ChiNext, a market of fortune and fluctuation

13:23, October 30, 2009      

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•Most of the first 28 companies listed on ChiNext, China's Nasdaq-style stock market, are hi-tech and service enterprises that show great potential for growth.

•ChiNext, as a growth enterprise market which differs widely from the A-share market, may face sharp fluctuations.

High P/E ratios

Most of the first 28 companies listed on ChiNext are hi-tech and service enterprises. Compared with the listed enterprises on China's A-share market, they are showing great potential for growth to investors.

Distinct from the A-share market, enterprises listed on ChiNext have their unique businesses. Ultrapower, an IT-service provider, is an outsource service provider of China Mobile's instant messaging software "Fetion". Centre Testing International (CTI-Cert) is a third-party testing, inspection and certification body. Sichuan Jifeng Agricultural Machinery Chain Co., Ltd. operates an agricultural machinery sales network. Huayi Bros. Media Group is China's top film and TV series producer. Aier Ophthalmology is a linked eye hospital group with the most competitiveness in China.

The market has been anxious that the IPO prices of these 28 enterprises are too high. Calculated from their 2008 annual reports, the average price-to-earnings ratio (P/E ratio) of companies listed on ChiNext tops 53.1, two times higher than that of the A-share market.

However, according to these companies' quarterly reports of Q3 2009, their total net profits increased by 75.58 percent year on year and average earnings per share jumped by 64.36 percent, easing market anxiety.

Wang Guoping, an analyst from China Galaxy Securities noted that there were various valuation methods for enterprises listed on the growth enterprise market worldwide. Taking growth potential into consideration, valuation of companies listed on the ChiNext should include not only common measures such as P/E ratio and price-to-book ratio (P/B ratio), but also their high expansion speed.

Growth enterprise markets in other countries have also showed different price formation mechanisms from the main board. The P/E ratios of 56 Chinese innovative enterprises that made IPOs in the U.S. between 2004 and 2007 ranged from 10 to 500.

Optimistic outlook

Shang Fulin, chairman of China Securities Regulatory Commission (CSRC), said on October 23 that the CSRC has received 188 applications for IPOs on ChiNext.

ChiNext opened the gate for them to make IPOs and to raise money. China's small and medium-sized enterprises (SMEs) are experiencing rapid growth, guaranteeing abounding listing resources, said Zhou Sili, an analyst from Northeast Securities.

Zhou noted that companies that already applied for IPOs on ChiNext are from 32 different industries, and that most of them are hi-tech, software and manufacturing companies. Diversity in industries helps to avoid risks and is the precondition for the stability of the market. Diversity with extra emphasis on innovation and growth potential is an advantage of ChiNext, he said.

"Keep a cool head"

Companies listed on ChiNext have great growth potential and flexible operation mechanisms. Diversified operation and profit models are their most attractive character. However, they are relatively small and bear more uncertainty, and their company valuation may spark fierce controversy and lead to price fluctuations.

Wang Guoping said that as the investment structure of the Chinese stock market was still a distance from perfection and some of the investors favored pure speculation, ChiNext may face sharp fluctuations in the short-term. Investors should "keep a cool head", he said.

By People's Daily Online
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