ChiNext Exchange Opens Door To Capital For Small Local Firms

• Doug Tsuruoka
• On 7:05 pm EST, Friday November 6, 2009

Rack one up for the young Chinese startups that may someday be the Googles of tomorrow.

A Nasdaq-style stock exchange began trading in China on Oct. 30. Dubbed ChiNext, it debuted with 28 listings. It offers (mostly Chinese) investors the first real crack at a host of lesser-known home-grown players in the software, drug, energy and other sectors.

ChiNext, also known as the Growth Enterprise Market or GEM, is a secondary board of the Shenzhen Stock Exchange in southern Guangdong province.

Unlike the big government enterprises mostly found on other mainland exchanges, the newly listed firms on ChiNext provide a window into China's entrepreneurial laboratory. They include Lepu Medical Technology, which makes coronary stents and catheters. There's also Beijing Ultrapower Software, an outsourced service provider of mobile phone operator China Mobile's (NYSE:CHL - News) instant messaging software.

Six of the 28 are engaged in biotech or drugs. The rest are scattered in information technology, energy, telecoms, medical devices, entertainment and electronics.

Hardly any enjoy the global profile of big Chinese companies like Sinopec (NYSE:SNP - News) and China Life Insurance (NYSE:LFC - News), which list on big exchanges like the NYSE, Hong Kong and Shanghai. But investors might do well to keep an eye on them because some may be the fast-track performers and hot stocks of tomorrow.

Analysts say ChiNext pries open a floodgate of capital for these smaller Chinese firms -- especially those in high tech. China's state-owned banks have traditionally lent their cash to large, state-owned enterprises, leaving some startups to wither on the vine. Such startups had to list their shares in Hong Kong (which also is dominated by large government-owned companies) or the U.S. But a small-company stock market in China changes the game.

ChiNext is also expected to give a strong boost to China's venture capital and private equity markets. Listed shares in promising startups now offer such investors a way to cash out of these investments once they've matured.

Chinese news reports say the first 28 firms on ChiNext raised a total of $2 billion from their initial public offerings. By Nov. 2, the second day of trading, their combined market value was almost $19 billion.

"The launch of ChiNext marks an important point 14 the development of China's capital markets and the robust nature of the economy there, and it's certainly an indication that homegrown companies shouldn't have to go around the world to go public," said David Garrity, the principal of GVA Research.

"It's a truly significant step to provide funding for these high-growth, high-tech companies that previously didn't have direct access to this type of (capital market financing)," said Ming-Jer Chen, a professor of business administration at the University of Virginia's Darden School of Business.

Individual U.S. investors can't invest directly in mainland China exchanges like ChiNext because of government rules. But they can invest via ETFs and China-based mutual funds, including some that focus on small caps.

Trading on the new exchange is volatile. State-run newspaper China Daily says trading in the 28 listed shares was halted for 30 minutes on Oct. 30 after they soared 20%. Twenty-five of the 28 fell on the second day of trading on Nov. 2. Many reached their daily loss limit of 10%.

No U.S. IPO Impact, Yet

The first batch of listed firms are the vanguard of more to come. Chinese news reports say a total of 188 companies from 32 industries have applied to list on ChiNext and their ranks may swell further.

University of Virginia's Chen says hundreds eventually may be listed on ChiNext.

The launch of ChiNext isn't expected to have an immediate impact on the U.S. IPO market, which has been benefiting from a number of hot Chinese issues over the last several years.

Tom Manning, a Hong Kong-based private-equity adviser, cautions it will take years before Chi-Next becomes a sound platform for both companies seeking capital and investors desiring reliable returns. So it's not a short-term threat to the U.S. IPO market.

"The best-quality young companies will still prefer foreign listings if possible," he said in an e-mail interview.

But ChiNext could have a longer-term impact as hundreds of other smaller Chinese companies opt to list there rather than on U.S. exchanges. As China's economy keeps growing, domestic investors may potentially have more to invest than those overseas. At the same time, it's not unusual for Chinese firms to list on both local and foreign exchanges. Sinopec, for example, lists on the NYSE, Hong Kong and Shanghai.

Here's a description of some of the lesser-known Chinese firms that currently trade on ChiNext:

Siasun Robot & Automation: Develops and makes robotic and automation tech for the rail, automotive, energy and other industries. Its board chairman Wang Tianran is director of China's National Engineering Research Center on Robotics.

Chengdu Geeya Technology: An OEM cable TV equipment maker. It specializes in digital receivers and other cable TV devices. The firm exports to the Americas, Europe, Asia and other markets and meets ISO technical standards for quality assurance.

Huayi Bros. Media Corp.: China's biggest movie studio. The Beijing-based company made the 2008 film "Forbidden Kingdom" featuring kung fu stars Jackie Chan and Jet Li. Its largest investors include Alibaba Group e-commerce king Jack Ma as well as several leading Chinese film actors and media honchos.

Tianjin Chase Sun Pharmaceutical: Makes drugs to treat sepsis. It's also one of two firms in China that produce kinase inhibitors to treat cerebrovascular diseases.

Sichuan Jifeng Agricultural Machinery Chain: Operates an agricultural machinery network.

Gansu Dayu Water-Saving Co.: Specializes in R&D and manufacturing of water-saving irrigation equipment.

Wuhan Zhongyuan Huadian Science & Technology: Specializes in high-tech methods to analyze electric power records.

Aier Ophthalmology: Runs a chain of top-rated eye hospitals in China.

Hangzhou Huaxing Chuangye Communication Technology: A telecom based in the city of Hangzhou in Zhejiang province.

Zhejiang Enjoyor Electronics: A maker of integrated digital technology.

Beijing Beilu Pharmaceutical: Makes and sells traditional Chinese medicines.

Centre Testing International: Offers testing and inspection of a range of industrial and consumer products.

University of Virginia's Chen says the access to capital provided by ChiNext is especially useful to Chinese startups at this time. The global downturn is pressuring many smaller players. They'll find it easier to survive now that they can launch IPOs on ChiNext, he says.

"China's startup sector has really been hurt by the downturn," Chen said. "ChiNext is a way to make up for the loss. The financing provided by ChiNext will also help these startups expand to other parts of the world."

Medical Firms Benefit

Analysts say some of the main recipients will be Chinese biotech and pharma firms that make up over a fifth of the 28 listed companies on ChiNext.

Until now, many local players in stem cell, vaccine and other biotech fields have depended on government funding or foreign venture capital to stay afloat.

In 2006, total VC investments in China surged by 22% from the prior year. Multinational investments made up nearly 76% of the total.

Data from the World Intellectual Property Organization say China's biotech industry grew 30% annually to $3 billion between 2000 and 2005. The sector is expected to reach $9 billion in sales by 2010.

Analysts say ChiNext's launch fulfills a long-standing pledge by Chinese officials. The government first floated the idea of starting a Nasdaq-style exchange over a decade ago.

But volatility on ChiNext is stirring worries about excess speculation and momentum trading. Based on Oct. 30 closing prices, ChiNext companies traded at about 100 times their price-earnings ratio, reported China Daily.

Buzz up!