Translated from Hangzhou Daily and other background medial sources by NextInsight's China correspondent Andrew van Buren
AFTER YEARS in the making, the much-anticipated Growth Enterprise Market (GEM) board is about to open for business in the southern Chinese boomtown of Shenzhen.
Sources at the China Securities Regulatory Commission (CSRC), the country’s bourse watchdog, said that among the 13 companies already approved for listing on the SME-heavy board along with 11 more well along the application process, investor exuberance and high P/E ratios could make billionaires of 50 fortunate shareholders.
At the same time, along with the successful listing of these companies, some of these billionaires could actually hit true paydirt and enter the realm of the coveted “multibillionaire” status.
Sources at the CSRC said that the first aspirant authorized to sell shares on the GEM board -- touted by many as China’s equivalent to the Nasdaq – could produce one of the first billionaires thanks to a Zhejiang province-based firm, headquartered in the tourist and cultural mecca of Hangzhou: Enjoyor Electronics Ltd.
Another possible billionaires-in-the-making machine is software firm Beijing Ultrapower, which has the potential to give some dozen shareholders such bragging rights. At present, each of the 12 are sitting on stocks valued at 100 mln yuan but analysts expect these treasure troves to multiply exponentially given the going IPO prices.
Among these lucky dozen, the one who might be laughing loudest all the way to the bank is Pu Zhongjie, managing director of Beijing-based Lepu Medical Tech, who holds about 60 mln of the firm's shares. Pu's worth is estimated at around 1.75 bln yuan after the firm’s issue price was set at 29 yuan.
Lepu has also been green-lighted to raise money on the GEM board.
Once candidates are listed, high-ranking executives could turn into paper billionaires overnight.
A handful of industry experts have cautioned that high valuations might not be in the best interests of the firms' future and urged cautious investing behavior.
"The GEM now has alarmingly high P/E ratios. I am very worried that it would just be a way of raising money for money's sake," said Cao Fengqi, Peking University’s head of finance and securities research.
IPOs for the GEM board sold at higher valuations than stocks listed on the “xiao-ban”, the current SME board in Shenzhen.
The average PE ratio for the inaugural 10 approved GEM board listcos was about 52.73 times, while just 37.68 times for the firms listed on the SME board in 2009.
The Shenzhen Stock Exchange said it plans to monitor and minimize first-day speculative trading on the GEM by suspending counters that go up or down by 80% until 2:57 pm Beijing standard time, which is three minutes before shares end trade for the day.
The Growth Enterprise Market, or GEM board, aims to finance high-growth start-ups, with lower requirements for listing. The most successful GEM board in the world is Nasdaq, set up in 1971, and now host to about 3,800 companies, including high-tech giants Google, Microsoft, and Intel.
A host of countries have established their own GEM boards. In fact, among the top ten countries in terms of GDP, only China has had no GEM board before. The idea of establishing a second board was first suggested a decade ago, but the free-fall of Nasdaq in 2001 put the process on hold.
In 2004, a mini second board for small and medium size enterprises was set up at the Shenzhen Stock Exchange to test the waters.
The establishment of the GEM board got on the fast track in 2007 when the draft management rules were ratified by the State Council. The final version was released this March.
In order to get listed, applicants need to have net assets of at least 20-mln yuan, and must have been open for business more than three years. In addition, they must post two consecutive years of profits, with combined earnings no less than 10-mln yuan.
Otherwise, they must be profitable in the past year, with a net profit no less than 5-mln yuan and operational income no less than 50-mln yuan, with annual revenue growth of at least 30% in the last two years.
Although the rules are much easier than the main board, they are stricter than many similar markets, as Chinese regulators have taken a cautious approach. CSRC says the board is an important measure to improve the structure of China's capital market.
It is expected to become an important pillar in China's economy by supplying much-needed investment in the private sector, especially for small and medium-sized businesses that are major employers and innovators.
Recent story: GEM board grants approval to 13 listco candidates
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