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On October 23, 2009, China launched its own "NASDAQ" -- ChiNext, a new capital platform for enterprises engaged in independent innovation and other growing venture enterprises. On October 30, the first 28 enterprises will be listed on ChiNext, a board of Shenzhen Stock Exchange.

A total of 188 enterprises had applied for listing on ChiNext by October 20, with the total account number exceeding 9 million. Institutional investors also actively applied to purchase stocks of the first 28 enterprises to be listed. For example, the National Council for Social Security Fund would purchase stocks worth $3.0 billion in total.

ChiNext enjoys several favorable factors, which will help with its future success, including: the accelerating urbanization process, the adjustment of economic growth mode, the upgrade of industrial structure, etc.

Risks from Overhigh PE Ratio and Excessively Raised Fund
However, ChiNext faces a series of challenges, such as overhigh PE (price / earning) ratio, excessively raised fund, and speculation on the newly issued stocks on the day of IPO.

The 28 to-be-listed enterprises planned to raise about $1.0 billion through IPO, however, the actual number reached $2.3 billion based on the issue prices of stocks. Average PE ratio of the 28 enterprises hit 55.7, with 7 enterprises exceeding 60. By contrast, the net profit of those enterprises only totaled $160 million in the first half of 2009.

The overhigh PE ratios could overdraft growth potentials of the listed companies, and therefore the stock prices are not likely to remain high for long. Meanwhile, due to limited operational capacity, market expansion potential and management experience of the enterprises, the excessively raised fund can be very possibly used inappropriately, which in turn will hinder healthy growth of the enterprises.

Successful Experiences of Similar Foreign Markets
By 2008, there were over 40 stock exchanges for growth enterprises, among which NASDAQ of the US, AIM of the UK and KOSDAQ of South Korea were successfully operated. Their success all benefited from strict supervising system, cruel elimination mechanism for enterprises with poor performance, as well as large pools of enterprises to be listed.

Preventative Measures for Risks
The Chinese government has taken a series of measures to prevent and tackle problems facing ChiNext.
For example, China Securities Regulatory Commission decided to establish a special department to supervise listed companied on ChiNext and develop corresponding supervising system.

Shenzhen Stock Exchange regulated that, excessively raised fund shall be deposited in special bank accounts; the fund shall be invested in each enterprise' main business rather than high-risk products such as stocks; the listed companies shall make plans for using the excessively raised fund within 6 months after IPO, and disclose the plans in time.

Shenzhen Stock Exchange also made arrangements to limit speculation on newly issued stocks on the day of IPO. When price of a stock is 20% higher than its opening price, transactions of the stock will be stopped for 30 minutes. When 50% higher, transactions will be stopped for another 30 minutes.

As for the listed companies on ChiNext, they need to do well in the following three aspects in order to realize sustainable growth: to seek the business model hard to be copied by competitors; to effectively use excessively raised fund in mergers and acquisitions; and to develop state-of-the-art investment portfolios.

By courtesy of ©ACMR-IBISWorld Reports, 2009

ACMR ALL CHINA MARKETING RESEARCH CO., LTD.