Little IPO spring left in GEM board, say analysts

Updated: 2009-08-07 07:16

By George Ng(HK Edition)

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HONG KONG: The city's dwindling Growth Enterprises Market (GEM) is set to lose further ground once the Shenzhen Stock Exchange launches a similar second board late this year.

The GEM, which is operated by the Hong Kong Stock Exchange with an aim of providing an alternative venue for start-up firms to raise capital for business development, has been increasingly losing its designated functions as both IPO and trading activities on the board have literally dried up.

The strong market response to the planned launch of the Shenzhen second board has not only reminded investorss of the lamentable current conditions of the local GEM, but has also raised a red warning flag regarding its long-term survival.

A total of 108 companies filed their applications for a listing on the Shenzhen second board on the first day that the mainland market regulator, the China Securities Regulatory Commission (CSRC), started accepting applications late last month.

The number of IPO candidates is expected to rise further as the planned launch of the board - likely in October - draws nearer.

In sharp contrast, only 170 listed firms are left on the GEM board, launched in 1999. Worse, there have been no new listings this year, after merely two IPOs last year and in 2007.

Meanwhile, its average daily turnover (ADT) shrank to around HK$400 million in June this year from a peak of HK$1.46 billion during the period of 2000.

"The GEM board is dead," Francis Lun, general manager at Fulbright Securities, pronounced.

With the upcoming launch of the Shenzhen second board, the GEM will lose further ground, market watchers believe.

"The Shenzhen second board will enjoy a competitive edge over the GEM, as it will offer much higher valuations for newly-listed stocks," Lun said, citing the highly speculative nature of the mainland market.

Another advantage for the Shenzhen second board is that the mainland provides a vast IPO stockpile while Hong Kong has relatively few listing candidates.

"Mainland start-up companies will prefer to list their shares on the Shenzhen second board, which is nearer to their market," Lun said.

Dickie Wong, research director at Kingston Securities Ltd, also believes that the GEM has lost its designated function of fostering start-ups.

"The GEM has earned itself a poor reputation. Listed firms always want to jump off and step onto the main board as soon as they qualify," Wong said.

In fact, many of the previously GEM-listed firms have moved on to the main board after showing a profit for three consecutive years and meeting other listing requirements.

Only loss-saddled firms stay on the second board, Wong concluded.

The poor reputation of the GEM board keeps investors at bay, which explains the low trading volume of the board.

"GEM stocks are definitely not my first choices as they are generally less well-known and less profitable," said Ruby Lau, a private investor.

"I have never traded GEM stocks, because the main board has so many good ones to choose from," said Johnny Tse, another private investor. "I haven't seen any particularly attractive concept on the GEM board."

Investors' generally weak appetite for GEM stocks, in turn, scares many IPO-hopefuls away.

The cash raised by small firms from their IPOs on the GEM is in many cases just enough to cover the cost of getting on board, Kingston Securities' Wong said.

(HK Edition 08/07/2009 page3)