The chances and challenges of small or medium-sized enterprises by GEM
中小型企業在創業板的機會與挑戰

ABSTRACT

The GEM's debut was merely ahead of the tech stock bubble peak in 2000 by five months. Since then it had dropped precipitously for three consecutive years, which was the lesser of a problem as high growth and high risk investments usually imply high volatilities, just like the US NASDAQ index. The GEM's weakness, nonetheless, was manifest in its 25% increase in 2003 when the blue chip Hang Seng Index rose by 35% in that year. Investors, bearing greater risks in a bear market, would demand greater rewards in a bull market. The NASDAQ's 50% surge in 2003 handsomely beat the Dow and the S&P's 25% rise. The GEM's weaker rally was a setback for investors, setting off a series of other problems.

An area of success of the GEM is its ever-increasing numbers of listed companies, which have grown steadily from 54 in the first year to the current 199. But because of the much weaker price movements of the stocks, the GEM's total market capitalization has nudged higher from HKD67.3bn to HKD72.7bn for the same period, leaving the impression that the GEM could only manage to grow quantitatively instead of qualitatively, failing to transcend itself along the way. When compared to the main board's HKD5482.6bn market cap, the GEM's is only 1.33% of its size.#p#分頁標題#e#

The GEM's ability to maintain high P/E ratio is a double-edged sword. While it is favorable to attract more IPOs in the primary market, it might become a deterrent in the secondary market. Moreover, except for 2002, the GEM's daily average turnover has been on a steady downtrend. In 1H04, the daily turnover was only HKD149mn or less than 1% of that of the main board and less than half of the HKD341mn reached in its first year of debut. This poses serious problems as a quiet secondary market in turn diminishes the attractiveness of the primary market.

5.1.1 Vertical Challenges: Recognition, Turnover, and Liquidity

The latest development of leading GEM companies seeking to move to the main board highlights the declining degree of recognition of both the listed companies and the market in general. It was reported that CK Life Sciences International, Tom Group (it had successfully moved to the main board on August 4, 2004), Phoenix Satellite Television Holdings and Hongkong.com have either applied for or entertained the idea of moving to the main board. As they were the 1st, 2nd, 3rd and 6th largest stocks (in terms of market cap) of the GEM by the end of June, they accounted for 36% of the GEM's total market cap and more than 20% of total turnover, the impacts of their departures would be significant. Their decisions are most likely related to the main board's relaxing of the listing rules in April this year, which enables large companies with market cap between HKD2bn and HKD4bn to be exempted from requirements of three consecutive years of earnings if they pass certain asset and income tests. The main board's decision was aimed at increasing its attractiveness to companies. But it also creates incentives for qualifying companies of the GEM to contemplate moving their listings.

The relatively quick decisions by the four leading GEM companies to seek main board listings after the rule changes more or less reflect these companies' as well as the market's higher confidence in the main board in terms of reputation, turnover and attractiveness to investors. Although the GEM has successfully listed more companies over the years, they are unlikely to make up for those departing leading companies. As a result, the GEM has constantly been put under the defense. And its ambition to eventually rival the main board is in serious doubt. In the NASDAQ, although the heavyweight Microsoft and Intel become constituent stocks of the Dow Jones Industrial Average, they have never sought to jump ship to the rivaling NYSE, which maintains the NASDAQ's prestigious status. This demonstrates that retaining high quality companies is of utmost importance to a board, failing which shows the lack of investor confidence.

 

The GEM's lack of turnover and liquidity will probably worsen at the departures of those leading companies. The ratio of its daily turnover to that of the main board has fallen from 2.77% in its first year of debut to the current 0.90%. This poses serious challenges to attracting companies and investors. For example, institutional investors usually screen stocks using historical turnover as a criteria to ensure ample liquidity against price loss in case they have to liquidate a position. When comparing the monthly turnover to the total market cap, the GEM's ratio of 5-6% in the past three years is much lower than the NASDAQ's 20%. If persisting, investors are likely to form the impression that the GEM is a secondary market, hindering its breakthroughs.#p#分頁標題#e#

5.1.2 Horizontal Challenges: Main Board, Shenzhen, Singapore and Consolidation

The four GEM companies' decisions to switch board are most likely business ones, taking into consideration of opportunities and costs. And if the main board goes further by simplifying switching rules and relaxing disclosure requirements, the ensuing switches will probably offset efforts by the GEM to recruit more companies. In other words, the main board is gaining strength at the expense of the GEM. Although the decisions to switch board are commercial ones made by the companies, and they are more suitable to further business expansions, the change of the main board's listing rules challenges the status quo of the two boards. Besides, the main board also hosts hundreds of small and illiquid stocks. Even though they may not all be tech stocks, they offer investors/speculators with alternative investment vehicles in the high risk, high reward arena. This also competes against the GEM for investment capitals.

