Shenzhen Stock Exchange

The lifeblood of regulated cash market exchanges, the entry
of new companies onto an exchange (IPOs) is widely viewed as indicative of
general health of the economy.

This is the case of the Shenzhen Stock Exchange. While
the blue chip market run by the Shanghai Stock Exchange is setting
records for liquidity and fund raising, the junior market is keeping
pace with a market dedicated to small companies.
As smaller companies are fundamentally different from larger older
companies, as the investors in those companies have different
expectations and concerns, so too has the stock exchange needed
to adapt precise rules, oversight, marketing and education to attract
listings and liquidity successfully.
Large state-owned companies used to dominate the IPO market
in China. Now the tide seems to have changed in favor of small
and medium-sized enterprises (SMEs)1. In the first 10 months of
this year, Shenzhen Stock Exchange (SZSE) admitted 261 IPOs,
all of which are SMEs. They raised a total of USD 36 billion in IPO
proceeds. Furthermore, over 400 SMEs are in the pipeline waiting for
approval of their prospectuses.
The booming IPO market reflects the strong and continuous
development of SMEs in China’s private sector in the last three
decades. According to the Ministry of Commerce, there are over
10 million registered SMEs, accounting for 99% of all businesses
in China. And 99% of the country’s SMEs are private businesses.
Furthermore, Chinese SMEs are responsible for 60% of the nation’s
GDP, 70% of exports, 80% of urban employment and 70% of
patents for technological invention. Undoubtedly, SMEs are
cornerstones for the nation’s economic growth and social well-being.
I SZSE’s growth markets
China’s recent IPO boom for SMEs started with the launch of the
SME Board in 2004. Though originally designed as a pilot market for
the smooth rollout of a venture market, the SME Board flourished
in its own right. In the last 6 years, the SME Board had 490 IPOs
and raised USD 53 billion. It not only channeled necessary funds
and created value for listed SMEs, but also erected a beacon of
hope for the vast number of ambitious SMEs. With 6 years of
successful operation, the SME Board has proved the capital market’s
effectiveness in growing emerging companies. In response to
challenges exacerbated by the global financial crisis where SMEs
were hard hit, China’s State Council decided to launch a new
market known as ChiNext in SZSE in late October 2009. Under the
leadership of the China Securities Regulatory Commission (CSRC),
ChiNext took on the mission of fostering innovative industries and
helping transform the nation’s economic growth model. In one
year’s time, ChiNext saw 134 innovative growth companies offer
shares, raising USD 14.8 billion.
The two growth markets serve SME issuers in both traditional and
innovative sectors. The SME Board adopted almost the same listing
rules as the Main Board. Though the SME Board maintained the
Main Board’s mechanisms geared toward traditional manufacturing
businesses, it offered an important opening toward private growth
companies seeking financing support from capital markets. ChiNext,
in comparison, offers less stringent listing rules, requiring shorter
operational history and less profit for potential issuers. ChiNext
is positioned to be more accessible to emerging companies from
innovative sectors.
II Powering growth on a sustainable track
SMEs play a crucial role as the Chinese economy moves away from
overdependence on lavish resource consumption, cheap labor and
high emission toward a more sustainable growth model driven
by innovation. China’s 12th Five-Year Plan clearly lays out the
new industries the nation aspires to develop. SMEs, adaptable and
responsive to business opportunities, are quick to take position in
emerging market niches. SZSE, under the guidance of CSRC, carefully
designed IPO promotion and service programs to groom and usher
innovative SMEs into the capital markets. As a result, some trends
have emerged in the SME Board and ChiNext Market where leadingedge
innovators become movers and shakers in their industries.
We have chosen some typical companies listed on the SME Board
and ChiNext as examples to illustrate some new business models
characterizing recent IPOs on SZSE.
