By Olivia Chung

HONG KONG – ChiNext, the Chinese stock market for fast-growth companies, has cause to celebrate its first year of operations, with the number of stocks listed on the board growing nearly fourfold and total capitalization surging by a similar amount in the past 12 months. The one dark cloud – senior executives of many of its listed companies are dumping their stock and heading for the hills.

ChiNext has grown to 134 companies from the original 28 since starting operations in Shenzhen on October 30 last year to allow businesses to raise capital with fewer listing requirements than the city’s main board for small to medium-sized companies. Total capitalization is up to 609 billion yuan (US$91.5 billion) from 140 billion yuan.

That growth is likely to continue, given the increasing role ofprivate companies in China’s booming economy and the rewards for executives when their businesses sell shares to the public.

More than 500 executives of ChiNext companies are now worth 100 million yuan in paper wealth, with 73 worth more than one billion yuan, according to the Shenzhen Stock Exchange, which overseas the growth board.

Top of the rich list is 46-year-old Li Li, who according to Forbes is worth US$5.38 billion after taking his Shenzhen Hepalink Pharmaceutical public in May. Other pharmaceutical tycoons on the list include Jiang Rensheng, president of Chongqing Zhifei Biological Products, and his son Jiang Lingfeng, worth a combined 9.5 billion yuan. Wu Guanjiang, 42, vice-president of the 15-year-old company is now worth more than 4 billion yuan.

ChiNext is also giving China’s retail investors great opportunities for quick profits. Last month alone, the value of shares in Shanghai Taisheng Wind Power Equipment, the country’s leading wind tower manufacturer, jumped 40% to 43.66 yuan on their trading debut, while on the same day shares in new listing Shenzhen Yitoa Intelligent Control, a nine-year old company that makes electronic devices that help control anything from power tools to lighting, jumped 23% to 44.27 yuan.

Yet, as the public piles their savings into these small outfits, many of the original owners and executives are dumping their stock on the market to make the most of high share prices as restrictions preventing them selling their holdings expire. A total of 1.2 billion ChiNext shares valued at about 33 billion yuan will be tradable from November 1, accounting for nearly 40% of the board’s total market capitalization.

In the first four days of this month, block trades of shares worth 944 million yuan, in 11 companies, were transacted, according to the Shenzhen exchange, which did not name the sellers but made clear that the sales were by people who were previously restricted from selling.

Some executives are even resigning their positions in apparently successful companies to get around sale restrictions, analysts said. Since April, 67 executives of ChiNext-listed businesses have quit, of whom more than 40 hold shares in their companies; 19 are from the first batch of 28 companies listed on October 30 last year. Departing executives at 21 of those companies own shares valued at a combined 5 billion yuan, according to Huatai Securities on October 26.

Under ChiNext rules, senior executives of growth board companies, including presidents and directors, are banned from selling stock for 12 months after their companies sell shares to the public. After that “lockup” period, they may sell 25% of their shares per year.

If the executives resign, they cannot sell their shares within six months of their resignation. But after that, they are allowed to sell 50% of their shares in the first year and thereafter can dispose of their remaining holdings. This means executives can sell their shares and grab the cash much earlier if they resign.

Among those who appear to be choosing this route is Liang Hui, vice-president and co-founder of Beijing Origin Water Technology, a nine-year old water treatment services company whose high-profile projects include the Beijing Olympic Park and the capital’s ultra-modern moated National Grand Theater.

Liang, who holds about 6% of the company, worth 909 million yuan as of November 4, quit on September 1. The shares last week traded at around 108 yuan, about 56% up from the initial public offering price of 69 yuan in April but down from the 151.80 yuan reached on their first day of trading, when they surged 120%.

Liang was transferred to a subsidiary of the company after his resignation, according to a company announcement.

Zhou Rong, director and general manager of Shenzhen Sunwin Intelligent Co, which she helped to start in 1997 when only 23 years old, is another early mover. Zhou, now 37, owned 7% of the company when she resigned for “personal reasons” in April, only three months after the firm went public at 22 yuan a share – the stock gained 30% to 28.6 yuan on their first day of trading. As of last Thursday, when the stock closed at 26.37 yuan, her holding would be worth 179 million yuan. The company has not announced whether she continues to hold her stake.

Deng Guoshun is another who cited “personal reasons” when he resigned in October as chairman and general manager of Netac Technology, less than nine months after the firm went public. Netac would appear to have a positive future. It claims to have invented a flash memory product and its patent requires any company producing external devices that use flash memory to license the technology from Netac. A patent dispute with Taiwanese firm Acer in 2002 has been settled and Netac says IBM, Samsung Electronics, Dell and Toshiba are among companies that have agreed to use Netac’s production facilities to manufacture components, according to mainland reports.

That wasn’t enough to hold on to Deng, the company’s largest shareholder with a 23.13% stake worth 456.9 million yuan at Thursday’s closing price of 29.57 yuan per share. The shares are 25% down from the 39 yuan IPO price and more than 40% below their January 8 debut high of 52.45 yuan.

ChiNext company executives are getting out now to take advantage of high share prices while they last, after acquiring stock at very low prices, said an analyst of Central China Securities who asked not to be named. High valuations were possible due to the large amount of capital pouring into the new and small market, he said.

“As valuations are too high and not justified by earnings growth, the stock prices will drop to the real value of listed companies when the market matures,” he said.

Li Jun, a strategist at Central China Securities, also questioned whether some company stock prices reflect real values. The present total market capitalization gives an average price-earnings (PE) ratio of 72, triple the average PE of 22.71 in Shanghai and the 38 PE for the Shenzhen exchange main board of small and medium-sized companies. A PE ratio of 60 is more reasonable for ChiNext, Li said.

Nor does profit growth justify present ChiNext values. Its companies’ net profits rose 25.7% in the first half of this year from a year earlier, much lower than the 43.6% surge by companies listed on the main Shenzhen board and the 41% gain by those listed in Shanghai.

Li said not only would the executives’ selling spree continue, but the departure of senior company officials would cause more investors to lose trust in their companies.

China’s market authorities are also eyeing the young, lightly regulated market with caution.

“ChiNext’s high valuations and high PE multiple reflect investors’ positive expectation on growth board companies, but also warn of under regulation,” Shang Fulin, chairman of China Securities Regulatory Commission (CSRC), the country’s securities watchdog, told a forum in Shenzhen on October 29.

Shang said more measures are needed to strengthen constraints on executives of ChiNext-listed companies and to better retail investors’ interests, and the CSRC will advance IPO reforms to make offering prices more reasonable.

Li of Central China Securities said a delisting system which is expected to be introduced by ChiNext in 2011 following exchange submissions of draft rules to the CSRC in late September, will to help solve the problem of high premiums.

Olivia Chung is a senior Asia Times Online reporter.

(Copyright 2010 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)


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