New board no quick fix for small firms
Analysts are sceptical about the capacity of the New Third Board to help SMEs raise funds but market-making system could bring benefits
The mainland's attempt to expand the over-the-counter market through the so-called New Third Board is unlikely to satisfy small companies' fundraising needs, say analysts, but a market-making system would help boost transactions.
The New Third Board, an equity transfer system that lets non-listed companies in four high-technology industrial zones register or list their shares, was launched in Beijing on January 16 after a seven-year trial.
The new platform is seen as a milestone for the OTC market, but analysts were sceptical about its role as a fundraising platform.
Huatai Securities analyst Zhao Xiang'e said the New Third Board was a platform for companies to list their shares but fundraising channels were limited.
"Companies listing on the New Third Board might seek to transfer to the main board but it's quite difficult as so many companies have lined up [for main-board listing] already," Zhao said.
The rules on transferring companies' listing from the New Third Board to the main board have not been released either. Unlike initial public offerings, which allow companies to raise funds through selling shares to investors, financing for New Third Board companies comes through private placements.
"Listing on the New Third Board is a way to display your company, to let people know your shares can be traded," Zhao said.
According to a Huatai Securities research report, 205 companies were listed on the New Third Board as of February 1, with 5.71 billion issued shares.
The OTC market pilot started in 2006 in Beijing's Zhongguancun, a hi-tech industrial zone home to many start-ups. The State Council last year approved expansion of the pilot zones to include the Zhangjiang High-tech Industrial Development Zone in Shanghai, Wuhan's East Lake High-Tech Development Zone and Tianjin's Binhai High-Tech Industrial Development Area.
At present, listing in Shenzhen and Shanghai are two of the major fundraising channels on the mainland.
Data from the China Securities Regulatory Commission shows that as of January 24, 175 firms were waiting for approval to go public on the Shanghai Stock Exchange, 338 were seeking to list on the Nasdaq-style Growth Enterprise Board in Shenzhen, while 363 were waiting for approval to join the main board and Small and Medium-sized Enterprise Board in Shenzhen.
Phillip Securities analyst Chen Xingyu said these companies were unlikely to turn to the New Third Board despite the slow approval process for initial share sales in Shanghai and Shenzhen.
"Companies on the New Third Board are mainly from the medical, software and technology sectors. These are not the mainstream sectors that investors are interested in," Chen said.
The lack of investors' attention and low transaction volume would undermine the fundraising function of the New Third Board, he said.
The New Third Board's scale was still too small, he said. "Now we have about 200 companies, but we are expecting the number to double or even triple in the future, so that the board can contribute in building a multi-tiered capital market," he said. "The impact on the capital market is minimal at this stage."
Zhao also said the new platform was not mature enough. "The transactions were not active at all," he said, but a market-maker system would help boost liquidity.
The securities regulator released draft rules on the OTC market last month, allowing companies to set the terms of equity transfers under a market-making system.
A market maker, which is usually a bank or a brokerage, quotes a bid and an offer price to the market and will buy or sell financial instruments at those prices.
Zhao said the market-maker system would give institutional investors an exit channel to sell the shares. It would help attract investors and boost liquidity on the New Third Board, he said.
The New Third Board could play the role of a stock exchange when the rules became mature, Zhao said in a research note.
The Huatai report said the transaction value of the New Third Board amounted to 597 million yuan last year. It was 560 million yuan (HK$695.4 million) in 2011.
The brokerage expects 5,000 companies to be listed on the New Third Board by 2017.