Skyrocketing ChiNext: A Land of Chances and Risks
Despite warnings from numerous skeptical commentators, the prices of stocks on ChiNext, China's NASDAQ-style board for growth enterprises, continue to shoot upward. On May 18, the ChiNext index ascended by 4.23 percent, with one third of its stocks hitting the upper limit.
The average price-to-earnings ratio of ChiNext companies has reached 114 in recent days, fostering a division over future trends among people in the trade. To my mind, the upsurge is not groundless, while the centralization of holdings by mutual funds may pose risks. In other words, the prospects may be inspiring as a whole, but stockholders should be on the alert for fluctuations.
The continued rise of ChiNext is justified by the current macro-environment. For one thing, the global economy is going through deep adjustments; for another, the Chinese economy is in the midst of a slowdown and ongoing structural adjustment as well as dealing with undigested stimulus policies. To smoothly push forward economic restructuring and create new growth engines, China is now committed to carrying out in-depth reforms, improving market environment, and encouraging employment and innovation. Since most companies listed on ChiNext are engaged in emerging industries, which are expected to wrench the economy out of the slowdown, the ChiNext boom is a matter of course.
An analysis on the 2014 annual reports of companies on the Shenzhen Stock Exchange indicates that the surge of the SME (small and medium-sized enterprise) board and ChiNext is testimony to the thriving area of strategic emerging industries. By April 30, the Shenzhen bourse had 626 companies engaged in strategic emerging industries, accounting for 37.44 percent of the total. Of them, 76 companies are listed on the mainboard, 233 on the SME board and 317 on ChiNext, respectively, making up 15.83 percent, 31.23 percent and 71.08 percent of the total companies on their individual boards.
ChiNext also took the lead in revenue and profit growth. In 2014, Shenzhen-listed companies registered gross revenue of 6.31 trillion yuan ($1.02 trillion), up 8.43 percent. More specifically, companies on the mainboard, SME board and ChiNext witnessed a revenue growth of 5.25 percent, 12.09 percent and 25.57 percent, respectively. Meanwhile, companies on the Shenzhen Stock Exchange generated net profits of 378.2 billion yuan ($60.97 billion) in 2014, up 11.65 percent, with those on the mainboard, SME board and ChiNext increasing 7.27 percent, 17.71 percent and 16.57 percent, respectively.
In terms of profitability, the average gross profit ratio of Shenzhen-listed companies stood at 20.87 percent, with that on the mainboard, SME board and ChiNext reaching 19.37 percent, 21.44 percent and 33.12 percent, respectively.
In addition, the average debt-to-asset ratio of Shenzhen-listed non-financial companies on its mainboard, SME board and ChiNext stood at 64.14 percent, 48.81 percent and 34.51 percent, respectively, by the end of 2014.
Since ChiNext came into being in 2009, it has weathered through the throes of economic restructuring. Most ChiNext-listed companies concentrate in strategic emerging industries, such as electronic information technology, environmental protection, new material, new energy, high-end manufacturing and biological pharmacy, presenting a series of novel business models. That makes ChiNext a barometer of the new economy.
Recently, the share price of two ChiNext companies--Shanghai Amarsoft Information and Technology Co. Ltd. and Guangdong Qtone Education Co. Ltd.--hit 400 yuan ($64), which has stunned the market. At the same time, some mutual funds have come into the spotlight. Five funds under China Universal Asset Management Co. Ltd. are believed to be jointly shoring up the stock price of Amarsoft Information and Technology, while the funds under Yi Fonda Fund Management Co. Ltd. are reportedly the major force jacking up the price of Qtone Education.
In fact, a number of growing shares are manipulated by the funds under the same company. Given the low circulation market value of ChiNext companies, if these funds hold over 20 percent of a ChiNext company's shares, they will be well positioned to earn super profits by driving up the share price. Of course, they also have to confront a morass together if risks break out.
At the turning point of the economic transformation and upgrading, the growth of ChiNext, which leads the new economy, comes as no surprise. As the nation pushes forward the strategy of Internet Plus, ChiNext is prepared to experience its hey day.
The investment value of growth stocks should be decided according to expectations of their future development, rather than their current valuations.
Investors should look on ChiNext in a farsighted way, and be aware that there are both opportunities and risks in a market yet to be perfected.
This is an edited excerpt from an article by Wu Qing, a financial commentator, published in Economic Information Daily
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Copyedited by Kylee McIntyre
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