Across The Border

China’s new third board booming, but IPO queue for the main market still backed up

Small companies thirsty for cash are flocking to list on the lightly controlled SME market, but turnover still remains worryingly low

PUBLISHED : Wednesday, 17 August, 2016, 5:19pm
UPDATED : Wednesday, 17 August, 2016, 10:29pm

China’s over-the-counter stock market is booming, with more companies than ever seeking positions in the lightly controlled platform.

But its flagging turnover and weak liquidity are still preventing the market from effectively alleviating, what remains the biggest problem for the country’s exchanges: a huge backlog of initial public offering (IPO) applications.

The number of companies listed on the Beijing-based National Equities Exchange and Quotations (NEEQ), effectively China’s capital market for start-ups, has surged by 156.68 per cent to 8,622 from the end of last August.

That compares with 2,914 companies listed on the Shanghai and Shenzhen stock exchange houses.

This year, companies have raised 78.2 billion yuan (US$11.8 billion) from share placements on the NEEQ, founded in 2012 and also known locally as the mew third board.

That compares with 120 companies listing on the A-share market since last November, which raised 66.97 billion yuan, when the regulator resumed approval of IPO applications after the stock rout in summer, according to data provider Wind.

“Smaller companies thirsty for cash are turning to the mainland NEEQ market as it gives a higher valuation with a lower threshold, and the costs are also cheaper,” said Wei Ran, an analyst with mainland based Sinolink Securities.

More importantly, however, it’s the lack of red tape which they like, with a listing usually taking less than six months from filing an application.

Smaller companies thirsty for cash are turning to the mainland NEEQ market as it gives a higher valuation with a lower threshold, and the costs are also cheaper
Wei Ran, analyst at mainland based Sinolink Securities

And candidate companies don’t need to worry about long queues, as seen in the A-share market, or that other better-connected companies may jump ahead of them in the queue, he said.

Hong Hao, chief strategist at Bocom International Holdings Co in Hong Kong, says the third board is solving another big problem for the Chinese economy, however. It is helping small and medium enterprises raise funds.

Nearly 700 companies are waiting for IPO approvals on the main exchanges, according to the latest estimates.

It can take years for the China Securities Regulatory Commission to review an IPO application.

The CSRC had been pushing for one significant IPO reform aimed at simplifying the process, bringing in a system of voluntary information disclosure.

But that idea was abandoned last summer, when the stock market rout wiped trillions of US dollars off the market’s value in just three weeks. The government became more concerned suddenly, on emergency rescue measures, than reforms.

The CSRC has since switched back to the approval-based IPO system, and continued to tightly control the pace of new floatings to avoid new IPOs diverting liquidity from the A-share market, in an effort to avoid any further fall in values.

Under the current IPO rules, companies have to prove their profit sustainability and growth potential before getting the green light for a listing.

On the Shenzhen-based ChiNext board – a Chinese version of the US Nasdaq board which is designed to attract start-ups – applicants need to have an accumulated net profit of no less than 10 million yuan ($1.61 million) for two years; or have a net profit of no less than 5 million yuan and revenue of no less than 50 million yuan in the immediately preceding year.

The NEEQ market requires just a two-year track record in business.

The third board is open to investors with at least 5 million yuan.

At the end of last year, nearly 200,000 individual investors held accounts, a fourfold increase in one year, Bloomberg reported.

The venue’s total market value of 3.17 trillion yuan at the end of July was more than double the figure from a year ago.

The regulators have reiterated they are looking at ways to allow some NEEQ-listed companies to transfer to the ChiNext board in Shenzhen – quality companies that have reached a certain level of innovation which could eventually be traded on the public market.

But even that has failed to solve what remains the weak turnover.

Despite rapid growth in the number of listed entities, the accumulative turnover of the NEEQ market shrank by 7.33 per cent quarter-on-quarter in the second quarter.

Total turnover on August 11 was about 525 million yuan, that’s less than total trading of stocks in Industrial and Commercial Bank of China Ltd, one of the SCI’s biggest shares, according to data from Bloomberg.

Xiao Bing, president of Fortune Capital, a Shenzhen based venture capital, is now concerned companies listed on the NEEQ “will die out, on a large scale”.

“The NEEQ market has not helped much on liquidity,” he said.

Some private equity and venture capital companies have been mightily relieved after some of the companies they invested in, listed on the NEEQ market.

But based on the current situation, many institutions are still no nearer successfully exiting, he added.

By August 11, 686 companies were still in a queue waiting for verification from the CSRC’s specialised IPO review committee.

It could be a long wait.