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November 18, 2009

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ChiNext gives top returns, then reality

JOYCE Chen, an individual investor, earned about 8,000 yuan (US$1,171) from her investment in China's Nasdaq-style board when it began trading last month. That's more than double the average monthly salary in Shanghai.

Anticipation of quick gains attracted many small investors to the new ChiNext, a growth enterprise board created to finance innovative start-ups.

Small wonder. Stocks in China almost invariably surge when they start trading and ChiNext didn't disappoint. All 28 of the first batch of companies on the new board doubled their value on average on the first day of trading on October 30.

"I sold out my shares in Qingdao TGOOD Electric Co at 40 yuan apiece in the morning session on concern that prices would retreat in the afternoon," said Chen, who bought 500 shares at a subscription price of 23.80. "But I never expected the price to surge that high."

Buffett reminder

A total of 252,600 individual investors bought ChiNext stocks at the debut, accounting for 97 percent of turnover on the board, according to the Shenzhen Stock Exchange, which hosts the new board.

Chen and others who cashed out on the first day must have remembered what billionaire Warren Buffett once said about investing: "You can only learn who has been swimming naked when the tide goes out."

On the second day of trading on ChiNext, the tide went out. Twenty of the companies on the new board plunged about 10 percent. And by November 13, the capitalization all 28 companies shrank to 127 billion yuan from 140 billion yuan at the debut.

"The soaring debut has reduced the investment value of the board as a secondary market, so we suggested individual investors subscribe for new stocks only for the short term," said Yu Haitao, an analyst at First Capital.

Stocks in the 28 firms was sold initially at an average 111 times 2008 earnings, compared with a price-earnings ratio of 25 on Shanghai's Class A share market.

"A PE ratio of 60 to 80 is reasonable for the new board," said Huang Xiangbin, an analyst at Cinda Securities Co.

The so-called "stag profits" on the first day of trading weren't shared by all. The value of shares held by the 10 richest investors in the ChiNext shrank 2.37 billion yuan within a week after the debut.

Wang Zhongjun, president of Huayi Brothers Media Co, lost the most - 596 million yuan. Huayi is China's biggest private film maker. It was formed by more than 50 star investors, including film director Feng Xiaogang and actor Huang Xiaoming.

Feng's shares totaled 200 million yuan at the debut, but their value shrank to 165 million yuan within a week.

Of the 28 first companies on the bourse, 20 were backed by 33 venture capital and private equity firms, the Zero2IPO Research Center said in a recent report.

The venture capital and private equity firms on average gained 5.76 times their investments in the listed companies after the IPOs, the report said.

"However, the rich return may be just a mirage for these institutional investors and big investors because they can't sell holdings during a lock-up period, and the high-risk board may mitigate gains," the report said.

Under rules promulgated by the Shenzhen bourse, controlling shareholders can't transfer their stocks for 36 months, and investors who bought stock in the pre-IPO period can't sell their holdings for a year.

But despite some drawbacks, ChiNext powers on. The China Securities Regulatory Commission last week approved Jinlong Machinery & Electronics Co Ltd and Beijing Gangyan Gaona Technology Co Ltd to float shares on the board.

ChiNext is intended to help smaller Chinese companies develop in a financial system that has long favored big, state-owned companies. Most companies on the new growth enterprise market are privately owned, while China's main bourses in Shanghai and Shenzhen are dominated by government enterprises.

Delays overcome

Smaller firms account for 99 percent of all companies and 75 percent of employment in China. But banks have been reluctant to provide them with financing because they lack solid track records and often don't have the high-power connections of large companies.

ChiNext offers less stringent listing requirements on revenue and profit, enabling smaller entrepreneurs with big ideas but little money to have the chance to make a go of it. A total of 188 domestic companies have submitted applications for ChiNext listings, with nearly 70 percent of them from the electronics, alternative energy, pharmaceutical and modern services sectors.

The debut of the board was delayed several times because of a variety of concerns, ranging from the after-effects of the global dotcom collapse to last year's market nosedive.

The size of share offerings on ChiNext is small compared with the multibillion-yuan initial public offerings on China's main boards.


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