Across The Border

Mainland media praise for ChiNext start-up board may be misplaced

ChiNext-listed firms reported total earnings of 60 billion yuan in 2015, just 2.4 per cent of the combined profits of all A-share companies

PUBLISHED : Friday, 28 October, 2016, 3:29pm
UPDATED : Friday, 28 October, 2016, 10:23pm

China’s state-owned media have begun to publish upbeat commentaries about the start-up board at the Shenzhen Stock Exchange ahead of its seventh anniversary.

China Securities Journal, to cite just one recent example, said that the firms listed on the ChiNext exchange “maintained high growth momentum despite complex economic conditions,” while the start-up board helped cultivate a spirit of enterprise and innovation that paves the way for further economic reforms.

But that kind of feel-good rhetoric is misplaced. The ChiNext market has fallen short of its early promise and contributed little to the world’s second-largest economy.

After almost a decade of preparation, Beijing launched the ChiNext on October 30, 2009, when 28 start-up firms made their trading debuts.

At that time, the mainland’s media touted it as a cradle for innovation that would lead to the creation of the country’s own equivalents of Microsoft and Cisco, where thousands of prospective technology start-ups could access much-needed funds to enable expansion.

The state-owned media are now highlighting the capitalisation of the ChiNext market, which has swelled to 5.49 trillion yuan, as proof that technological innovation has become a driving force for the domestic economy.

It’s still too early for the regulator to relish the success of the market
Bob Zhou, chief executive, Yinshu Capital

The total market value of the start-up board is now more than 34 times what it was at the end of 2009. About 540 companies have landed on the ChiNext market through initial public offerings (IPOs).

In the past seven years, a combined 620 billion yuan of funds were raised on the exchange, whose listing threshold is relatively lower than the main board.

“It’s still too early for the regulator to relish the success of the market,” said Bob Zhou, chief executive of Shanghai-based private equity group Yinshu Capital. “At least, not a single tech giant has stood out.”

Analysts said that the impact of the ChiNext market on the national economy had been minimal, based on the output generated by its component companies.

The ChiNext-listed firms reported total earnings of 60 billion yuan in 2015, just 2.4 per cent of the total profits of all A-share companies.

The mainland leadership had pinned high hopes on the ChiNext to help Chinese-made products move up the value chain, and in the process create a batch of technology behemoths which could one day rival the likes of Apple.

Regulators held a firm belief that the market would give promising tech firms a fast ticket to huge success.

They believed that those start-ups with vast growth potential would catalyse tech transfers to churn out products that struck a sweet spot with consumers after receiving funds from the stock market.

Unfortunately, the annualised profit growth of ChiNext-listed firms between 2009 and 2015 stood at a disappointing 12.9 per cent.

The performance of the start-ups was eclipsed by those traded on the SME board at the Shenzhen exchange, which posted annualised growth of 15 per cent in the 11 years to 2015, 2.1 percentage points than their counterparts on the start-up board.

They [investors] are not interested in fundamentals, they just believe the growth potential of the small firms can support the high PE ratio
Shen Ye, hedge fund manager

The SME board, established in 2004, was designed for companies offering volume of less than 100 million shares.

China’s retail investors, who fell in love with the ChiNext market, should take note. Over the past seven years, perceived all of the start-ups as future profit stars, they have driven their prices sky-high.

The average price-to-earnings ratio for the ChiNext market topped 79 on Thursday, compared to 15.8 on the Shanghai Stock Exchange where most blue chips are traded.

Indeed, among the 100-odd companies listed on the ChiNext market between October 30, 2009 and late August 2010, only a tenth of the total proceeds they netted from new share sales were used to fund their own growth because the lofty IPO prices enabled them to raise much more than they needed.

“Mainland individual investors have yet to feel queasy about the high valuation of the ChiNext-listed stocks,” said Shen Ye, a hedge fund manager in Shanghai. “They are not interested in fundamentals and they just believe the growth potential of the small firms can support the high PE ratio.”

The ChiNext market is awash with liquidity. In the first nine months of this year, 4 per cent of shares changed hands each day as investors bought heavily and sold quickly to chase short-term gains.

Leshi Internet Information and Technology, the an on-demand video streaming platform, is the best performing company listed on the start-up board, with annualised profit growth of 53.1 per cent. Its shares have jumped to 25 times their value in August 2010.

None of the mainland’s top technology firms including internet giants Baidu, Alibaba - which owns the South China Morning Post - Tencent and smartphone maker Xiaomi, are listed on ChiNext.