Shcri.com: Growth Enterprise Market (GEM) Plays a Significant Role in Improving China's Capital Market
www.shcri.com -- On early morning of March 31th, 2009, China's Securities Regulatory Commission issued 'Interim Measures on Administration of Initial Public Offering and Listing on Growth Enterprise Board' on its official website.
According to public information, there are two sets of financial standards for the threshold to starting a new enterprise. One is that the enterprise should gain profits for these two years and the total profits of two years should see a continuous growth to more than RMB 10 million. The other one is that the enterprise should gain profits for one year, with net profit more than RMB 5 million while the operating revenue should be more than RMB 50 million for one year and the growth rate of revenues for these two years should be higher than 30 percent. these two sets of standards can be summarized as 'two years' profit and one year's profit'. The former standard is suitable for enterprises which enjoy a stable growth rate, such as an enterprise which earned respectively RMB 400 million and RMB 600 million these two years. The latter one is suitable for enterprises which suddenly develop, such as an enterprise which earned little (even in deficit) in 2007 but suddenly made a sales value of over RMB 50 million and a net profit of over 10 percent in 2008.
Besides, the enterprise should be in continuous operation for three years and do not have not-yet-paid losses, with its net assets exceeding RMB 20 million. It is also required to realize a total capital stock of more than RMB 30 million after listed. On part of the profit standards, the threshold of GEM in China is the highest among all countries and regions. However, there are a large quantity of excellent mid-sized and small-sized enterprises in China. For example, the number of enterprises which can meet the standards reaches 1100 in Shenzhen. Therefore, it can be concluded that there will be tens of thousands of enterprises which are able to meet the GEM standards.
The basic principle of foreign GEM is that enterprises with large potentials and little profit can also be approved because there is no limit to the lowest profit. At the same time, interests of investors can be guaranteed by setting limitations to the lowest amount of share held by shareholders and lifting the responsibilities of sponsors.
However, the multi-level capital market can not be fulfilled by simply classifying profits and sponsored money. In the past, mid- and small-sized enterprise board appeared in the name of 'pioneer of GEM' but stayed unchanged in laws and regulations, listing standards, trading markets and investors. At the beginning, the mid- and small-sized board was limited in its listing scales (less than 30 million stocks) in order to show a difference from main board. But now this limitation is not taking effect and Bank of Ningbo issued 450 million stocks, which was far more than the limited scale.
Today, the GEM in China has followed the mode of mid- and small-sized board and in this way it will be more difficult to realize the multi-level capital market.
China's GEM which has been in preparation for ten years does not show any improvement in its operating mode and can not reach consensus in the examination and approval system, market dealer and board-switched issue.
The first problem is the examination and approval system. Whether enterprises are able to enter GEM should be decided by market, rather than the government. Investment value of some high-tech enterprises can not be determined by enterprises' business state in the past. Some profitable enterprises might go into bankruptcy because of the sudden updated technologies.
The second problem is the system of market dealers. In the present trading system, there is no auction of agencies. Instead, transactions are carried out by market dealers on Nasdaq market. The purchase price and sales price of a certain securities are issued at the same time by market dealers who will do business with investors who want to buy it or sell it. It is required on Nasdaq market that every securities should have two market dealers at least. In fact, most of the securities own more than 10 dealers. Market dealers not only play an active role during transactions, but also carry out a long-term professional study on a certain enterprise and thus help enterprise discover more potential values. The purchase price and sales price are given by dealers on the basis of a careful study on the enterprise.
There are basic differences between market dealers and market makers. Market makers try all means to mislead private investors and gain profits. On the contrary, market dealers make public offerings and take the responsibilities of purchasing and selling. They have to pay a large amount of money and energy to further study the high-tech enterprises in order to provide a reasonable offering. Those dealers who give unreal statements and improper offerings will eat their own bitter fruit at last.
The last problem is that enterprises may switch board during business. On April 2nd, 2009, the total market value and transaction amount of 174 GEM stocks in Hong Kong only stood at 48.7 billion HKD and 130 million HKD, with the average knock-down price at 0.12 HKD. An important reason for the failure of GEM in Hong Kong is that many excellent companies rely on main board, which is the cul-de-sac for GEM. The independent Nasdaq, taking the main board as rival, develops rapidly. Nowadays, Nasdaq has owned three of the top five companies with largest market value: Intel, Software and Cisco.
The three aspects mentioned above should be regarded as key points during process of system establishment of GEM and even the whole capital market. Market dealers are not only the 'legal market makers' but also the real 'qualified' investors of GEM. Moreover, GEM ought to be an independent trading market competing with main board instead of relying on it.
Anyway, GEM plays a significant role in improving capital market which just consists of enterprise, investor and supervisor. There are a large number of excellent enterprises in China and hundreds of enterprises have entered foreign GEM in the past six to seven years. At present, there are still thousands of enterprises waiting for permission into China's GEM.
Source: China Research and Intelligence
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Based on the database, Interviews and research methods from China Research and Intelligence, CRI analyzes the development and opportunities in this industry clearly.
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