1 New economy
The word “new economy” was coined during the Internet boom in
late 1990s. It refers to business models based on communication
networks. Thanks to its positive external effect, a network service
becomes even more attractive with increasing number of users. It
totally revolutionized traditional linear cost-output structure and
created the possibility of exponential growth. However, there is one
condition that a winning network business has to meet: a critical
The latest statistics show that there are 460 million Internet
users, and 760 million mobile phone users in China. Over 900
million Chinese people watched the opening ceremony of Beijing
Olympics on TV. And the world’s most-watched sports game ever was an English Premier League soccer match, where two Chinese
players showed up in the opposing teams. Convergence of different
networks is underway in China. The link-up of Internet, mobile
phone, cable and even electronic devices in China is likely to create
one of the largest and most connected communication networks in
the world.
UltraPower (300002.SZ), listed on the ChiNext market, was founded
in 2001, well after the Internet bubble burst. It founder, Mr. Wang
Wing, was nonetheless convinced that network convergence would
create vast opportunities in communication services. In 2008, the
company developed Fetion, an instant messaging system for China
Mobile. It enabled the mobile phone user to transmit text and
pictures to his or her friend’s computer screen, and vice versa. With
fast adoption by users for its convenience, Fetion soon reached
a critical mass to launch a news pop-up, social networking, and
other services. UltraPower now leverages its experience in instant
messaging services to develop a mobile messaging service system
for farmers.
2 Chain services
Traditional service businesses in China tend to be small and
family-held. Over the centuries, some brand names have stood
the test of time and become iconic national legacies. Despite their
fame and time-honored skills or recipes, they remain small. Their
growth potential is constrained by boutique-style service and
self-accrued funding. In this perspective, McDonald’s restaurants
showed their Chinese counterparts a new approach to food service:
standardization for cost-cutting and fast expansion.
Chinese food, with tastes largely dependent on chefs, is difficult to
standardize and duplicate the way McDonald’s does. But it is not
impossible. Quanjude (002186.SZ), listed on the SME Board, was
among the first to commercialize a traditional food brand and recipe
on a large scale. For Chinese people, Quanjude is synonymous with
authentic Peking roast duck. Today, Quanjude operates restaurants
in Beijing, Shanghai, Chongqing, Harbin, Zhengzhou and Qingdao.
The restaurant chain now offers roast-duck meals prepared and
served in a standardized manner. A customer can expect almost
the same experience wherever he or she goes to a Quanjude.
Standardization helps the company gain economies of scale in
procurement, marketing, cost management and knowledge sharing.
Home appliance store operator Suning (002024.SZ), which became
listed on the SME Board in 2004, represents a variety of retail chain
issuers on SZSE. On the back of streamlined logistics services and
riding on strong consumer demand in China, Suning has grown from
43 stores in 2004 to what is now over 1,000 stores. The company
has seen its assets grow by 50 times in value, profits rise by 30 times
and share price up 60 times since listing.
3 Green industries
China’s effort to foster recycling and environmental technology
comes out of necessity. For a long time, China’s economic
growth put a heavy strain on its environment. Thanks to the
government’s recent policies in support of environment-friendly
development, green industries have taken center stage in response
to environmental challenges.
OriginWater (300070.SZ), listed on ChiNext market, was created
by a group of returned overseas scientists in Beijing in 2001. The
company envisioned an increasing demand for water treatment
with fast urbanization in China. Thus the company developed
patented MBR (membrane bioreactor) technology to effectively
and economically filter and purify waste water. Its technology was
adopted by major facilities like Beijing Olympic Park and National
Grand Theater in Beijing.
Shenzhen-based GemHi-tech (002340.SZ), listed on the SME Board,
is a company that specializes in recycling batteries. Batteries are
convenient devices that, if improperly disposed of, may pose great
danger to the environment. And cobalt, the metal that powers
batteries, is extremely precious. Therefore, it makes perfect business
and ethical sense to commercialize battery recycling. And thanks
to support by the capital markets, GemHi-tech was able to expand
production facilities in Hubei Province. GemHi-tech also collects
electronic trash, reclaiming metals inside and reprocessing the
remaining plastic materials into furniture.
