Shenzhen: The World’s Busiest IPO Market in 2010
Article by: Chris Jaramillo [Associate Saks Gloweli Consulting]
Through June of 2010 the Shenzhen Stock Exchange had the most active IPO marketing the world, leaving its next competitor, Shanghai in a distant second. The first half of this year saw 161 firms raise a combined total of $22.6 billlion USD, while Shanghai hosted 11 firms combining for $8.2 billion USD. This marks an amazing leap for both Shenzhen and its young stock exchange, which was not in the top 5 indices in China only 2 years before.
The amazing growth can be traced back to the inception of the Chinext market in October 2009, which allowed small/medium-sized enterprises (SME’s) to enter the capital market. Similarly impressive is the fact that “Shenzhen’s Stock Exchange is effectively closed to all investors from outside China”1 further demonstrating the power of domestic players to drive local investment in local enterprises. The Chinext page on the SZSE website claims its purpose is aimed at “improving the level and structure, enhancing the depth and extent of China’s capital market” and promotes opportunities for China’s myriad SME’s, innovators, venture capital,and the capital market. What’s equally impressive is the fact that the Chinext Market was designed specifically to target funding for technology and innovation-driven start up companies to further align China’s long term plan to shift its focus from labor-intensive markets to more specialized, tech-heavy industries.
The Chinext Market opened in October of 2009, after nearly a decade of preparation,with the IPO’s of 28 companies. Modeled after the NASDAQ market in the US,Chinext was created to aid domestic SME’s in an internationally competitive marketplace. An interesting facet of the Chinext market so far is the high investment rate in these enterprises. Daily volume on the Chinext market averages in a troughly 200 mil shares, and the companies that have debuted here all experience an abnormally high Price/Earnings ratio (P/E) demonstrating the willingness of domestic investors to take risks in these enterprises. While the companies will have to justify this kind of investment in the long term, it is still a very enticing draw for the many Chinese enterprises that have the same dream of featuring their IPO on this fast-growing exchange.
While this newsworthy fact is impressive, it must be noted that this sort of undertaking is no simple task, and that the boom of IPO activity is impressive but not without its own perils. As Chinese enterprises look to raise capital in these arenas, they must also take into account that these markets were created to aid domestic enterprises while also helping them to be more internationally competitive. This means that these companies need to bring the standard of their finances and operations to the same level that their international peers have set.For some this could prove to be a daunting task, but one that will ultimately benefit them and any of their future investors in this unprecedented market expansion.