HONG KONG: Worries are growing with the unveiling of a long-awaited Nasdaq-style trading board in Shenzhen last week and as 28 firms prepare for their debut there at the end of the month. Major concerns include whether the new second-tier market will eventually eclipse its Hong Kong counterpart by forming a stronger fund-raising channel for start-up companies that couldn't survive on the main trading board.

The Growth Enterprise Market (GEM), known as ChiNext, which has been in the planning stage for more than 10 years, will attract many cash-thirsty small and medium-sized companies that could be potential listing candidates at the Hong Kong bourse's second board, market watchers warned.

Hong Kong's GEM has already elicited a cold market response for having low turnover and a decreasing number of securities over the last few years. It has only 172 listed companies totalling HK$86 billion in market capitalization.

A stock market operator makes profits from trading fees paid by investors and listing fees paid by listed companies. Narrowing turnover and decreasing numbers of securities could imperil its profitability substantially.

"The new GEM in Shenzhen is likely to drag many potential share issuers away from Hong Kong," said Peter Lai, director at DBS Vicker Securities. "That is inevitable."

After more than a decade's work, China Securities Regulatory Commission (CSRC) has carefully designed a fund-raising platform to emulate Nasdaq and hopes it will fund technology- and innovation-driven start-ups, as such smaller firms have had little access to the country's new lending. The new bourse is also Beijing's latest effort to restructure its export- and manufacturing-dependent economy in the long run.

However, Hong Kong's GEM still has its selling point that excels ChiNext, argued Edmond Chan, a partner of capital market service division at Pricewaterhouse Coopers.

"A-share sale in Hong Kong means a large number of foreign investors' participation; companies that are seeking international exposure would favor Hong Kong."

Moreover, Hong Kong Exchanges and Clearing (HKEx), the city's stock operator, has been well prepared for the upcoming competition. It has since early this year provided easy access for companies trading on the GEM aspiring to transfer to the Main Board by simplifying the process.

Before, companies of the GEM had to go through a share sale procedure all over again in order to shift their shares onto the Main Board. Now all they need to do is just to file an application to the bourse, according to HKEx.

On the other hand, ChiNext itself will have many hurdles to face. Analysts expect excessive valuation fed by enthusiastic investors could rattle the new stock market over the next few months.

"We will see big ups and downs in the new market; the price fluctuation is always huge on second-tier boards, particularly so in the mainland stock markets," said Lai at DBS Vicker.

"Investors on the mainland don't have many choices in terms of investment products, and the shares market circulation is also narrower than those in Hong Kong, which leads to a high valuation," Pricewaterhouse's Chan explained.

Mainland residents have hoarded approximately 26 trillion yuan in their savings accounts, while the investment products available for retail investors are limited to stocks, bonds and insurance.

The high valuation has already been demonstrated in the stocks-in-waiting at ChiNext. A total of 28 firms will debut on ChiNext on October 30. They all have completed flotations in September, setting prices at an average 56 times last year's earnings. One of them, Dinghan Tech, a Beijing-based electrical equipment supplier, has a price per earning ratio of 83.3 times.

In comparison, the average historical price-earnings ratio of Shenzhen-listed shares is 39 times and that of stocks on the main Shanghai Stock Exchange is 27. Both already appear pricey against 17 times for Hong Kong-listed shares.

"High valuations will no doubt be a key risk, although we expect others, such as more frequent stock delistings, will endanger investments in the new market," said economist Jin Dehuan at the Shanghai Securities and Futures Institute, as quoted in a Shanghai-based securities journal.

The 28 new listees, almost all private companies, have raised a combined 15.5 billion yuan in their offerings, more than double the planned 7.1 billion yuan, and locked up 1.87 trillion yuan in subscription funds, with an average oversubscription ratio exceeding 120 times. More than 100 companies are on ChiNext's waiting list.

(HK Edition 10/29/2009 page4)