Just like the main board, the GEM is working hard to attract more Chinese companies. The current headcount is that 30 out of the 199 GEM companies are Chinese enterprises. And out of the HKD5bn in IPO funds raised in 2003, HKD1bn or 20% are raised by state owned, privately owned and red chip companies. The launch of Shenzhen's SME board will undoubtedly increase the competition in this area. Although potential supplies seem unlimited, i.e. there are millions of registered SMEs in China and 1200 are ready to be listed, the exclusive status that the GEM used to enjoy to list Chinese SMEs will diminish if Shenzhen's SME board matures, becomes independent and relaxes its listing rules. So far, there has been little overlap of the two boards. The currencies of funds raised are different. The GEM offers an international funds platform and development path while Shenzhen is still a pure domestic play. Shenzhen's SME board is only a sub-board, employing the main board's more stringent listing rules, requiring longer approval time, but is relatively more efficient in terms of costs and refinances.

And then, competitions from Singapore cannot be overlooked. The Singapore Stock Exchange has wasted no time luring Chinese SMEs. The incentives it provides include the specially designed small S/A share model, relaxation of listing rules to exempt certain requirements in earnings, operations, local shareholding company structure and continuity of managements, etc. As a result, there are 45 Chinese companies listing in the SGX so far, up by 11 in 1H04 and accounting for 40% of this year's IPOs. In such ways, Shenzhen, Hong Kong and Singapore all vie for the Chinese SMEs' listings.

Besides direct competitions from other exchanges, the GEM is also under the global consolidation pressure. In 2003, according to Grant Thornton's report, there were seven sub-boards around the world that had either been shut down, changed to a stock index or OTC market. The GEM has survived the consolidation thanks to its efforts and the support of the China factor that continue to boost the numbers of listing companies and the total market cap. Though shutdown or reorganization is not the issue for now, the pressure could reemerge if the GEM's development remains stagnant.#p#分頁標題#e#

 

5.2 Domestic undertaking board market question solution

On March 21, 2008, the Chinese Securities Supervisory Association announced "For the first time the Public release Stock and in the Undertaking Board Going on the market Policing method (Questionnaire Opinion Manuscript)", to social public questionnaire opinion [15]. On December 2, 2008, Securities Supervisory Association mobilizes momentarily to prepare to push the undertaking board; means that fermented near ten year undertaking board to promote is just round the corner. Is affected the US financial crisis, our country economy postpones in the situation, the small and medium-sized enterprise finances the difficult question even more to highlight, promotes our country to start an undertaking as soon as possible the board market, pours into the blood to the small and medium-sized enterprise, is the urgent matter. Our country should in profit from the overseas undertaking board market in experience's foundation, needs to come according to our country reality to set up our country characteristic the undertaking board market.

(1) Localization wants accurate

"For the first time the Public release Stock And in the Undertaking Board Going on the market Policing method (Questionnaire Opinion Manuscript)" pointed out that the undertaking board is to promote the growth undertaking enterprise is the independent innovation enterprise's development specially; Plans Listed enterprise's financial situation to meet the following requirement: 1. the recent two years gain continuously, recently two year net profit accumulated many in 10,000,000 Yuan, and sustained growth; Or recent one year profit, and the net profit many in 5,000,000 Yuan, recently one year business income many in 50,000,000 Yuan, recently two year business income rate of increment was not lower than 30%. The net profit buckles, only if around regular profit and loss are for computation basis; 2. Before the release, net assets many reach 20,000,000 Yuan; 3. Recently an end of the period did not exist has not made up the loss; 4. After the release, capital stock total amount many in 30,000,000 Yuan.

Our country starts an undertaking the board market starting point is for the atonement existing market function insufficiency, provides a financing platform for more small and medium-sized enterprises. But the financial situation which stipulated from the means looked that the threshold is a little high, starts an undertaking enterprise's development present situation with our country to tally not greatly. Because under US financial crisis's influence, many undertaking enterprises encounters the management cold winter, some even go bankrupt. Such undertaking board is not able to solve the small and medium-sized enterprise financing difficult problem truly is promoted. Profits from the overseas undertaking board development experience, wants to develop our country Small and medium-sized enterprise, strengthens its vigor, must reduce suitably enters the market the threshold, will otherwise only keep them out more small and medium-sized enterprises. Therefore our country starts an undertaking the board market localization of target to be: Expanding good small undertaking enterprise, but the expanding standard must depend upon the reliable rating standard to determine.#p#分頁標題#e#

(2) Market supervision wants strict

Because the undertaking board market threshold is low, the risk is big, the strict supervision starts an undertaking the board market healthy development to our country appears important especially.

