Banking & Finance

Thanks a billion

ChiNext exchange turns three. But how have investors done?

Not so bullish: investors in ChiNext-listed firms have seen falling returns

Established in 1971, the now middle-aged Nasdaq was not a star performer in its infancy. The market benchmark, the Nasdaq Composite, started trading at a base level of a 100 points. Three years later, it had lost nearly half of its value – down to 55 points.

Nowadays, of course, the Nasdaq is one of the world’s largest stock exchanges and is trading at around 3,000 points. This should be heartening news for the market touted as China’s answer to Nasdaq – ChiNext, the growth enterprise board launched in Shenzhen, which celebrated its third birthday on October 30.

But for investors in ChiNext, there is precious little to celebrate. The ChiNext Price Index is 44% lower than its peak in December 2010. As of the middle of October, 221 of the 355 companies listed on the board were trading below their IPO price, reports the Economic Observer.

The newspaper points out that ChiNext has been criticised for high offer prices and excessive amounts of capital raised in listings. At the same time, stock prices on the board are low, and profitability is declining. Of the 128 companies that listed on ChiNext in 2010, 33 experienced shrinking profits in 2011, reports Global Times. And as of mid-October this year, only 12.75% of firms were predicting more than a 50% increase in profit during the first three quarters; a similar proportion to the companies expecting to report a loss, at 13.88%.

Jiangsu Nata Opto-Electronic Material, a manufacturer of metal organic compounds, in many ways exemplifies the problems facing investors on ChiNext. The company listed on the board in late August, after two years of spectacular growth: in 2010, net profit grew by 730.89%, and then by 215.57% in 2011.

The growth story made the company attractive enough to investors for it to go public. But when the third quarter results came out this year, net profit was down 74.81%. Nata’s shares are now 30% lower than their IPO price.

The first stock to list on the exchange was Qingdao TGOOD Electric, a company connected to China’s high-speed rail industry. Economic Observer calculates that its share price is down by more than half since its IPO. “This is just a glimpse into the performance of the share price of all ChiNext stocks in the past three years,” the newspaper comments.

Of course, there are winners on ChiNext too. According to Investor Journal the core shareholders of Shenzhen Inovance Technology have done well. The industrial automation firm seen 19 shareholders amass wealth greater than Rmb100 million ($16 million), thanks to its listing.

They’re not alone. Shenzhen Daily reports that 736 people have made at least Rmb100 million from their companies listing on the exchange.

Ten individuals have seen their average net worth rise to Rmb4.5 billion as a result of ChiNext.

In an article titled “Looters of the nation”, the newspaper compared this success to the plight of investors, who it believes to have made a combined loss of Rmb18.3 billion.

In fact, major shareholders cashing out of ChiNext companies has been an ongoing issue. Although some company founders do hold on to their stock, many have been selling out. So it was with some surprise that investors greeted news in September from early-stage shareholders in 32 firms on the board that they would be extending a lock-up period that was due to expire in late October, reports Reuters.

By deciding to hold on to their stock for a longer period, the group stops as much as Rmb38.44 billion worth of shares flooding the marketplace. But whether their decision was freely taken is another matter. Market sentiment has been poor, making the selling of shares unattractive. But Reuters adds that the decision was taken “in accordance with guidance from regulators to help stabilise the market”.

Private equity firms have been another major beneficiary, as the ChiNext is the perfect venue for pre-IPO investors to exit their investments. In fact, private equity funds have been able to make average returns of 6.1 times their original investment from flotations in ChiNext’s third year of operations, reports the China Daily, although this is less than the 9.1 multiple they would have made on average in the first year.

A six-fold return might seem pretty good. But it doesn’t seem to be enough for some market players.

“We are glad to see the role that the ChiNext played in the past three years but the golden period has not come for us yet,” Wu Gang, chairman of Kunwu Jiuding Capital, told China Daily. “The consecutive decline in investment returns was mainly the result of the weak stock market at the moment and we are patiently awaiting its recovery.”

As private equity firms exit their investments through ChiNext, they are also looking abroad for new opportunities. In particular, they are showing interest in Chinese companies listed in the United States, whose valuations have dropped to such low levels that going private is looking like an attractive opportunity.

In just one week in October, four Chinese companies announced plans to delist from the US markets, reports Information Times. In many cases, they have hopes of relisting in China, where valuations are higher.

Private equity firms active in China are keen to help out. “I know that China does have a number of intermediaries, watching these Chinese stocks listed in the United States to see whether there is an opportunity for them to recommend the stocks to the domestic [private equity funds]. If a good project is recommended, we will be happy to have a look,” an unnamed PE executive told 21CN Business Herald.

One problem that the delisters might want to note? There is a queue of 780 companies looking to list, so going public in China won’t necessarily be the quickest of options.


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