ChiNext First Anniversary Brings Stock Overhang as Lockups End

As China’s version of the Nasdaq Stock Market marks its first anniversary tomorrow, many investors have little reason to celebrate.

An index of 100 companies that trade on Shenzhen-based ChiNext, China’s main market for start-ups, has gained 6.7 percent since the gauge was introduced on June 1, trailing the 17 percent advance for the Shanghai Composite Index. ChiNext’s companies are still about three times as expensive as the average Chinese stock relative to earnings, according to data compiled by Bloomberg.

ChiNext’s stocks have underperformed on concern that executives and investors who held shares in the companies before their initial public offerings will flood the market with equity as lockup restrictions expire. About 33 billion yuan ($4.9 billion) of ChiNext shares become tradable on Nov. 1, equal to a quarter of the total outstanding stock on the board, according to Liu Xiangning, an analyst at Huatai Securities Co.

“Most shares in ChiNext companies are held by venture capital firms and individual shareholders who got in at relatively low costs, indicating high incentives to sell,” 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.”

Photographer: Kevin Lee/Bloomberg

ChiNext was created as an alternative exchange for smaller Chinese companies to raise money with fewer listing requirements than the nation’s two main boards in Shanghai and Shenzhen. Close

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Photographer: Kevin Lee/Bloomberg

ChiNext was created as an alternative exchange for smaller Chinese companies to raise money with fewer listing requirements than the nation’s two main boards in Shanghai and Shenzhen.

Funding Avenue

Some 59 percent of companies listed on ChiNext are backed by venture capital or private equity firms, compared with 35 percent of stocks traded on China’s six-year-old board for small and medium-sized businesses in Shenzhen, according to ChinaVenture.

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, the research firm estimates.

ChiNext was created as an alternative exchange for smaller Chinese companies to raise money with fewer listing requirements than the nation’s two main boards in Shanghai and Shenzhen. Companies such as Beijing-based Baidu Inc. have gone public on New York’s Nasdaq Stock Market after they couldn’t meet requirements of the exchange’s in Shanghai and Shenzhen for three years of annual profit before listing. ChiNext requires a two-year profit history.

‘Strategic’ Industries

ChiNext is helping the nation reduce its reliance on exports by nurturing local companies in “emerging and strategic” industries, Shang Fulin, chairman of the China Securities Regulatory Commission, said today at a forum in Shenzhen, according to a transcript of the regulator’s remarks posted to the website of the People’s Daily.

ChiNext IPOs raised $15.1 billion in the board’s first year of operation. That’s equivalent to almost 80 percent of the amount raised in first-time sales by U.S. companies in the same period, data compiled by Bloomberg show. Chinese companies have sold $71 billion of shares in domestic IPOs in the past year.

The board accounted for five of the worst-performing IPO stocks in the past year and three of the biggest gainers, Bloomberg data show.

That hasn’t stopped investors from flocking to ChiNext IPOs, allowing companies to sell shares at higher valuations. The average first-time sale on the board valued stocks at about 66 times earnings, according to Ophelia Tang, an analyst at SooChow Securities Co. The Shanghai Composite trades at 20 times earnings, data compiled by Bloomberg show.

Bosses Depart

“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 and a former researcher at the State Council, China’s cabinet. “It’s most obvious if you look at all the 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, Liu of Huatai Securities wrote in an Oct. 26 report, citing exchange filings.

Departed managers at 21 of those companies own shares in their firms valued at a combined 5 billion yuan, Liu estimated.

Under ChiNext listing rules, controlling shareholders are banned from selling stock within three years of the IPO. Other pre-IPO investors face a 12-month lockup. Executives typically pledge not to sell stock within six months of resigning, according to company filings.

New Billionaires

The creation of ChiNext helped spark a jump in the number of rich Chinese, said Rupert Hoogewerf, founder of the Hurun Report, which compiles an annual list of China’s wealthiest people.

“This year we’ve found about 400 people with a billion yuan, many of them coming through listings,” Hoogewerf said in an interview in Beijing last month. “We’ve seen ChiNext create a whole lot of new wealth that we didn’t even know existed.”

Local investment banks have benefited too. Fees for ChiNext IPOs average 5.14 percent, according to Bloomberg data, more than double those for first-time sales on the main board in Shanghai. ChiNext offerings have generated 5.17 billion yuan in total fees, the data show.

Ping An Securities Co. is the biggest underwriter of ChiNext IPOs, followed by Essence Securities Co. and Guosen Securities Co., data compiled by Bloomberg show. Credit Suisse Founder Securities Co. is the top-ranked foreign-backed underwriter of such deals in 35th place.

Netac Technology Co., a manufacturer of external hard drives, is the worst-performing ChiNext stock with a 23 percent drop from its January IPO. Netac raised 655.2 million yuan in an offering arranged by PingAn Securities.

“The perception of high-growth ChiNext companies hasn’t been matched by reality, so investors’ enthusiasm might have been dampened a bit,” said Tang of Soochow Securities.

--Eva Woo. Editors: Philip Lagerkranser, John Liu

To contact the reporter on this story: Eva Woo in Beijing at ewoo9@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

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