CSRC may cut profit periods to help more companies sell stocks

China’s securities regulator is considering lowering the profitability threshold for companies to qualify for a listing on the main board of Shanghai and Shenzhen exchanges, in a move that would make it easier for new businesses to raise capital, according to two sources close to the watchdog.

The China Securities Regulatory Commission (CSRC) is considering a plan to revise its listing requirements to enable companies with at least two consecutive years’ profit track record to sell shares on the main board, shorter than the current three years, the sources told the South China Morning Post.

“Changing the requirements will unlock opportunities for both start-ups and investors and is something that should have been done years ago,” said Shaun Rein, managing director of the China Market Research Group in Shanghai.

“Many Chinese firms that would prefer to go public in China ended up listed in the US instead because of onerous profit requirements. In fact, many great companies like Amazon never would have been allowed to go public in China if they had been Chinese start-ups.”

The regulator may keep the pace of approving initial public offerings (IPOs) at about 10 per week, the sources said.

The pace of IPO approvals has accelerated in China since late 2016, in a move by financial regulators to broaden the avenues of capital raising for Chinese companies, and to reduce their dependence on bank borrowings.

As many as 134 companies raised a combined 70 billion yuan (US$10 billion) in the first quarter, the highest quarterly figure since 2014, according to data by KPMG.

The Chinese regulator will also discourage share placements or restructuring by listed companies wishing to expand into businesses related to movies, entertainment and culture, sectors in which intensive speculation on the secondary market has led to exceptional overvaluations in the past few years.

The private placement market jumped fivefold from 2013 to 1.18 trillion yuan in 2016, dwarfing the market for IPO, which raised just 147.6 billion yuan last year. Scandals involving insider trading and misuse of proceeds have haunted the market.

The CSRC has been tightening its approval process for private placements, challenging the deal prices and the purposes of the cash being raised, particularly for those deals related to projects on entertainment sector, in which valuation methods are often vague.

On the other hand, a regulatory source also said internet-related companies engaged in consumer services now need to get prior approvals by the Cyberspace Administration of China, in addition to the CSRC’s approval for IPO. The agency was established in 2014 to strengthen the Chinese government’s management of the Internet.

Before the latest move, the CSRC had already given a one-year profitability allowance since 2014 to a specially established Nasdaq-like market called the ChiNext, to allow startup companies and new businesses to raise funds.

Lakala, a third-party electronic payment platform, was the first Chinese company to seek a listing on ChiNext under the one-year profitability allowance. Its February application is still under review by the regulator.

“Regulators are moving more towards a market-oriented system similar to America’s but they still have a lot more to do,” said Rein. “They really need to let the market rather than regulators determine what companies should be allowed to go public and on what time frame.”

Keith Pogson, senior partner of financial services for Asia-Pacific at EY, said a lower profitability threshold would probably have a limited impact in terms of attracting back technology titans, most of which have favoured the US as an IPO destination in recent years.

“The profitability requirement is not really that important as they are already very large and can drive profitability to achieve targets tactically if they need to, by buying more old-world or profit-generating businesses,” he said.

“The [China] market is fundamentally appealing because of high valuations, and so is a good choice for Chinese companies. However, the demand for foreign currency capital, international brand exposure and other factors will continue to drive some companies to go to offshore listing venues.”