The Growth Enterprise Market (Gem) needs reform to attract more investors and initial public offerings (IPO) if it wants to stay competitive with the Shenzhen Gem, analysts say. 'We have to act quickly, otherwise our Gem board will lose out to our competitors in other Gem-board equivalents in Shenzhen or Korea. They are very active in attracting companies,' says Jack Chow, audit partner at KPMG China. 'All companies listed on Gem-board equivalents would be future listing candidates for the main board. 'Once these companies are listed on other Gem boards, it will mean that we will lose these candidates forever.' So far this year, the Gem board has attracted only one new listing compared with 23 new listings on the main board of the Hong Kong stock exchange. Market insiders say the Gem board needs to work hard to attract more companies and investors. Chow says one way to improve the Gem board is to upgrade the requirements for Gem IPOs, making gradual changes and even considering shifting the model to one that is similar to the Alternative Investment Market (AIM) model in Britain. 'If we really want to have an active Gem market, I think the UK AIM model would be good,' he says. 'The investors' interest may be aroused by introducing brokers into the market to arrange deals. 'Hong Kong is ready to make a change as retail investors, who are the main concern of regulators, have become more mature.' As a second board in the market for companies intending to list in Hong Kong, the Gem board has not performed satisfactorily since its launch in 1999. Although a number of Gem companies have moved on to the main board, a number of Gem companies have failed, while some have been embroiled in scandals. 'The Gem board's success is directly related to the economy and the potential size of IPO candidates,' says John Tang, China strategist at investment bank UBS. 'For smaller economies, Gem board has a much bigger chance of failure.' One of the reasons for this is the lack of understanding by investors, and a shortage of analysts with a strong background in specific fields, such as technology, since the Gem board aims to attract start-up companies, and smaller-sized IT and technology firms. 'The problem in Hong Kong is there are not many research analysts with strong technology backgrounds,' Chow says. 'Also, those research analysts may not be interested in small and medium-sized technology companies.' This in turn leads to lower trading volume on the Gem board compared with its bigger counterpart. 'Investors are not aware of these companies since research analysts are not interested in them,' Chow says. 'Another reason is that these smaller companies don't want to pay public relations companies to help promote their company. 'If we turn away from technology companies and look at start-up companies in the traditional sense, they are normally associated with higher risk. 'But our market regulators normally do not like high-risk companies being listed in Hong Kong, as a high proportion of retail investors are involved or participate in the market.' Furthermore, the Gem board's entry barriers attract companies that are not yet qualified for the listing on the main board in the Hong Kong stock exchange. However, companies listed on the Gem board continue to be small, and the good performing ones move on to the main board after some time. Moreover, fees incurred during an IPO is another factor that discourages some small to medium-sized companies from listing on the Gem board. 'IPO fees as a percentage of Gem profit is quite significant,' Tang says. 'So, naturally, those who are eager for a Gem IPO may plan returns from other ways like inflating their profits.' Tough regulations imposed on the Gem board and the lack of promotion also hinder the interest of retail investors. 'Institutional investors shy away from the Gem board,' Tang says. 'A majority of large funds forbid Gem board investments. 'This is a vicious cycle. The lack of institutional investors leads to a lower valuation and trade volume, which in turn causes less incentive for potential candidates to consider Gem IPO, resulting in a further deterioration of Gem quality.' Will the Gem board survive in the next 10 years? It's a question no analyst wants to answer.