Despite delays and continuing uncertainty, 2009 should see the opening of China’s first stock market for smaller, high-growth technology companies. Modeled on the NASDAQ in the US and AIM in London, this new market will be headquartered in Shenzhen, as part of the Shenzhen Stock Exchange, the smaller of the two stock markets in China.
Overall, this is a positive development for China’s financial industry, and the private equity and venture capital communities. Since China’s Prime Minister, Wen Jiabao announced in March 2008 the planned establishment of this new stock market, after almost a decade of internal discussion, the date for the launch has steadily slid back, a casualty of the 60% fall in China’s main stock markets this year.
The final details have not been announced, but what seems clear at this point is that this new market will have significantly lower qualifying thresholds for companies seeking a stock market listing, compared to the main boards in Shenzhen and Shanghai. The numbers talked about are net assets above RMB 20 million (US$2.8mn) and revenues above RMB 10mn (US$1.5mn). There seems to be no requirement, as of now, for companies to be profitable at the time of listing. It’s possible, therefore, that companies listed on the new exchange will have market caps that barely exceed $10mn.
Here’s my thinking. The largest quoted companies on the Shanghai market are trading at a price-earnings multiple of under 12. This is down, like the broader market, by almost 60% from recent highs. Put those kind of multiples on a small company with revenues under US$2mn and profits below $1mn, and you have the possibility of market caps in that very low range. True, high-tech companies tend to enjoy higher p/e multiples than more traditional large-caps. But, even so, this new stock market will be operating in some unchartered territory for China’s financial markets — companies with comparatively thin floats, low total market value, and so, most likely, higher price volatility.
This could help explain why the Chinese government has repeatedly delayed plans to launch this stock market for high-growth companies. The regulators have probably seen this year all the volatility they care to see for a long time.
Of course, the key factor won’t be earnings multiples or volatility, but the quality of the underlying high-tech businesses to be quoted on this exchange. Here’s where I see bigger problems. China, like its richer neighbors in Asia, as well as Western Europe, would very much like to rival the USA in nurturing successful high-tech companies in industries like software and chip technology. Across China, there are high-tech business parks where early-stage technology companies are concentrated. By one count, there are over 5,000 across the country. But, so far, there haven’t been many big break-out successes.
The simple truth is that, as other countries have learned over the last decade, it’s hard to duplicate the particular success the US has in developing successful high-tech businesses. Having a stock market for high-tech companies is certainly not much of a factor. If so, Germany, which started its own high-tech company stock market, the NeuerMarkt ten years ago, would today be awash with leading technology firms. Instead, there are few, if any good tech companies in Germany and the Neuer Markt eventually was shut down. Britain’s AIM market has also failed to produce many successes in that country.
In my mind, China does have a better shot than Germany, or Britain, or Japan. The main reason: Chinese are more entrepreneurial, and there’s more a culture of prudent risk-taking than elsewhere. If any country has a shot to achieve some of the same success the US has enjoyed building great technology companies, it’s got to be China.
So, I hope this new stock market gets started early in 2009. It will provide more motivation – not that much is needed – to China’s budding technology leaders, and also provide another viable exit route for venture capital investors in China