4 Cultural ventures
With rising disposable income, Chinese people have greater demand
for cultural products. Now China produces the world’s largest
number of TV series. It is also the world’s third largest movie market
with an estimated USD 1.43 billion entries in 2010 and averaging
30% year-on-year growth since 2005. And China has the world’s
second largest number of newspapers in circulation. However, China
has yet to produce a world-class media company. NewsCorp, listed
on NYSE, with annual revenue of USD 32 billion could dwarf the
entire publication industry in China.
Though in its nascent stage, China’s cultural industries have already
embarked on journey of commercial development with the help of
capital markets. Huayi Brothers Media Group (300027.SZ) was the
first Chinese movie maker to launch an IPO. Now, a year after its
debut, it commands 40% of the market for locally produced movies.
Its hit movie Earthquake, which reaped USD 100 million, is likely to
top the box office revenue chart for the year. China’s movie market
is likely to reach USD 4.5 billion by 2015, becoming the world’s
second largest movie market. Furthermore according to Huayi’s
Chairman, Mr. Wang Zhongjun, the company’s IPO helps promote brand recognition and financial strength, and retain the best talent in
the industry with equity-based incentive schemes.
5 Biotechnology
With emerging health challenges in the country, biological and
medical research is called into action to help tackle epidemics like
H1N1 and other common diseases. Though effective vaccines and
medicine are always in high demand, they are hard to come by as
bio-medical research is heavily capital-intensive and involves high
uncertainty. The role of the capital market is, thus, to help leading
biotechnology firms obtain the necessary financial resources to
succeed in their R&D effort and mass-produce medical products.
Hualan Biological Engineering Co. (002007.SZ), listed on the SME
Board since June 2004, is a specialized bioengineering company. It
became well-known in 2008 when the H1N1 epidemic broke out,
causing serious concern. Hualan was one of the first in China to
produce safe and effective vaccines against H1N1. The company
provided 15 million vaccines every month during the peak of H1N1
Hepalink (002399.SZ), also listed on the SME Board, was founded
by a biologist who succeeded in abstracting medicinal substance
from pig bowels. The substance proved to be effective to treat
cardiovascular disorders, was in strong demand both at home and
overseas. Hepalink’s stock soared 70% on its debut, making Mr. Li Li,
the founder of the company, the richest man in China on that day.
6 Equipment manufacturing
When trapped miners were finally lifted to the ground after a 68-
day ordeal in Chile, everyone around the globe cheered, including
engineers from a Shanghai-listed equipment manufacturer Sanyi
Heavy Industry (600031.SH). The company provided the crucial
crawler crane to lift the rescue capsule from far underground. Sanyi
represents a large number of Chinese equipment manufacturers who
can be called to action for daunting tasks. In fact, the capital markets
have enabled many leading equipment manufacturers, especially
SMEs, to invest in capability-building and achieve technical
Hans Laser (002008.SZ) started as a small laser equipment dealer
in Shenzhen. Mr. Gao Yunfeng, founder of Hans, was amazed by
the wonders of laser technology. The high-power beam could cut
with precision, weld faster and better than any human being, and
the potential was huge for printing electronic circuit boards. Mr.
Gao chose to launch his own venture in 1996. Eight years later,
Hans Laser was listed on the SME Board of SZSE. Now Hans Laser
equipment has been adopted by all top 500 industrial companies in
SIA Sun (300024.SZ), listed on ChiNext Market of SZSE, is a
robotics technology company. Starting off as a commercialization
project of the National Robotics Research Center, the company has
turned many research projects into successful products to improve
workplace productivity. Its robots now repair electric wires and
control production lines. The robots not only replace human workers
in unsuitable working conditions, but also perform their tasks with
precision and tirelessness.
