Shenzhen Bourse’s ChiNext Board Begins Accepting IPO Filings From Unprofitable Firms

(Yicai) April 13 -- China’s securities watchdog has issued new guidelines to further the reform of the Shenzhen Stock Exchange’s ChiNext technology board, allowing it to accept initial public offering applications from companies that are yet to turn profitable.Unprofitable firms in emerging industries with an estimated market capitalization of no less than CNY3 billion (USD439.1 million), an operating revenue of at least CNY200 million (USD29.3 million) in the previous year, and an operating revenue compound annual growth rate of over 30 percent in the previous three years can now file for an IPO on the ChiNext board, according to the latest regulations issued by the China Securities Regulatory Commission on April 10.Moreover, unprofitable enterprises in future industries will also be allowed to go public on the ChiNext board if they have an estimated market cap of no less than CNY4 billion, an operating revenue of no less than CNY200 million in the past year, investment in research and development in the previous three years of no less than CNY100 million, and cumulative R&D spending in the past three years accounting for over 15 percent of the operating revenue in the period, per the new rules.The overall intensity of the ChiNext reform has exceeded expectations, Tian Xuan, dean of Peking University’s Guanghua School of Management, told Yicai.The first indicator is well-suited for the rapid growth of emerging industries and can accurately identify hard-tech enterprises in the early stage of commercialization with small operating revenue but high growth, Tian noted. The second one focuses on the long-term investment characteristics of future industries and can screen out strategic technology enterprises with a high percentage of R&D investment in their operating revenue and with deep technological barriers but short-term profits yet to materialize, he added.The combination of ‘market cap + operating revenue + growth or R&D’ precisely matches the development characteristics of companies engaged in emerging and future industries, Yang Yusong, general manager of Southwest Securities, told Yicai. Some emerging firms in the Chinese mainland that are preparing for or have already listed in Hong Kong and meet the fourth criterion may return to the mainland stock market, he noted.“It is unlikely that there will be a sudden surge in applications in the short term,” Yang warned. “After all, going public is a systematic project, and enterprises need to first complete processes such as standardized governance and financial rectification.”The possibility of a large-scale valuation bubble is not high, Yang said. But there may be a risk of overvaluation for some companies, so investors should make a comprehensive judgment, he pointed out.Unlike the growth layer of the Shanghai Stock Exchange’s Star Market technology board, the trading of enterprises that meet the fourth criterion is the same as that of other enterprises, except that they are labeled with a ‘U’ mark.The new measures also stated that local governments can hand information on enterprises planning to list on the ChiNext board to the CSRC and the SZSE. But such information is only used as a reference for review and not a necessary procedure for listing.Through the local governments’ information release mechanism, the tutoring and standardization work for IPOs can be moved forward, allowing professional intermediary institutions to get involved earlier, which can improve the quality of IPO projects, enhance the efficiency of review, and better integrate regional advantageous industries with the capital market, Yang said.But he reminded that all enterprises should adhere to the principle of market-based screening, and a dynamic management and exit mechanism for firms under the information push mechanism should be established and improved.Editor: Futura Costaglione