As many as 500 small enterprises are expected to list on the Growth Enterprises Market (GEM) board on the Shenzhen Stock Exchange after meeting financial rules recently laid out by China’s stock authorities, prompting speculation of a capital market leap in the near future.
Clearer rules for listing on the GEM, the ChiNext board styled after the NASDAQ, from the Beijing-based National Equities and Quotations (NEEQ) open up the potential for wide access to capital in cutting-edge industries such as biotechnology, software and finance, according to the China Internet Information Center.
A circular issued Nov. 20 by the China Securities Regulatory Commission gave guidance on two key financial requirements for companies currently listed on NEEQ to obtain a GEM listing, profitability and net assets.
The circular states that enterprises listed on NEEQ should either be profitable for two consecutive years with combined net profit no less than 10 million yuan ($1.57 million), or be profitable in the latest year with the annual revenue of no less than 50 million yuan.
Net assets in the most recent annual results must be less than 20 million yuan without any undistributed deficit, the circular said. The guideline gauges a company's financial backing of gross assets minus liabilities.
Around 700 NEEQ-listed enterprises met the core financial conditions for 2013 and 2014, according to financial information services company Shanghai Wind Information Co. Ltd., although other requirements must be complied with as well.
"The actual number of enterprises which are qualified to transfer to the GEM board may be around 500, as some enterprises which met financial requirements have not yet met requirements for enterprise governance, such as stability of major executive officers, and operation terms," the Shenzhen-based Essence Securities Co. Ltd. said in a research note.
Still, the prospects for many NEEQ firms swapping listings to GEM are high in the coming years, according to Wind Information.
An estimated 85 percent of the 2,318 firms listed in NEEQ were profitable in 2014.
However, any gaps in valuation on average price-to-earnings ratios for firms that switch to GEM from NEEQ, or other markets, need to be understood by investors before and after the move.
"Investors need to focus on performance and healthy growth of a company when making investment decisions. And as multiple-tier capital markets are emerging and evolving in China, there are more opportunities for good values to be picked," said Li Daxiao, chief economist at Yingda Securities Co. Ltd.