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May 22, 2015

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Home » Business » Biz Special

Sharp share rises put spotlight on ChiNext

By Leng Cheng | May 22, 2015, Friday | Print Edition

INVESTORS were asking questions on April 6 why shares in Beijing Baofeng Technology Co, an unprofitable Internet company, had surged by the 10 percent daily trading limit for 10 straight days. By the 39th day of trading to the daily limit, they got tired of asking.

Shares in Baofeng, a streaming and online video company, have risen 4,100 percent since they first listed in March after a 214 million yuan (US$34.5 million) initial public offering. The share price touched 300.81 yuan on Wednesday, lifting the company’s market value to 36.1 billion yuan.

But the price dropped 7 percent yesterday in what could be a sign of a topping-out.

The company has issued 13 risk alerts about “abnormal trading” in its shares since its IPO on the Shenzhen Stock Exchange’s startup board ChiNext. Investors apparently took no notice, until yesterday.

The market value of ChiNext, once a laggard board steeped in IPO scandals and wild trading gyrations, has more than doubled this year. New listings have posted average gains of about 500 percent, after the authorities rolled out initiatives to boost the technology sector and encourage stock investment.

Some are pointing the finger of blame at fund management companies, which are big holders of many ChiNext shares. The risk is that the “smart money,” after ramping up prices, will suddenly head for the exit, taking hefty profits and leaving individual investors who piled on for the ride with heavy losses. ChiNext certainly has a history of such behavior.

Though apparently ignored, Baofeng’s risk alerts have some basis. In the first quarter, the company’s losses deteriorated by 147 percent from a year earlier to 3.2 million yuan. Last year, Baofeng launched a new product called Mojin, a virtual-reality goggle for viewing 3D screens. By the end of March, revenue from the product totaled only 17.8 million yuan.

“In terms of performance and potential growth, Baofeng would rank below the 200 top Chinese Internet companies,” Wu Xiaobo, a well-known freelance analyst said in one of his market commentaries. “That’s the case even though its market value has surpassed China’s biggest video website Youku.com. No theories or economic models can explain investor passion for the stock."

Baofeng is not the only equity to chalk up meteoric gains on ChiNext. Starway Bio-Technology Co shares have risen more than 50 percent this year despite the agricultural producer having racked up losses in the last two years.

The average price-to-earnings ratio for ChiNext, which caters to startup companies, was 125 times yesterday, nearing a 2009 high of 128. That compares with a ratio of 35.7 on the mainstream Shenzhen board.

Funds dominate the lists of the top-10 shareholders of some companies on ChiNext. That has fueled talk of market manipulation.

Guangdong Qtone Education Co has nearly 43 percent of its circulating shares owned by fund management companies. Its share price rocketed to 380 yuan last Friday.

Li Shaojun, an analyst at Minsheng Securities, said buying by funds is behind the surging share prices. Individual investors, he said, are watching prices go up and up, and are jumping on the bandwagon so they don’t miss the bull market.

Market watchers said such supercharged markets invite attention and possible intervention from regulators, who are watching the effects of speculative tools such as margin financing and short selling.

Securities Times said last week that the China Securities Regulatory Commission has asked three fund management companies to cool their trading on ChiNext, but CSRC spokesman Deng Ke denied the report.

Li said: “The regulator and fund management companies are playing a see-saw game. The high price won’t last forever.”

Most fund managers seem to think ChiNext has some way to go. They are the big boys when it comes to moving share prices. They are also supposed to be the most prudent players, but are they?

“A single fund shouldn’t be allowed to hold more than 10 percent of its asset equity in small and medium-size enterprises,” Wang Hongyuan, president of First Qianhai Fund Management Co, was quoted as saying in Shanghai Securities News yesterday.

The company said the ChiNext bubble will burst at some point.

Biz Special


 

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