Q+A-China launches Nasdaq-style second board

Fri Oct 23, 2009 2:15am EDT

By Samuel Shen

SHENZHEN, Oct 23 (Reuters) - China officially launches its Nasdaq-style second board, ChiNext, in the southern city of Shenzhen on Friday, a landmark move aimed at reforming the country's capital markets and funding private sector growth.

Twenty-eight high-growth companies, including software maker Beijing Ultrapower (300002.SZ: Quote, Profile, Research, Stock Buzz) and sportswear maker Toread (300005.SZ: Quote, Profile, Research, Stock Buzz), are the first to list on ChiNext, with their shares to start trading on Oct 30.

For a related ANALYSIS, click [ID:nSHA160989]

For a TIMELINE, click [ID:nSHA143174]

WHAT IS CHINEXT?

ChiNext will complement China's two main stock exchanges in Shanghai and Shenzhen by targeting the country's high-growth start-ups. The market, based alongside the existing Shenzhen main board, is an important component of China's multi-tier capital market system, which includes the two main boards and a Small & Medium-sized Enterprise (SME) board.

HOW DOES CHINEXT DIFFER FROM CHINA'S MAIN BOARDS?

Compared with the Shanghai and Shenzhen main boards, ChiNext has a lower listing threshold, offers riskier but potentially more profitable investment opportunities, and imposes more stringent rules on trading, information disclosure and delisting.

WHY IS CHINA LAUNCHING CHINEXT?

China wants funds to be channelled through to small and medium-sized private enterprises, which have largely been excluded from existing exchanges that are dominated by former state-run enterprises.

Such SMEs typically find it tough to get bank loans, but are crucial to driving innovation and creating jobs at a time when China is keen to sustain growth and reduce the economy's reliance on manufacturing.

The move, a milestone in China's capital market reform, is also aimed at widening investment channels, stimulating public enthusiasm for entrepreneurship and boosting domestic venture capital and private equity investment.

WHAT TYPE OF COMPANIES CAN LIST ON CHINEXT?

Applicants must show a profit in the two most recent years, with an accumulated profit of not less than 10 million yuan ($1.46 million), and growing steadily.

Alternatively, the issuer must have been profitable in the most recent year, with net profit of more than 5 million yuan and revenue of over 50 million yuan, and revenue growth of more than 30 percent in either of the two most recent years.

Issuers must also have net assets of at least 20 million yuan at the end of the most recent accounting period, with no uncovered losses; and total post-IPO share capital of at least 30 million yuan.

DO OTHER COUNTRIES HAVE SIMILAR BOARDS?

There were 47 such second board markets worldwide at end-2008, according to Bohai Securities. Successful ones include the Nasdaq in the United States, Britain's AIM and South Korea's Kosdaq. Others, such as Hong Kong's Growth Enterprise Market (GEM) and Japan's Jasdaq, have struggled with waning investor enthusiasm. (US$1=6.832 Yuan) (Editing by Doug Young & Ian Geoghegan)