Alarm bells ring over results of ChiNext listings

PUBLISHED : Monday, 23 April, 2012, 12:00am
UPDATED : Monday, 23 April, 2012, 12:00am

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Alarm bells are ringing on China's Nasdaq-style share market as members of the much-hyped board prepare to unveil first-quarter losses.

Stung by the outcry from investors, regulators have responded to the profit warnings by introducing measures to de-list underachievers.

A third of companies traded on ChiNext, the start-up board at the Shenzhen Stock Exchange, have issued warnings to brace for profit declines or losses when results are released for the first quarter.

According to data from the China Securities Journal, 16 start-ups have warned they will report losses for the first quarter, while another 74 firms have warned that profits will fall in the same period.

The outlook comes after battery component supplier Beijing Easpring Material Technology posted a full-year loss of 728,000 yuan (HK$891,000) for 2011, winning the dubious distinction of being the first loss-maker on ChiNext since it was launched in October, 2009.

The official newspaper estimated that the start-ups, touted at the time of their listings as China's future profit stars, would report an overall 45 per cent year-on-year profit drop for the first quarter. After a decade of preparations, Beijing launched the technology-laden second board with great fanfare in 2009. It was pushed as a key to encouraging innovation and push Chinese products up the value chain.

Analysts sang the praises of the board after its debut, believing the China Securities Regulatory Commission (CSRC) would select firms with solid earnings and high growth potential from the thousands seeking a listing on the start-up board.

The market then embarked on a roller-coaster ride over the past two years as investors bid stock prices to unsupportable levels only to find the earnings' fundamentals of many companies were insufficient to support the lofty prices.

As a result the CSRC set up a delisting mechanism for ChiNext to expel underachievers on the market, and on Friday last week the Shenzhen Stock Exchange published a draft rule that firms that reported negative net assets for two consecutive years would face delisting.

Upon delisting the companies would be demoted to the Securities Trading Automated Quotations network, an over-the-counter market for equity trading, according to the Shenzhen rules.

A first batch of 27 companies started trading on the new board on October 30, 2009, with millions of shares subject to a one-year lock-up period. But many of the shares were then dumped on the market in block trades between November 1 and November 2, 2010, after the lock-up period ended, driving prices sharply lower.

'The founders were not interested in developing the firms over the long run,' a venture capitalist said. 'Instead they cashed-out to take their gains because the share sales would make many of them millionaires.'

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start-up companies have warned of losses for the first quarter of this year, according to data from the China Securities Journal