Expiry of shares' lock-up period a test for ChiNext
By Wang Yanlin |
November 3, 2010, Wednesday
|
Print Edition
Print Edition
CHINEXT, China's version of Nasdaq, is put to the test this month when a quarter of the outstanding shares of listed firms on the market become tradable.
It is very likely that shareholders, which include venture capital investors, private-equity firms and senior company executives, of the listed start-up companies will sell their holdings after lock-up restrictions expire, analysts said.
"Most shares in ChiNext companies are held by venture capital firms and individual shareholders who got in at relatively low costs, and incentives to sell are high," said Qian Weihai, an analyst at Shanghai Securities Co.
"It's less about how much the company is actually worth to them, but more about cashing in when they can as the profits have become phenomenal."
According to Bloomberg News, about 35.4 billion yuan (US$5.2 billion) of ChiNext shares were allowed to be traded on Monday, equal to almost 25 percent of the total outstanding shares on the board.
Some 59 percent of the companies listed on ChiNext are backed by venture capital or private-equity firms, compared with 35 percent of stocks traded on a six-year-old board for small- and medium-sized businesses in Shenzhen.
The release "creates a huge burden on the performance of ChiNext, which already trails other major boards," said Liu Xiangning, an analyst at Huatai United Securities Co.
"It may also rekindle investors' doubts over the real value of ChiNext, which is designed to bolster China's start-up companies in the long run, not to produce quick billionaires."
Making its debut on October 30 last year, ChiNext has high aims. It was formed to help China cut its reliance on exports - a major revamp to improve the national economic structure by nurturing local companies in "emerging and strategic" industries.
To achieve the goal, ChiNext offers less stringent listing requirements on revenue and profit, enabling smaller entrepreneurs with big ideas but little money to realize their dreams. For example, while exchanges in Shanghai and Shenzhen demand aspiring firms aiming to list to achieve three straight years of annual profit, ChiNext requests only two years.
Smaller firms make up 99 percent of all companies and 75 percent of employment in China.
But banks have been reluctant to lend to them because they lack solid track records and often don't have the high connections that large companies boast.
With ChiNext, smaller firms in China have found a new platform for funds. Indeed, it has become a main market for start-ups.
More than 130 companies have been listed on ChiNext over its one-year existence, up from 28 at the start. Of the total, 120 are in engaged in high-tech, including telecommunications, biomedicine, new energy, new materials, environment protection and new media.
However, since its establishment ChiNext has been haunted by two thorny issues.
One is extremely high valuation which heralds big risks for investors. The average first-time sale on ChiNext valued stocks at about 66 times earnings, compared with Shanghai Composite Index's 20 times earnings on average.
The other problem is whether these start-up companies can persist in realizing their goals with such lucrative high valuations.
Also, shares held by venture capital and private-equity investors make up quite a huge proportion of ChiNext-listed firms.
Research company ChinaVenture said venture capital and private-equity investors in ChiNext companies have made an average return of 13 times based on book value, or the carrying value of their investments.
If they sell their holdings - an expected normal move for investors - ChiNext will suffer a blow.
Under ChiNext's rules, controlling shareholders can't transfer their stocks for 36 months and investors who bought stock in pre-initial public offering can't sell their holdings for a year. Executives who resigned are not allowed to sell their stakes within six months of leaving.
So here comes the test for shareholders when their stocks become tradable. To sell or not to sell? The next few months will be critical because their decision will signal if they favor long-term development for the company or they prefer short-term cash reward.
Some economists were rather pessimistic.
"ChiNext is the best tool for the powerful and the rich to cash in," said Xu Xiaonian, a professor at China Europe International Business School. "It's most obvious if you look at ChiNext executives resigning soon after the company they helped found got listed."
Executives, including general managers, board members and chief financial officers, at 37 ChiNext companies have quit since their firms went public. The shares of the departed managers at 21 of those companies were worth a combined 5 billion yuan, according to Bloomberg.
General investors are worried such scenarios may just turn out true, which explained for the disappointing performance of ChiNext.
An index of 100 companies that trade on ChiNext has only gained about 7 percent since the gauge was introduced in June, far behind the 17 percent advance for the Shanghai Composite Index during the same period.
"The perception of high-growth ChiNext companies hasn't been matched by reality, so it might have dampened investor enthusiasm a bit," said Ophelia Tang, an analyst at SooChow Securities Co.
At a forum to commemorate ChiNext's one-year anniversary last week in Shenzhen, Shang Fulin, chairman of the China Securities Regulatory Commission, said the board must still nurture smaller companies with huge potential because they are important components to help the nation shift its economic structure in the 12th Five-Year Plan period, which starts in 2011.
