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The Shenzhen-based ChiNext index has advanced 53 per cent this year, almost five times the gain on the benchmark Shanghai Composite Index. Photo: SCMP
BusinessMarkets

ChiNext rally in Shenzhen keeps stock traders on guard for fallout as valuation approaches 2015 peak

  • The ChiNext board of start-ups trades at 77 times earnings, more than four times the multiple for the benchmark Shanghai Composite Index
  • The ChiNext index gained 4.8 per cent last week for the best five-day performance in a month after trading rules were eased
Stocks
Zhang Shidong
Zhang Shidongin Shanghai
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Traders are wary of the lofty valuations of Shenzhen’s US$1.3 trillion technology board after an index tracking the stocks completed one of its best weeks amid high-flying initial public offerings and market deregulation.

The rally in ChiNext, the 11-year-old board that hosts 868 companies, has pushed its average price-to-earnings multiple to 77 times, according to data compiled by Bloomberg. That is four times more pricey than the average of 1,496 stocks represented in the Shanghai Composite Index.

Some money managers are jittery about ChiNext’s 53 per cent advance this year that outpaced the Shanghai benchmark by five times. The risk of credit-tightening or market-cooling measures remains a concern. Bocom International, the investment banking unit of Bank of Communications, described ChiNext as a venue for speculation.

“I am not too upbeat on the broader ChiNext board,” said Wang Zheng, chief investment officer at Jingxi Investment Management in Shanghai. “When the central bank begins to tighten liquidity after the epidemic is over, ChiNext will suffer.”

While small-cap companies are key beneficiaries of record amounts of liquidity unleashed by the People’s Bank of China, the ChiNext index is just one-third shy of its record high, which it reached just before a meltdown that erased US$5 trillion in value from the broader market in 2015.

The index of start-ups advanced 4.8 per cent last week, its best run in a month after the China Securities Regulatory Commission doubled the daily permissible trading band for companies to 20 per cent from August 24.

The easing of the trading barriers has so far boosted market liquidity rather than heightened volatility. Average daily trading volumes over the past week has surpassed their levels a year ago by more than 20 per cent, according to exchange data.

The decision to widen the daily price swings came on top of a move to adopt a registration-based system for IPOs, giving investors more leeway for pricing and valuing new shares.
A big screen displaying stock prices of the first batch of registration-based initial public offerings on ChiNext board at Shenzhen Stock Exchange on August 24. Photo: Xinhua

So far, both measures have captivated investors, who interpreted the policy as a greenlight for further stock gains. After all, Chinese authorities in July championed local bourses amid US-China tensions in tacit approval of the market rally.

All 18 debutants on ChiNext surged on their first day of trading last Monday. Medical equipment maker Contec Medical Systems at one point soared 30 times over its offer price, the kind of wild increase that previously provoked a warning and intervention by regulators.

The easing “is conducive to bolstering trading activities,” said Wan Kelin, an analyst at Huaxi Securities in Chengdu. “It gives the market greater room for full trading and makes new shares converge to their true market values more quickly.”

Wan expects a significantly higher supply of IPOs – such as the impending offerings by Dongfeng Motor, Henlius Biotech and Pinlive Foods – in the second half of the year, as the registration-based system leads to a shorter vetting period.

The impact on the market may be muted, as the increased capital coming in from individual and institutional investors is mitigated by a greater stock supply, the analyst said.

The spectacular run of ChiNext stocks may lose momentum because of a lack of new catalysts, according to Shen Yandong, an analyst at Vanho Securities. The sustainability of abundant liquidity, China’s economic recovery prospects, and the simmering US-China tensions are among key concerns.

Besides, the recent rush into the market by retail investors at local brokerages may be a sign of market exuberance, borrowing money by the most in five years. In the aftermath of the 2015 fiasco, Chinese regulators fined three houses for breaking margin financing and securities lending rules.

While there are still good companies on ChiNext to invest in, “buying needs to be very selective now based on the quality of earnings”, said Wang at Jingxi Investment.

This article appeared in the South China Morning Post print edition as: Shenzhen’s technology board rally puts stock traders on alert for a fall
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