Posted by: Frederik Balfour on October 30, 2009
China’s newest roller coaster opened today in Shenzhen. It’s called ChiNext, and is the country’s answer to Nasdaq. The long awaited bourse has been nearly 10 years in the birthing, and retail investors have been chomping at the bit for a new venue to engage in “chao gu”, meaning stir fry, the local equivalent of flipping stocks. These guys make day traders in the U.S. look conservative by comparison.
ChiNext certainly serves up the kind of fare that caters to the tastes of chao gu traders. Take Huayi Brothers, a Beijing-based film production company which has worked with box office stars including Jackie Chan, Jet Li and Zhang Ziyi. Within minutes of the opening bell its shares soared 129% from its IPO price and by midday were up the close was up 210% to yield a price-earnings multiple of 151. By comparison, the average price earnings ratio based on estimated 2009 earnings for companies on the Shanghai Stock Exchange is about 21. Another company, Beijing Toread Outdoor Products, which makes and retails camping accessories and clothing, surged 152.5%, Bloomberg reported. Medical device maker Lepu Medical Technology, the largest company on the bourse, leapt 182% by 1:00 p.m. giving the company a valuation of $4.3 billion.
Today’s price moves might have been even bigger were it not for the existence of circuit breakers. In fact, all 28 companies’ shares were suspended at one point. The first trigger point on ChiNext occurs if prices have moved up 20%—leading to a 30 minute pause in trading. The next 30 minute halt takes effect after a 50% move, and if the difference between the high and low of the day exceeds 80%, the stock is only allowed to trade in the final three minutes before the closing bell. [The trading band is based on the first trade of the day, not the IPO price.] Compared to the Shanghai Stock Exchange, which has had a 10% daily price change limit, ChiNext offers greater thrills to investors in search of a white-knuckle ride. [Nasdaq’s first trigger point occurs at 10%, then 20%, and trading is suspended for the entire day if price swings reach 30%.]
UPDATE: There was a severe reversal of fortunes on the second day of trading, Monday Nov. 2. According to Bloomberg, 20 of the 28 stocks traded down the daily limit of 10% as investors took as much money from their first day gains off the table as they could.
But we will have to wait and see whether the frenetic pace of trading set on the first day is sustainable. Volumes in any market typically soar on the initial day of trading following an IPO and today’s launch of ChiNext amounts 28 simultaneous trading debuts. And nearly all the activity is from small retail investors. Because of the relatively small size of the market- before the first day of trading, the combined market capitalization was just $10.2 billion [Shanghai’s market capitalization is about $2.48 trillion], and though this more than doubled on the first day, all but a handful of institutional investors are likely to participate. What’s more, many funds raised their cash long before the new bourse opened, and do not have a mandate to invest in it. The 28 companies on the growth-enterprise board raised a total of $2.27 billion in their IPOs.
But at these price levels, even funds which can invest in ChiNext are unlikely to do so. Simon Murray (China) launched its $250 million SMC China New Market Fund on October 1, in part to invest on the new bourse. However its Shanghai-based chief investment officer Tony Yam says he rather wait on the sidelines until the froth comes off the market. “Some of these companies look interesting and have been purposely selected by the regulators as good quality or new sector companies,” he told me the night before the market opened. “But we are fundamentals driven and we have set entry level prices…but right now they are not trading at cheap valuations.” Considering how much prices moved up on the first day, Yam will be watching from the wings for some time to come.
While ChiNext is bound to leave lots of carcasses of unwary investors by the wayside when the inevitable correction comes along, the new exchange is a welcome development in China’s long march to liberalize its financial sector. “It’s very positive because China needs to create a good system to help high quality but good companies to reach capital to fund growth other than the main boards consisting of larger listed companies,” says Tian Rencan,CEO of Fortis Haitong Investment Management.
Private enterprises face enormous obstacles in raising capital, as banks tend to regard state-linked enterprises as less risky borrowers. The Shanghai Stock Exchange is still predominantly made up of state-controlled companies which depend on connections as much as economic fundamentals to get permission to list their shares in a process that is far from transparent. Whether ChiNext will be any less opaque remains to be seen.