The Second Wave of Policy Bonus Breaks the Risk of “The New Three-Board”
Source: www.cb.com.cn View: 214 Date: 2015-10-11

Reset of IPO in A stock market has long way to go; while the second wave of policy bonus in the new three board is coming. It may bring vitality for new three-board market that has been depressed for near six months. 

Sui Qiang, the vice-general manager and spokesman of National Equity Exchange and Quotations recently indicated that the implementation of internal delamination in the new three-board will be started in 2015. At the same time, system of equity exchange and quotation also published relative business guidance of preferred stock and other documents before October 1st, 2015. According to deployment, before the end of November, relative technologies of preferred stock exchange and quotation business of new three-board must be prepared.

Additionally, according to information from “Security Daily”, CSRC will publish document of fully supporting development of new three-board market. This document includes delamination and other systems and arrangements. It is first time for CSRC to make comprehensive deployment for development of new three-board.

Industrial insiders indicated to further perfect financing function of new three-board; meanwhile, these policies mentioned above will further optimize structure of investors, which benefits for improving mobility of market and stability of current listed enterprises.

However, the research center of Minsheng Security new three-board holds calm opinion. “It is sure that the second wave of policy bonus will be coming but is not every positive that should not make more perspective of market. The possibility of another soaring in new three-board market is rare.”

Unsolved “Risk of Mobility”

Fu Xinghua, the executive vice-president of Zero2IPO Group and managing director of Zero2IPO Research said when interviewed by reporter from “China Business Journal” that new three-board will face three big challenges: bubble, risk of mobility and long-term investment testing.

From current situation, the most criticized problem of mobility is the most fatal one. “Firstly, compared with situation faced by listed enterprises that break record and have popular market, the second-tier market of new three-board has not stable transaction situation: in the first four months of 2014, the transaction of new three-board has increased all the way but dramatically decreased after May of 2015. The second one is that the depression of new three-board and lack of mobility have affected normal financing of listed enterprises certainly, and also damaged interests of market makers and investors.”

In the opinion of Fu Xinghua, the “risk of new three-board” urgently needs to be solved that also need policy to promote reform and innovation of new three-board market system.

Until September 30th, 2015, there were 3585 listed enterprises in new three-board that far beyond the total number of markets from Shenzhen and Shanghai with 2800 enterprises, and has become the basic security market with biggest amount of listed enterprises in China. Furthermore, until August 31st of 2015, there were near 6000 enterprises finishing signing with securities traders, changing systems, finishing stock exchange and passing brokerage kernel.

However, non-matching of rapid growth of number of listed enterprises is that new three-board has lower mobility; the publishing of series of preferred policies also need long-term to wait. In September 30th, there were only 498 individual stocks successfully dealt in new three-board, which only accounting for 13.89%; the transaction value was 417 million RMB. It is only a small part of transaction value of A stock in Shenzhen and Shanghai market.

"The second-tier market currently is relative cold that has not enough transaction value; however, the first-tier market is very hot. The transaction volume of whole market made by market makers always far away from a single stock in Second-board Market” told by director of commercial equity exchange and quotation department of one security company, he will interview 10 or even more enterprises every day.

For the problem of mobility in new three-board, market looks more forward to the implementation of relative guiding documents of preferred stocks.

Recently, “The Business Guidance of Preferred Stocks from National Equity Exchange and Quotation (Trial)”, “No.1 – No.3 of business guide” and other documents have been published. According to requirement of stock exchange system, before the end of November of 2015, should make good preparation for relative technologies of preferred stock exchange business.

At the same time, as mainly innovative business, the publishing of preferred stocks not only increase financing channels, but also opens more policy expectations.

Report also noticed that business guides mentioned above relatively “weakens” fiscal indexes for listed enterprises, but deliberately emphasizes on financial status of enterprises and other hard fixed indexes for publishing of preferred stocks.

For example, in the document of “the No.2 of Preferred Stock Business Guide—The Host Brokerage Recommend Content and Format of Working Report”, it is clearly indicated that in recommended working report from the host brokerage should include “financial status and solvency of publishers”; the host brokerage also “should mainly analyze profit ability, debt-paying ability, cash flow and other financial indexes according to financial statements and audit report of publishers within recent two complete fiscal years as well as recent financial statements (if have).”

Wu Yanyan, the researcher of new research center of Minsheng Security emphasized that should have a sufficient evaluation for slow-release effect of policy bonus of new three-border. “The soaring of 2015 has broken or delayed the releasing speed of policy bonus; and although market has relatively weak mobility, the activity of enterprises to be listed has never been effected” judged by Wu Yanyan: it maybe not enough requirement to rapidly release policy bonues.

Financing Amount Difficultly Meets Demands of Market

Beside promoting preferred stock, Sui Qiang said that in order to further strengthen financing function of market, exchange and quotation company will also increase supply of products; for example, cooperate bonds, shares pledged repo business and other financing tools of security companies make business rules of asset securitization to explore index products that benefit for risk management. According to introduction, currently there are 10 fund management companies formally submitting application document to develop index products.

In fact, since April of 2015, with great adjustment of the secondary market, after faced problems of mobility, the financing function of new three-board also faces challenges.

According to data of Choice from EastMoney.com, since April of 2015, there have been more than 2000 financing planning promoted in new three-board. Until now, there only are less than 1300 plans implemented; the finishing proportion only was 63.94%. At the same time, compared with planning to raise the funds of 132.5 billion RMB, only 59 billion RMB has been recorded to account.

