Castor Pang Wai-sun, strategist of Sun Hung Kai Financial, noted that share prices of GEM-listed companies nearly always gained sharply immediately after the declaration of their intention to move up to the main board. For example, shares in supermarket chain operator Beijing Jingkelong surged as much as 5.6 per cent when it announced on January 19 it would be switching.

The rise in share price could be attributed to more active trading volume. For example, average daily trading volume of software firm Kingdee International was about 1.45 million shares in the 12 months through February 28, 2006, while only 949,474 shares in the year before it moved up to the main board on July 19, 2005. Kingdee's share price has jumped 187 per cent since it moved up to the main board based on its closing price on February 28.

The trade volume is boosted by the fact that many funds that don't buy GEM-listed firms because of their more lax risk-management systems feel free to climb on board.

Also, the move up signals to investors that a company's earnings were improving, said Kenny Tang Sing-hing, associate director of Tung Tai Securities.

In order to list on the main board, candidate firms are usually required to post at least HK$20 million net profit the year before when applying for a listing and an aggregate net profit of HK$30 million in the two preceding years. No such minimum earnings are required for listing on the GEM board.

Of course, since little fundamentally changes in a company moving up - other than perhaps slightly improved borrowing terms - long-term investors need to do more than bet the promotion indicates an improved company. Indeed, about half the firms that have made the move have seen their share prices slip from their final GEM closing price.

'It is a good buying opportunity' for investors willing to search out the 'quality' stocks, Mr Tang says. 'Investors should be patient, as stock prices are not likely to jump dramatically in the short term. It always takes several months or even a year for a company to complete the switching of its listing.'

Similarly, Sun Hung Kai's Mr Pang says 'you could find some very good companies and hold for a long-term investment', but some are better for short-term 'stir frying'.

How does one decide which to hold in your portfolio and which to churn in the wok?

Ricky Tam Siu-hing, director at Champlus Asset Management, recommends 'ticking out' dotcoms and focusing instead on industries that are easy to understand, and then choosing the companies that paid dividends and had valuations lower than 15 times earnings.

Of the clutch of GEM-listed firms to have declared an intention to move up to the main board, Mr Tam touts 'agriculture and environmental protection' concept Xinjiang Tianye Water Saving Irrigation System and 'Chinese domestic consumption' plays on supermarket operator Wumart Stores and retailer Convenience Retail Asia (see table).

'They have a great potential to switch to the main board, but this is not the most important aspect - even if they don't move up, I think they are worth investing in because of their growth prospects,' Mr Tang says.

Mr Pang of Sun Hung Kai also likes Tianye Water, citing the outfit's solid earnings performance since listing.

Tianye Water, which raised HK$239 million on its Hong Kong GEM initial public offering in February last year, posted 9 per cent growth in net profit to 60 million yuan last year on a turnover of 462 million yuan. The stock has more than doubled since its listing, to close at HK$2.80 on February 28 from its offer price of HK$1.18.

Some big funds, including Fidelity, Value Partners, Dreyfus Premier Greater China Fund and BNP Paribas Asset Management, each have between 6 and 9 per cent of the company's outstanding H shares (which accounted for 35.69 per cent of the company's total issued capital), according to Hong Kong Stock Exchange's filings.

But market watchers warn that GEM stars could turn into dogs after the switching, since the main board is stocked with plenty of large capitalisation competitors for investors' money. They cite the cases of Tom Group and Vital BioTech Holdings.

Another concern is the switching costs. For example, Enric Energy Equipment shelled out about HK$5 million on fees, including to the exchange, bankers and auditors, to facilitate its move to the main board last July, a process that did not raise any new funds for the company. In October 2005, it spent about HK$16 million on its GEM board listing, from which it raised HK$175 million in net proceeds.

Future switchers might find the process less taxing if Hong Kong Exchanges and Clearing, which runs both of the city's bourses, implements some of the measures being discussed to increase the GEM's attractiveness amid shrinking daily turnover and competition from other exchanges, such as London's AIM. One idea being floated includes streamlining the process for GEM traded companies shifting to the main board.

A final issue of caution is that switching plans are sometimes aborted, which occurred with financial firm CASH Financial Services Group and health products provider Eco-Tek Holdings.

Likely movers

GEM board listed companies that have announced or expressed their interest in moving up to the Stock Exchange main board

1 Wumart Stores: mainland supermarket chain operator

2 Shandong Weigao Group Medical Polymer Products: single-use medical devices manufacturer

3 Rojam Entertainment Holdings: music and entertainment related company

4 Xinjiang Tianye Water Saving Irrigation System: maker of drip film, PVC/PE pipelines and drip assemblies used in water-saving irrigation systems

5 Beijing Jingkelong: supermarket chain operator

6 CK Life Sciences: maker of environmental and human health products

7 Techpacific Capital: in merchant banking, asset management, venture capital and direct investment

8 CASH Financial Services Group: securities brokerages and online game service provider

9 Eco-Tek Holdings: maker of environmental protection and quality health related products

10 Century Sunshine Ecological Technology Holdings: maker of organic fertilizers and bio-pesticides

11 Zhengzhou Gas Company: piped natural gas provider

12 Yantai North Andre Juice: apple juice concentrate producer

13 Convenience Retail Asia: convenience store chain operator in Hong Kong and the mainland

14 Ko Yo Ecological Agrotech: maker of chemical fertilizers and chemical products

15 Shenzhen EVOC Intelligent Technology: engages in EIP products for telecommunication, industrial, military, video frequency control, transportation