Regulators urged to have better understanding of tech firms to keep them listing in mainland
Hundreds of prospective start-ups have balked at the strict IPO profit requirements in China and sought listings overseas instead
Mainland regulators still need to better understand the nature, operating structures and earnings potential of technology start-ups, as firms accelerate their fundraising activities via new share issues, according to professional service company PwC.
Technology firms are subject to strict profit requirements if they chose to launch initial public offerings (IPOSs) on the A-share market. But Beijing is equally determined to liberalise the stock market to ease their expansions.
“The regulators are imposing higher requirements on supervising companies and assessing their qualities,” said Gao Jianbin, a PwC partner.
“Internet companies now have a colossal number of clients and the regulators have to understand how their business models work, and how they make or plan to make profits. It’s often a tough question for the regulators to answer.”
The China Securities Regulatory Commission (CSRC) has been fast-tracking IPO approvals this year, and is likely to give more than 300 listing applicants, most of which are small- and medium-sized companies, the green light to raise funds on the stock market.
An accelerated IPO process and frenzied buying surrounding newly listed stocks have triggered fresh concerns about the quality of listed companies on the mainland equity market, which is seen as arcane still by many commentators.
Mainland IPO applicants can only secure approval to float shares if they report a profit for at least a year.
As a result, hundreds of prospective start-ups have balked at the requirement and sought listings overseas instead, where loss-making firms are allowed to launch IPOs.
Analysts say the stance taken by mainland regulators on technology firms’ IPO has also increased the risk of fraudulent earnings data and the use of other accounting tricks to meet the listing requirements.
“There are signs already that some firms are considering taking advantage of regulatory loopholes to dress up their earnings to win IPO approval,” said He Yong, a vice president with investment consultancy, New Third Board Club.
“Regulators need an eagle eye to identify the most-promising technology firms and grant them fundraising opportunities.”
Thriving e-commerce, online-to-offline and financial technology (or fintech) businesses have redrawn the mainland’s economic landscape over the past five years, as the incumbent leadership embarked on its “Internet Plus” strategy to transform the country’s economic growth pattern into one driven by consumer spending and enterprising spirit.
Beijing is mulling over plans to fast track internet IPOs such as Ant Financial, an affiliate of Alibaba Group, Zhong An Online Property and Casualty Insurance, the country’s first internet-only insurer, Reuters has reported.
Alibaba, owner of the South China Morning Post, Tencent and Baidu, are the three largest homegrown internet behemoths, but are all listed outside the mainland.
Beijing has been striving to attract more promising tech firms to list at home where valuations of internet-based businesses are often higher than those in New York and Hong Kong.
In the second half of 2017, 58 mainland technology, media and telecommunication companies launched IPOs at home and abroad, raising a combined 33 billion yuan (US$4.77 billion) – a sharp rise of 547 per cent from the first half of 2016, PwC said.