Business

Time-bomb ticks as second board turns a year old

By Bai Ping (China Daily)
Updated: 2010-10-22 16:15

BEIJING - As China's Nasdaq-style second board approaches its first anniversary on Saturday, the market is gripped by growing anxiety over rumored imminent share dumps by insiders and former executives.

Since the growth enterprise board or ChiNext started trading in October last year in the boomtown of Shenzhen in southern China, 18 senior managers from 16 listed startups have resigned, bringing with them shares worth a whopping 1.45 billion yuan ($216 million), Chinese media reports say.

The companies have cited personal reasons, including family reunions or health conditions, for their departures. But media and financial analysts now warn of massive sales as they suspect the entrepreneurs are preparing to cash out as soon as their lockup agreements expire.

Following the board's rules, executives are not able to sell shares within 12 months of their company's initial public offering (IPO). However, the lockup period shortens to half a year if a manager resigns.

Market analysts say the restrictions explain why the resignations had peaked in March and April, about half a year before the lockup agreements end.

The temptation to cash out while share prices are still high is obvious. Wei Yi and Nie Pengxiang, both vice-presidents of the ChiNext-listed Center Testing International, were paid yearly salaries of 194,000 yuan and 473,000 yuan before they quit in June.

They'll soon be able to sell their shares, now valued at about 11.6 million yuan for Wei and 9.5 million yuan for Nie.

Media reports say that to get around the lockup restriction for management, senior executives in several ChiNext companies have given up their titles to take non-managerial position.

People in the West may argue there is nothing wrong if an entrepreneur decides to collect his share of profits early rather than wait until the later stages of his company. Venture capitalists usually sell shares shortly after, if not at the time of the IPO.

But critics of China's ChiNext don't think so. They believe the exodus of the senior managers is just another proof the market, designed to be a financing platform for innovative companies, and is killing off rather than encouraging Chinese entrepreneurship.

Liu Jipeng, a capital specialist with China University of Political Science and Law, said that ChiNext-listed companies are usually oversubscribed with soaring share prices because a too-stringent process had made them "rarities", a situation where too much money was chasing too few listings.

The first batch of 28 startup companies made their debut on the exchange, with opening prices soaring 76 percent to 44.57 yuan on average. The first trading day was closed with an increase of 81 percent.

With the easily raised capital, these companies could make tens of millions of yuan in interest income alone if they simply deposit the money at local banks, he said.

ChiNext was meant to spur finance-starved innovative start-ups with strong growth potential. However, "if a ChiNext-listed company found itself flush with raised capital that yields profits more easily than growing a new business, why would it continue to be entrepreneurial?" Liu wrote on his blog.

Judging by the companies' pampered situation and the resignation of senior executives, Liu believes the Chinese entrepreneurial zeal is dying rather than flourishing after the tide of IPOs on the ChiNext.

There are also talks about business ethics now that the insiders are exiting their businesses.

When former managers rush to sell their stocks to realize profit, it may come as a double whammy to small investors. The excess supply can put severe downward pressure on the prices, and share dumps by insiders may weaken people's confidence in the long-term potential of the company.

Since the midterm financial reports were made public, stock analysts have raised doubts on the growth sustainability of some of the more than 100 ChiNext-listed companies and suspected several were the works of spin doctors. So their founders are eager to cash out before people begin to question their business models.

Chinese financial commentator Pi Haizhou once predicted that the biggest problem for the ChiNext would be regulation.

"The regulatory efforts should be 100 times as intense as those on the main board, otherwise any company on the ChiNext could be a bomb. Investors should not pay for the delisting of a company," he said.

China Daily