III SME IPOs unlock value
The last 30 years has seen China gradually transit from a planned
economy toward a market-oriented economy. The Chinese capital
markets’ mission also evolved from mainly supporting large stateowned
companies to helping market-responsive SMEs. IPOs have
become a major channel of direct financing for Chinese SMEs. Along
with the capital markets, many other doors have been opened to
SMEs. By means of IPO, capital markets are consolidating financial
services for SMEs, unlocking a value chain that benefits society at
1 The booming SME IPOs have unlocked capital formation and value
creation inaccessible to private businesses and the general investing
public in the past. The private sector, though accounting for 99% of
China’s business population, had been largely kept out of the capital
market until the SME Board began in 2004. Thanks to government
support and new policies, SMEs of different ownership structures
have been admitted into the capital market. Private businesses are
now able to capitalize on their assets, know-how and brands. Listed
family businesses are subject public supervision and required to
take social responsibility. Shares and other financial products have
become available to investors of different risk appetites. Wealth
management can also be facilitated by capital markets. Investors
are thus able to share in the fruits of the nation’s economic growth.
Furthermore the subsequent stable growth in listed companies on
the SME Board and ChiNext market has helped create a virtuous
cycle for continued IPOs.
2 The booming SME IPOs provide a catalyst for private equity and
venture capital investment. It is important for a start-up company to
secure seed investment. However, in order to encourage investment
in early-stages companies, there must be an exit strategy for venture
capitalists. ChiNext has again showcased the equity market’s power
to incentivize investment. Among the 134 listed companies on
ChiNext Market, 89 involve venture capital investment. As calculated
on the share prices on 30 September 2010, venture capitalists and
private equity investors marked an average return of 11.36 times
the original investment. In the city of Shenzhen alone, there are over
400 active venture capital firms, managing total funds of over USD
10 billion invested in over 2,700 start-up and growth companies
across the country.

3 A financial supply chain has taken shape to help SMEs every
step of the way. With increasing number of offerings by SMEs,
banks, guarantee and collateral services, intermediary services have
mushroomed to take advantage of new business opportunities. Big
state-owned banks, which used to exclusively serve large stateowned
companies, have established business divisions to help
potential SME issuers, with the hope to retain them even after they
mature. Some banks even coin the phrase “financial supply chain,”
which means provision of tailored services for SMEs from early
stages to IPO and afterwards.
4 SME IPOs benefit the local economy. The idea of IPO by SMEs was
unheard of to many local government officials back in 2004. Local
officials were more familiar with bank lending than with capital
markets. IPOs were slow in the beginning of the SME Board partly
because there was the lack of government consensus at local levels
on IPO for SMEs. However, the market seemed to work its way from
the bottom up. Some small townships emerged from the first round
of IPOs in 2004-2006 with a cluster of listed companies within
their jurisdictions. The influx of IPO proceeds made remarkable
contribution to local economies. Talents moved into these small
towns, attracted by higher salaries and greater opportunities in listed
companies. Business boomed as new investment helped upgrade
R&D, marketing and technology adoption. Local issuers also helped
create jobs as suppliers and logistics providers clustered around
them. Government was also happy to see revenue increase.
These small towns soon found themselves closing their wealth gap
from larger and more established cities.
A small county named Jiangyin in Jiangsu Province, noted for its
pioneering effort in promoting SME IPOs, became one of the most
visited towns in China. Jiangyin is now home to 28 listed companies,
which raised a total of USD 3.1 billion. Jiangyin ranks top in both
IPO proceeds and number of IPOs among Chinese townships. It
produced 10% of China’s listed companies on one ten-thousandth of
the nation’s land and with one thousandth of the population. With
a GDP of USD 26 billion, Jiangyin is not only top of the nation’s 500
strong township economies but also a bustling cluster of SMEs from
a diversity of sectors. The benefits of SME IPOs gradually became
visible to government officials at local levels in other regions, who
swarmed to Jiangyin for advice for their own promotional policies.
IV Facing up to challenges in SME IPO
So far it has been a rosy picture for China’s SME IPO market.
Liquidity is ample thanks to relatively high savings by Chinese
people, and the government’s relaxed monetary policy. And offering
prices are high partly because supply of SME IPOs still falls short of
market demand.