Until now, market making index of 2015 has been cut after the peak in April 7th; the transaction volume also has clearly decreased.

Additionally, according to statistics from Wind Information, currently the average transaction volume of new three-board reaches near 300 million RMB every day, the peak volume is near 500 million RMB; however financing amount still can’t meet the demands of market. Because of that, the director of above mentioned commercial stock exchange department indicated that currently financing proportion decreased, if long-term keeps this low proportion of financing, not only enterprises can’t find capital, but also it will effect enterprises to login in the new three-board.

For influence of financing function of new three-board adjusted by market, Sui Qiang admitted that the reason not only is affected by not enough strong system effect brought by immature national stock exchange system, also reflects that market exists structural imbalances when rapidly develops. There is also difference between market innovation & perfect process of system and market expectations.

Therefore, the next step of stock exchange system will “make revolution to optimize agreement exchange system, to greatly develop market making business; lead market makers to increase investment of market making, to improve market making ability and level; expand market supply of long-term capital including institution investors and value investors; introduce public funds to steady market expectation, to improve operation quality of market and to strengthen confidence of market main bodies.”

Among many system innovations, the planning of internal stratification will be expected to be firstly launched. Sui Qiang said that “if fit for structural and hierarchy changes of market and internal demands, it must research to ensure basic principles, implementation planning and relative systematic arrangements of internal stratification to implement internal stratification of market optionally.” He also indicated that this work will be started in 2015.

In August, a stratification plan of new three-board has spread in industry. Although according to official information from stock exchange company, this version is not final one; they are discussing the detailed planning and will publish it after publicly receive comments.

For stratification of rumors, the research center of new three-board from Minsheng Security believes that it will be feasible plan to firstly divided into two layers then to divide another layer from preferred layer for bidding and delivery. According to statistics of Minsheng Security, there are 267 enterprises fitting for entering standards of “innovative layer” that is relatively high layer of rumors; the proportion of listed enterprises accounts for 7.51%; the number of companies to meet standard of growth ability accounts for largest propotion.

Wuyanyan indicated that stratification is only a kind of means; the most important is to make diversified system arrangement combining with stratification. For example, enterprises at the top layer should achieve qualification to publish         small amount of public offering that breaks limitation of 35 people. This will benefit listed companies to rapidly expand, and provide conditions for promoting bidding transaction and lowering threshold of investors in the next.

Long Time for Being Combined Market Makers

For long term, there are many policies more important than stratifications: bidding transaction, lowering threshold of investors, public funds entering into market, expanding of market makers; all of these will greatly increase mobility of new three-board. In opinions of institution investors, investment opportunities of new three-board are coming from systematic opportunities of system improvement.

Then the question is coming—whether these more important policies will be rapidly promoted?

Wuyanyan directly said “to have certain problems”. Because that “lowering the threshold of investors means to increase threshold of listed enterprises that will not benefit small & medium-size enterprises to be listed. Even lowering also should be further discussed after dividing layers. Under situation of not lowering threshold of investors, the promotion of bidding transaction will lack of a precondition. Not to mention that current degree of equity dispersion and scale of liquid equity can’t support bidding transaction; it is more difficult to make public fund investment in new three-board.”

Since May of 2015, there has been many “zombies” stock in new three-board; they are standing at pause situation of stock-jobbing and no transaction for long term. For this situation, personnel in the market believes that this phenomenon is directly related with relatively small number of market makers, and small scale of capital in new three-board.

Until 30th of September, among 3585 listed enterprises in new three-board, there are 2728 enterprises transferred by contract, 857 enterprises transferred for market making which only accounting for 23.9%.

By contrast, the scale of capital held by market makers is small, compared with market value of listed enterprises in new three-board is a drop in the bucket. Information from official website of National Equities Exchange and Quotations also can be proofed that in aspects of enterprises’ transaction, publishing, merger and reorganization, capital operation efficiency of market making stocks is obviously better than agreement stock.

For institutions, if new three-board wants to develop, the key is to make system of market makers more marketized that means to expand team of market makers to introduce more institutions to make transaction in new three-board.

"The amount of capital decides amount and frequency of transaction then to affect vitality of new three-board market” suggested by general director of equity exchange and quotation business of stock merchants. If properly introduce VC/PE institutions that are good at investment and have abundant capital to make market, it not only can increase vitality of market and expand scale of transaction; but also can promote positive competition to better divide winners and losers and to force market makers without competitiveness to exit the market.

There are relatively more voices in the market all the time for expanding the scale of market makers. However, there is also opinion that under condition of not perfect system of market makers and not change inspiration system of market makers currently, whether expanding scale of market makers can save mobility of new three-board? It may produce more and bigger chaos.

Reporter also noticed that in multi innovations of systems mentioned by Sui Qiang, he has not mentioned expanding scale of market makers.

"Before implementation of bidding transferring, making the mode of market making transfer perfect should be on the agenda after stratification that means to introduce non-equity institutions to make market and to implement system of combined making market.” Wuyanyan analyzed that when number of enterprises can implement bidding transferring is enough, it can be expected that implementation of bidding transferring will fall into place. This will also remove the biggest barrier of public fund investment in new three-board.

The director of commercial stock exchange and quotation business of a security judged that combined transaction system will be promoted sooner or later.  “There are many denounces in outside for market makers. Hosted stock makers play multi-role at same time, such as recommender, market maker and investor, which easily brings insider trading. Besides that, from growth of new three-board, it is not enough to play only based on number and capital fund of stock makers; also needs to introduce multi institution investors to co-make market bigger.”

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