Establishes the strict information disclosure system, the undertaking board market information disclosure system must be more complex than the motherboard market, be complete, is detailed. The publisher must certainly carry on the comprehensive information to disclose, so long as does not involve the enterprise to be secret, must momentarily disclose that the business events progress, the operational project, to be listed management structure information and so on, so that investors get prompt understanding material. To the publisher issued that false, error message, must give the serious penalty. The guaranteeing and recommending person system, our country may profit from British AIM the procedure, through the formulation corresponding laws and regulations, stipulated strictly guaranteeing and recommending person's qualifications, the responsibility, guaranteed guaranteeing and recommending person's plays its proper role after listing counseling and in the going on the market supervising. Moreover, the stock exchange must complete the verification Listed enterprise to report that the surveillance enterprise observes ministrant work and so on market rule. Securities Supervisory Association must be responsible for the listing, the verification, the release and so on significant item work. Finally, through strengthens the market supervision, causes the GEM the systematic risk to fall lowly, and protects investor's benefit greatly.

(3) Draws back the city system to want the science

Because the undertaking board market's going on the market object's scale is small, risk defense capability is weak; the listed enterprise draws back the city the situation to sometimes occur. Strict draws back the city system to be advantageous to the enhancement undertaking board market to be listed quality, enhances the undertaking board market the operating efficiency.

The NASDAQ market draws back the city condition is the condition which licenses continually by the stock indicates, including two concrete quantity standards and company management structure, information disclosure aspect non-quantity standard. What the termination going on the market procedure uses investigates the system. After determining the condition which some stock no longer satisfies licenses continually, because the NASDAQ market's going on the market qualifications department will inform To be listed its stock no longer to satisfy the condition which the NASDAQ market licenses continually to terminate going on the market. If to be listed refuses to accept to the above decision, may the progressive appeal. Our country must certainly formulate strictly draws back the city standard which restrains with the legal means that and in the possible situation, to profit from NASDAQ to investigate the system, because investigates the system to be possible to give the investor at the same time certain cushion time, on the other hand may reduce the regulatory authority to make the wrong decision the possibility, enhances draws back the city process the transparency.#p#分頁標題#e#

We cannot continue to these to achieve the undertaking board market requirement the enterprise, may outside the field the trading market take its withdrawal channel, the outside trading market on the scene carries on the license transaction, but can only carry on the stockholder's rights circulation, does not allow to expand stock financing. This is helpful to the safeguard undertaking board market vigor and the quality. Moreover, the outside trading market on the scene obtains the growth enterprise to be possible to satisfy the undertaking board market standard time to carry on transfers the board.

In brief, undertaking board's establishment with the consummation is a systematic project. Our country should act according to our country's reality, in profits from the overseas undertaking board market experience's foundation, establishes our country's undertaking board market as soon as possible, provides the financing platform for the small and medium-sized enterprise, promotes our country economy steadily, the healthy development.

5.3 Domestic GEM suggestion

1. We need clear about the undertaking board to support the small and medium-sized enterprise undertaking the market localization. Our country started “the national undertaking investment mechanism research” to the undertaking board's research date from at the end of 1997 Department concerned, at that time is mainly from the development high technology and new technology industry and for the undertaking investment provides withdraws from the channel to know the start undertaking board the necessity. Along with the understanding unceasing enhancement, the start undertaking board's important meaning is through supports the small and medium-sized enterprise undertaking and the development, lays the solid microscopic foundation for the national economy sustainable development. Especially is rich in our country this kind of pool of labor power, the market relatively broad country, develops the high tech to be no doubt important, but supports has the expanding small and medium-sized enterprise undertaking and the development, is not only advantageous to displays our country's pool of labor power superiority fully, is also advantageous in develops for the High-tech enterprise creates the market demand.

2. Understanding the start undertaking board highly from the strategy the pressing. Generally speaking, the undertaking board market's risk must be higher than the motherboard market, but is precisely because it can undertake a higher risk, only then can melt the entire national economy movement system's risk effectively. The question key is must face up to the risk, and profits from the international experience, establishes the perfect risk control mechanism. If only avoids the risk constantly, our country very possibly loses the opportunity in the global undertaking board market recent round development, large quantities of outstanding To be listed resources will also drain the overseas, thus endangers finally to the state economy security.#p#分頁標題#e#

3. Positive, advances the undertaking board market construction safely. Presently, our country should under the current law frame, according to deliver the institute and Shenzhen Stock Exchange suitable division of labor principle, is clear about Shenzhen Stock Exchange achievement early “the small and medium-sized enterprise stock exchange” the status, chooses above total capital stock 50,000,000, the circulation stock 50,000,000 following small and medium-sized enterprises in Shenzhen Stock Exchange going on the market, promotes the small and medium-sized enterprise direct finance, implements and realizes "Small and medium-sized enterprise Promotion Law". To new going on the market this part of small and medium-sized enterprises, implements the isolated operation, to supervise alone. After treating accumulation certain experience, according to the undertaking board market construction situation, reduces the threshold gradually again, appropriate readjustment going on the market scale and profit request.