However there is no reason for complacency, and the future is
not without challenges. Investor confidence comes from stable
performance of issuers. Good corporate governance, transparency
and strict market oversight are the necessary conditions for
continued sound performance in IPOs. Retail investors provide the
majority of market liquidity in China. Retail investors with portfolio
or assets value less than 1 million RMB yuan (USD 149,700)
generate 67% of the total market trading value in SZSE. And
they are more vulnerable to market manipulation than seasoned
institutions. Growth markets are, by nature, more volatile and
uncertain than main-board markets. As a result, protection of
investors, especial individual investors, are important safeguards for
market integrity and investor confidence for IPOs.
1 Controlling first-day speculation
Large first-day price hikes were a major concern for regulators. Lured
by profits, retail investors tend to chase high prices in a speculative
mood. In response to first-day speculation, the CSRC implemented
a more market-oriented IPO pricing system at the beginning of this
year. SZSE also introduced a circuit-breaker mechanism to calm
down the market during the first-day price hikes. At present, the
average first-day gain in ChiNext market is about 30% percent,
down from 130% in the beginning of this year.
2 Investor Education Program
With limited analytical tools and research capacity, retails investors
are susceptible to herd mentality, rumors and irrational trading
behaviors. It is therefore important to provide retail investors with
necessary information and tools to understand the market and
take a rational attitude toward investment. To this end, SZSE went
on TV, radio, newspapers and magazines to publicize educational
information for investors. Over 600 TV and radio programs are
aired each year. SZSE also provided 350,000 booklets titled “Getting
to know the ChiNext Market,” and over 20,000 education DVDs
to investors free of charge last year. Over 220,000 people have
participated in a knowledge contest about the ChiNext market,
and over 15,000 investors have tried a mock trading program for a
simulated experience of trading since the middle of last year.

3 Investor protection and suitability program
With greater volatility and uncertainty than the Main Board,
ChiNext securities may not be suitable to all investors. It is
important that the market open only to investors with adequate
experience and the ability to bear risk. To this end, SZSE set up a
ChiNext Investor Suitability Program, requiring that an individual
investor have at least two years’ trading experience before opening
trading accounts. Those who have less than 2 years of trading
experience but insist on joining the market must hand-copy a special
declaration of risk understanding.
SZSE, working with frontline member brokers, carefully registered
the necessary information on all investors in the ChiNext market,
providing a basis to offer the right financial products to the right
4 Strengthened information disclosure
In comparison with the Main Board, information disclosure
requirements for ChiNext companies have been strengthened. For
example, risk alerts must be written on prominent positions in the
prospectus. In order to prevent first-day speculation, issuers are
required to publish risk alerts on the first day of listing to clarify
relevant issues and disclose major risks involved. Within one month
after release, listed companies are also required to hold an annual
report briefing to explain their business strategy, operational
performance, new product or technology development, financial
results, investment projects, sales and purchases of core technology,
changes in core technology teams or key technical personnel.
5 XBRL-based electronic information system facilitates
access to information
With increasing information demands from diverse market
participants, it can be a challenge for the exchange to
simultaneously satisfy everyone’s needs. Convinced that a universal
computer language is basic infrastructure for a unified information
system, SZSE was the first in China to adopt XBRL (extensible
business reporting language) in 2003. SZSE developed an XBRLbased
electronic disclosure system comprising of data filing,
management, supervision and dissemination. The issuer can easily
upload structured information to be disclosed according to a set of
rules in line with IFRS; SZSE manages and supervises
the files before signing them off for public disclosure on designated
websites. Thus the system provides a complete electronic solution
from corporate disclosure to fair speedy information access for
investors. Furthermore, an investor-relationship website is also
available for direct communication between investors and all SZSElisted
SMEs are an integral part of the Chinese economy. They help
meet consumer demands by developing innovative, effective, even
disruptive technologies, and creating new forms of services. SMEs
have risen to push back our horizons and fill demands left open
in the rich texture of modern commerce. In this sense, small is
However, beauty resides in not only the nimbleness and flexibility
of SMEs, but also a supportive system ready to help them move up
to a higher stage. The beauty also lies in the power of the market’s
invisible hand, which allocates the right resources to the right
companies, who, in turn, are expected to improve conditions of life
for human society. People often say that beauty is in the eyes of the
beholder. We are convinced that the capital market tends to have
the right vision for beauty.