Emerging Private Equity – ChiNext Launch

Emerging Private Equity – ChiNext Launch

China has launched a Nasdaqstyle exchange designed for smaller, innovative companies in a move that some hope will offer private equity firms a lucrative new exit route.

Based in Shenzhen, ChiNext (also known as the Growth Enterprise Market) launched in late October with 28 listings, with another 23 filing to list over the rest of 2009. On November 30, ChiNext had a market capitalization of RMB 139.0bn(US$20.4bn); a rise of 120%.

The market is expected to be volatile, but offer high valuations to companies that list there. “The Chinese economy is experiencing tow asset bubbles: property and equities,” explained Chris Rynning, CEO of Origo-Sino India.

He added: “Opening another exchange has the ability to cool down the equity market. Yet there is so much cash in China that can’t be invested outside the country because the currency is not truly convertible, a lot of this has to be channeled into equities. ChiNext will be a major beneficiary of that.”

Rynning said the exchange had a real chance of being a competitor to Nasdaq and London’s Alternative Investment Market (AIM) for Chinese companies and could offer a good way of realizing investments for the country’s private equity firms. “This is an additional exit market for funds,” he said.“They can opt for the relatively illiquid AIM market, where they will achieve a price/earnings multiple of, say, seven or they could go for ChiNext, where they could get a multiple of 60. There will be funds starting to structure investments to exit on the market. Also, Chinese companies that tried to go to AIM will now question whether they should go for the more liquid ChiNext market.”

He said that this firm would be looking to structure exit with the possibility of taking advantage of the valuations on the market, which are around three times those seen on the Shanghai Main Board, base on p/e multiples.

The opening up the exchange could also foster the development of the Chinese private equity industry, which is the already growing at a fast pace. “China has always had a surplus of cash, but it never really had good exit routes,” said Rynning. “This should accelerate the growth of private equity funds and increase investment activity. Competition will heat up.”

Companies must be majority owned in China to be eligible for listing on the exchange. They must also have net profit over the last two years of no less than RMB 10m (US$1.5m) or have profits of RMB5m(US$750,000) and revenues of no less than RMB50m (US$7.5m) and a revenue growth rate of no less than 30%. They will also need to have been trading for three years and have net assets of no less than RMB20m (US$3m). Companies filing for initial public offering will be vetted by the China Securities Regulatory Commission and by the ChiNext board.