It is very likely that shareholders, which include venture capital investors, private-equity firms and senior company executives, of the listed start-up companies will sell their holdings after lock-up restrictions expire, analysts said.
"Most shares in ChiNext companies are held by venture capital firms and individual shareholders who got in at relatively low costs, and incentives to sell are high," said Qian Weihai, an analyst at Shanghai Securities Co.
"It's less about how much the company is actually worth to them, but more about cashing in when they can as the profits have become phenomenal."
According to Bloomberg News, about 35.4 billion yuan (US$5.2 billion) of ChiNext shares were allowed to be traded on Monday, equal to almost 25 percent of the total outstanding shares on the board.
Some 59 percent of the companies listed on ChiNext are backed by venture capital or private-equity firms, compared with 35 percent of stocks traded on a six-year-old board for small- and medium-sized businesses in Shenzhen.
The release "creates a huge burden on the performance of ChiNext, which already trails other major boards," said Liu Xiangning, an analyst at Huatai United Securities Co.
"It may also rekindle investors' doubts over the real value of ChiNext, which is designed to bolster China's start-up companies in the long run, not to produce quick billionaires."
Making its debut on October 30 last year, ChiNext has high aims. It was formed to help China cut its reliance on exports - a major revamp to improve the national economic structure by nurturing local companies in "emerging and strategic" industries.
To achieve the goal, ChiNext offers less stringent listing requirements on revenue and profit, enabling smaller entrepreneurs with big ideas but little money to realize their dreams. For example, while exchanges in Shanghai and Shenzhen demand aspiring firms aiming to list to achieve three straight years of annual profit, ChiNext requests only two years.
Smaller firms make up 99 percent of all companies and 75 percent of employment in China.
But banks have been reluctant to lend to them because they lack solid track records and often don't have the high connections that large companies boast.
With ChiNext, smaller firms in China have found a new platform for funds. Indeed, it has become a main market for start-ups.
More than 130 companies have been listed on ChiNext over its one-year existence, up from 28 at the start. Of the total, 120 are in engaged in high-tech, including telecommunications, biomedicine, new energy, new materials, environment protection and new media.
However, since its establishment ChiNext has been haunted by two thorny issues.
One is extremely high valuation which heralds big risks for investors. The average first-time sale on ChiNext valued stocks at about 66 times earnings, compared with Shanghai Composite Index's 20 times earnings on average.
The other problem is whether these start-up companies can persist in realizing their goals with such lucrative high valuations.
Also, shares held by venture capital and private-equity investors make up quite a huge proportion of ChiNext-listed firms.
Research company ChinaVenture said venture capital and private-equity investors in ChiNext companies have made an average return of 13 times based on book value, or the carrying value of their investments.
If they sell their holdings - an expected normal move for investors - ChiNext will suffer a blow.
Under ChiNext's rules, controlling shareholders can't transfer their stocks for 36 months and investors who bought stock in pre-initial public offering can't sell their holdings for a year. Executives who resigned are not allowed to sell their stakes within six months of leaving.
So here comes the test for shareholders when their stocks become tradable. To sell or not to sell? The next few months will be critical because their decision will signal if they favor long-term development for the company or they prefer short-term cash reward.
Some economists were rather pessimistic.
"ChiNext is the best tool for the powerful and the rich to cash in," said Xu Xiaonian, a professor at China Europe International Business School. "It's most obvious if you look at ChiNext executives resigning soon after the company they helped found got listed."
Executives, including general managers, board members and chief financial officers, at 37 ChiNext companies have quit since their firms went public. The shares of the departed managers at 21 of those companies were worth a combined 5 billion yuan, according to Bloomberg.
General investors are worried such scenarios may just turn out true, which explained for the disappointing performance of ChiNext.
An index of 100 companies that trade on ChiNext has only gained about 7 percent since the gauge was introduced in June, far behind the 17 percent advance for the Shanghai Composite Index during the same period.
"The perception of high-growth ChiNext companies hasn't been matched by reality, so it might have dampened investor enthusiasm a bit," said Ophelia Tang, an analyst at SooChow Securities Co.
At a forum to commemorate ChiNext's one-year anniversary last week in Shenzhen, Shang Fulin, chairman of the China Securities Regulatory Commission, said the board must still nurture smaller companies with huge potential because they are important components to help the nation shift its economic structure in the 12th Five-Year Plan period, which starts in 2011.
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
