Hong Kong's secondary stock board, long ignored by big investors, faces deepening gloom as some of its largest stocks prepare to flee to the city's main board. By switching, the companies are hoping to attract more investor attention and analyst coverage by meeting tougher profitability requirements for firms listed on the main exchange.
The Growth Enterprise Market (GEM) would see its market capitalization slashed by more than one-third, from its current level of HK$74 billion (US$9.5 billion), if all the companies believed to be considering an exit actually leave. The main board's collective market value, by contrast, is HK$5.4 trillion. GEM has struggled to attract investors since shortly after its launch in late 1999, which was closely followed by the bursting of the tech bubble.
"The leaders in the GEM are being forced to leave because fund-raising and the other purposes of listing cannot be achieved there," said Raymond So, associate professor at the Chinese University of Hong Kong and a specialist in corporate governance.
"The quality of many of the GEM companies is in doubt, their liquidity is poor, and most banks will not accept GEM shares as collateral for loans. The GEM board is facing a crisis," he said.
Some in the market say the GEM board should either be shut or join forces with a new bourse that is being planned for small and medium-sized firms in Shenzhen.
Two of GEM's three biggest firms, Phoenix Satellite TV and the TOM Group, have confirmed that they plan to leave for the more liquid Hong Kong main board.
The biggest GEM stock, CK Life Sciences International (Holdings), also plans to abandon the GEM, according to a report in the Hong Kong Economic Journal. The company did not respond to requests for comment.
The newspaper also said that hongkong.com, with the sixth-largest GEM market valuation at nearly HK$3 billion ($382 million), is also eyeing a move to the main board. The company declined comment on the switch, but said it would consider every opportunity that would be of benefit to shareholders.
Both CK Life and TOM Group are controlled by Asia's richest businessman, Li Ka-shing. Another Li firm, TOM Group spinoff TOM Online , recently raised HK$1.5 billion in a dual GEM and Nasdaq listing and has the fourth-largest market value on the GEM exchange. TOM Group, an Internet portal that has become a Chinese language media conglomerate, said exiting the GEM for the main board would increase liquidity and raise its profile by attracting coverage from analysts and the attention of institutional investors.
"The listing of the shares on the main board will be beneficial to the future growth, financing flexibility and business development of the company," TOM said in a statement. The Hong Kong stock exchange has confirmed that nine companies have recently moved from the GEM to the main board and the Tom Group had been given permission to move as well.
"It is not unusual for some GEM companies, as they develop and grow, to consider listing their shares on the main board as part of their long-term strategy," the exchange said by e-mail.
Nasdaq wannabee
The GEM was intended as a Nasdaq-type bourse for high-growth companies that did not meet the profitability requirements of Hong Kong's main board. Its launch was accompanied by the debut of numerous other such growth-focused exchanges around the globe, many of which have since closed.
While the board boasts 196 firms and has attracted 14 IPOs this year, most GEM stocks are obscure with low trading volume. "It should never have been set up in the first place," said Stephen Brown, head of research at Kim Eng Securities in Hong Kong. "They should just close it." Excluding TOM Online's IPO, the average new GEM listing this year raised HK$60 million.
GEM turnover has steadily shrunk and accounts for less than half a per cent of main board trade. In May, HK$60 million worth of GEM shares traded per day, compared with HK$180 million a year earlier. In November 1999, the average was HK$356 million.
Since the start of 2001, the GEM index has fallen by two-thirds.
"The performance of the GEM market has been disappointing," said Ben Kwong, associate director at KGI Asia. "The stock exchange needs to make more of an effort to lift the quality of the companies and to step up corporate governance." More than one in four GEM firms has switched auditors since August 2002 due to disagreements over fees - a trend that has raised worries about corporate reporting standards.
Some mainland firms that would seem ideal GEM candidates have bypassed the board for the Nasdaq during the recent IPO rush. Since late 2003, Ctrip.com, Linktone and Shanda Interactive Entertainment have all listed on the Nasdaq, raising a total of US$314 million.
(HK Edition 06/09/2004 page18)