4. In “gait strategy” in the implementation process consummates our country's undertaking board market pattern unceasingly. World undertaking board market's establishment is different with the movement pattern, which one kind of pattern a country or do the area choose, is by its synthesis factor decisions and so on historic condition, socio-economic development condition. Looking from the region layout, the American NASDAQ is outside several thousand fields in the trading market foundation the unification conformity and the independent movement; Europe will favor will start an undertaking the board to take the motherboard interior a tectonic plate; In Asia, independent mode's undertaking board market is successful. Which kind of pattern but regardless of being, whether can take most be advantageous in promotes the small and medium-sized enterprise financing system construction and the multi-level capital markets “both suitably divides the work, and moderately competes” as the starting point. Says in light of this, has had two stock markets in our country in the situation, will deliver locates develops in the main support Major industry, Shenzhen Stock Exchange mainly locates in supports the small and medium-sized enterprise undertaking, both are advantageous in avoids the securities trading market the building redundant project, and is advantageous to two exchange specialized development. As for future Shenzhen undertaking board concrete movement rule and supervision system, then definitely may try to find out gradually in reality.
 

5. The perfect risk control mechanism, guaranteed that the undertaking board market construction steps the first step. Although according to “the gait strategy”, Shenzhen Stock Exchange does not need to change the present negotiable securities supervision the fundamental rule, however, because the small and medium-sized enterprise has the Major industry different stock price movement characteristic, therefore, still had the essential research formulation to adapt the small and medium-sized enterprise movement characteristic each executive regulation: (1) studies the formulation expanding small and medium-sized enterprise public stock offering and the listing standard, establishes the strict market access system; (2) studies formulates the small and medium-sized enterprise To be listed guaranteeing and recommending person rule, practical guard inferior listing; (3) studies formulates the small and medium-sized enterprise going on the market counseling direction, guaranteed that the company establishes the perfect legal person management structure; (4) studies formulates the small and medium-sized enterprise To be listed information disclosure criterion, through enhances the information disclosure frequency and timeliness, expands the information disclosure scope, strict market supervision; (5) studies formulates the small and medium-sized enterprise stock offering to draw back the city means that establishes smoothly draws back the city mechanism.#p#分頁標題#e#
 

5.4 Domestic GEM trend of development
 

Facing multiple internal and external challenges, it is time for the GEM to review its positioning and development strategies. First of all, the bottoming of global tech stocks has defeated the threat on the GEM's existence. But questions linger on whether it should still be positioned to become a tech heavy board that mirrors the NASDAQ and rivals the main board, or it should serve as a host for companies not yet qualified for main board listings. Judging from the current situation, the latter positioning seems to be the order. As for the ambitious former positioning, the market condition poses serious challenges. Although the GEM can facilitate growth by utilizing tools such as listing rules and policies, it is still largely the market force that decides the fate of a listed company.

Even so, the GEM still has room for improvement and development. The first task in order is to retain high quality companies in order to rebuild the market and investors' confidence. Instead of trying to prevent desertions using administrative measures or manipulating listing rules, the GEM must strive to provide some of the advantages similar to those of the main board in order to retain loyalties of the listed companies. A thorough survey on those companies having moved or moving to the main board will provide invaluable answers. Moreover, increasing liquidity and turnover is very important to attract investors and capitals, especially institutional investors. But it must be pointed out that unless the GEM dramatically raising the bar of listing, increasing the minimum requirements of funds raised and ratio of public shareholding, which have far fetching implications, the GEM will still host many small and illiquid companies. In this case, those mid to large size companies should be selectively targeted when considering measures to boost turnover. A market making system can be adopted, just like what the bond market has done. However, there exist many technical issues regarding a market making system for so many different stocks, as many large shareholders of an illiquid stock could easily act as a market maker. And ultimately the deciding force lies in a company's quality and market's selection, which is less relevant to whatever the GEM can do.

As it is inevitable that some GEM companies will seek to move to the main board once it achieves certain growth, the GEM needs to consider establishing a echelon relationship with the main board, under which qualifying GEM companies move up to the main board, and in turn the main board raises the criteria for continuous listing and sends those second, third or even fourth liners to the GEM under a delisting mechanism. Although the GEM will inherit weaker companies from the main board, this mechanism can partially solve the main board's delisting problem and stop the GEM's blood loss. And the echelon formation bodes well for optimizing the structure of the overall market and facilitating its development. The GEM also needs to review its own delisting mechanism in order to improve quality. Like the NASDAQ that desisted 430 or 11.4% of its stocks in 2003, its market cap grew by USD208bn or 9.3% nonetheless, proving that quality is worth pursuing. Of course, market practitioners and investors must be thoroughly consulted for this matter to avoid the plight of the penny stock crisis.#p#分頁標題#e#