers and investment banking sources have cast doubts on the timing and mode of the second board, on the back of a slowing Chinese economy despite the government’s view that the outlook is improving.

Talk of a second board began more than a decade ago and Beijing started to lay its groundwork in 2000, hoping to create its own version of Nasdaq to replenish cash-hungry start-ups.

However, the internet bubble that burst as swiftly as it boomed on the Nasdaq market forced the country to shelve the plan.

“The present economic downturn would affect the development of the market,” said Fu Zhekuan, a director with Shenzhen-based Fortune Venture Capital. “But the market is also created to boost the economy since the mainland must adjust its industrial mix to pave a way for future development.”

A source close to the CSRC said the securities regulator was unsure whether the first batch of initial public offerings could take place soon, but it would be demanding of listing candidates and approve only those with solid earnings. “No one is sure of the economic conditions. No one is sure whether it can be successful,” said the source.

According to the listing rules, companies are eligible for listing if they have been in operation for more than three years and posted a combined net profit of at least 10 million yuan (HK$11.34 million) in the past two years.

They can also apply for an initial share sale if they earned 5 million yuan in the latest fiscal year but recorded revenue of more than 50 million yuan.

Sources said the watchdog would need at least three months to complete the vetting of applicants and grant approvals.

More than 1,000 firms are reportedly queuing up to sell shares on the new board, as venture capitalists were eager to cash out and small companies hungry for growth capital.

Though Beijing loosened its monetary policies late last year to inject vigour into the slowing economy and encouraged banks to extend credit, commercial lenders are reluctant to offer loans to high-risk small firms on concerns over their profitability.

“It is understandable that the growth market must be launched to fund the growth of the start-ups,” said Wang Fen, an analyst at Shanghai Securities. “The country wants to maintain the employment rate and the start-ups won’t survive without access to cash.”

Analysts predicted that about 100 companies would be allowed to list, raising a total of 30 billion yuan. They also believed the growth market’s launch would have a knock-on effect on the economy.

The mainland is facing increasing pressure to upgrade its industrial mix to lift its products on the value chain as a drastic plunge in overseas demand took a toll in the country’s once booming export sector.

The government has been calling for technological innovation in the past decade to further strengthen the nation’s economic might.

“The mainland still abounds with capital, and the launch of the growth market is definitely music to the ears of the venture capital and private equity industry,” said Liu Zehui, senior vice-president of Legend Capital. “In the long term, the second board will be of great benefit to the economy.”

Still, concerns of an oversupply of equity on the stock market have prompted Beijing to delay the launch of the growth market. The benchmark Shanghai Composite Index dived 65.4 per cent last year, the biggest drop in its 18-year history as panic-stricken investors lost confidence in the world’s third-biggest economy.

Officials have better reasons to take the plunge now since the benchmark has advanced nearly 30 per cent so far this year.

The CSRC announcement was in line with a prediction that the regulator would give the growth market approval when the index hit the 2,400-point level. The Shanghai index closed at 2,373.21 yesterday.

Sources said the second board might face further delay if the stock market went downhill in the coming months.

Some analysts remained doubtful about the success of a second board, spooked by fears of the Growth Enterprise Market in Hong Kong.

“There will not be a negative impact on Hong Kong because the function for the GEM board and the China second board is totally different,” said Castor Pang Wai-sun, a strategist at Sun Hung Kai Financial. “And enterprises in China that want to absorb overseas funds need to list in the GEM.”

Because foreign investors are restricted from investing directly in the mainland, a Hong Kong listing is a convenient way for companies across the border to attract foreign funds. And new enterprises may also seek a GEM listing because it can put them on track to secure a main board listing.

Some investors have been reluctant to invest in GEM-listed companies because some of the regulations are less extensive and performance records are not as complete as their main board counterparts.

However, the GEM index could still serve as a useful stepping stone for mainland firms because of the listing benefits, Mr. Pang said.