ChiNext - China's Millionaire Factory

By Huang Liming

Published: 2010-10-27

Economic Observer Online
October 26, 2010
Translated by Tang Xiangyang
Original article: [Chinese]

As of November 1, restricted shares in 28 of the 135 enterprises listed on ChiNext - China's growth enterprise board–will be released for trading. A total of 1.199 billion shares valued at 33.68 billion yuan will be released. According to calculations based on the board's October 25 closing prices, 122 individuals hold shares worth over 100 million yuan, another 284 hold stock worth more than 10 million yuan and another 324 individuals have holdings in excess of 1 million yuan. As of November 1, a large number of these individuals will be able to finally trade the bulk of these holdings, resulting in a new batch of multi-millionaries.

ChiNext was established one year ago in order to provide financing to small-and-medium-sized enterprises (SME) and start-ups that had found it difficult to list on the main board. The Shenzhen-based board has since grown from the original 28 companies that were approved to list when the board was unveiled, to the current 135 enterprises.

However, some of the listed firms are likely to face huge pressure after restrictions on the trading of shares are lifted and the future of some ChiNext listed-stock is uncertain, with some enterprises even facing the prospect of being forced to delist.

Creating Wealth through Lifting the Ban

According to our calculations, Pu Zhongjie, the director of Lepu Medical (300003), will probably emerge as the wealthiest of the newly minted ChiNext millionaires, the value of his personal holdings may soon reach 3.354 billion yuan. The personal share holdings of Wang Zhongjun, chairman of the board of Huayi Brothers (300027), are estimated to be close to 2.8 billion yuan. Wang Ning and Li Li, both executives at Ultrapower Software (3000002), hold shares estimated to be valued at over 2.5 billion yuan.

But it's not just the CEOs and Chairmen of these companies who are being catapulted into wealth, the release of the restiricted stock in Ultrapower Software will result in 16 individuals holding stock valued in the hundreds of millions, another 13 will hold stock valued in the tens of millions and a further 17 will become multimillionaires. Likewise, the release of restricted Huayi Brothers shares will result in 14 individuals holding stock valued in the hundreds of millions, 19 with stock valued in the tens of millions and a further 30 whose stock will be worth over 1 million yuan.

Celebrated Chinese film directors Feng Xiaogang and Zhang Jizhong, along with actor Huang Xiaoming, will also hold Huayi Brothers shares worth over 100 million yuan. The impact of the release of these previously restricted shares should not be underestimated. Currently, the total value of all tradeable shares on ChiNext is 32.47 billion yuan, while the value of restricted shares that will be allowed to trade as of November 1 is 33.68 billion yuan. The release of more than 336 million Lepu Medical shares alone will push up the total market value of tradeable ChiNext shares by over 9.3 billion yuan.

Several high-level executives of enterprises listed on ChiNext have quit their jobs recently, indicating they have a strong desire to sell their shares once the trading restrictions are lifted.

According to the EOs calcualtions, there have been 60 instances involving 56 separate private equity firms investing in the 28 enterprises whose restricted shares are to be released.

These private equity firms are looking at making an average profit that is 14.7 times higher than their original investment. Normally PE firms look to triple their investment over a one year period.

According to one Guangdong investment banker, "after the shares are released, private equity firms that had restricted share holdings will generally look for a means to dump their stock, only fools will not take action; they also need to look at the rate of capital turnover,"

In September, the ChiNext Index dropped by 8.1 percent, a much steeper decline than the 0.64 percent fall of the Shanghai Composite Index. Analysts explained the growth enterprise board's sharper drop on the weaker-than-expected interim growth reports and also investors awareness of the upcoming release of previously restricted stock.

ChiNext - Market Divergence

Listed firms are likely to face huge pressure after restrictions on the trading of shares are lifted and the future of ChiNext listed-stock is expected to diverge according to company performance.

According to this reporter's calculations, the stock price of 12 ChiNext companies slid by more than 20 percent in the first half of 2010.Among them, Bode Energy Equipment fell 82 percent, Huaping fell 76.6 percent, Narada fell 69.48 percent, Hanwei Electronics fell 49.77 percent, Netac fell 33.49 percent, and the remaining seven companies all witnessed stock price falls of between 21 and 30 percent.

Despite the fact that ChiNext is still waiting for a direct delisting mechanism to be released, performance is likely to be the most important factor in establishing which enterprises will be forced to delist. Therefore the first batch of ChiNext companies to delist will probably emerge from among the above-mentioned 12 poorly-performing companies.

This month, the State Council, China's cabinet, issued "Resolution on Accelerating the Cultivation and Development of Strategic Emerging Industries", at the same time, recent discussions about the contents of the Twelfth Five-Year Plan have also highlighted the need to develop strategic emerging industries.

Due to this run of favorable policy announcements, the market's focus has once again returned to the Small and Medium Enterprise (SME) Board and ChiNext.

Last week, 44.6 billion yuan worth of shares were traded on ChiNext, a 12 billion yuan, or 37 percent increase, from the trade volume of the previous complete week of trading.

Over the same period, the total value of trade on the main market board decreased.

Because of this, despite the price pressures associated with the imminent lifting of the ban on restricted shares, from the start of October up until October 25, the ChiNext index increased by 10.24 percent. Shares in Guibao Science Technology (300019), Wansu Science Technology (300017) and Shanghai Bestway (300008) all rose by their daily limit on Monday.

Shao Qing, an analyst from Ping An Securities, observes that, due to the fact that adjustments to China's economic structure will continue for many years, national policies will continue to provide encouragement and strategic assistance to the development of emerging industries over a long period of time. Emerging industries can therefore expect to have strong and persistent growth and therefore market capital will maintain an interest in investing in these companies over the long term.

Although the overall evaluation of ChiNext is a tad high, trading opportunities will continue to attract investors over the long term.