17 February 2019

Is ChiNext on brink of NASDAQ-style tailspin?

China’s four-year-old ChiNext has had an extraordinary growth spurt this year — the benchmark index of the NASDAQ-style exchange for high-growth, hi-tech start-ups has almost doubled. That’s in stark contrast with main-board markets; the Shanghai Composite Index fell 2.6 percent and the Shenzhen Component Index dropped 5.5 percent during the same period.

“Overvaluation” and “excessive speculation” have become the most commonly used phrases in mainland media commentary about the market. The burning question now is whether ChiNext will go through the same free-fall that the NASDAQ did 13 years ago.

The rises on ChiNext have mostly been among TMT-focused (technology, media and telecommunications) stocks. By Monday, more than 90 percent of the 355 stocks listed on the exchange had made eye-popping year-to-date gains, according to data provider Wind Information.

The top three gainers are multiplayer online-game maker Shenzhen ZQGAME Co. Ltd. (300052.CN), with a 470 percent rise so far this year; mobile-game maker Ourpalm Co. Ltd. (300315.CN), which is up 450 percent; and mobile-TV pioneer Leshi Internet Information & Technology Corp. (300104.CN), at 366 percent higher.

If insider plays are any guide, ChiNext is already seriously overvalued. According to exchange filings, 280 ChiNext companies have had big changes in share ownership.

Insiders, like management and major stockholders that own 5 percent or more of a company, have sold 26.3 billion yuan (US$ 4.3 billion) in these companies this year and bought just 542 million yuan.

Insiders probably have a clearer understanding and expectations of a company’s profitability and future development than those on the outside looking in. If they start offloading stocks on this big a scale, it suggests the stocks are much pricier than they are worth and have become detached from fundamentals and reality.

The NASDAQ began its drift from reality in 1995 when it started on a wild five-year ride that saw it rise 331 percent in value before the eventual burst of the internet bubble. It lost 80 percent of its value before hitting bottom. ChiNext, by comparison, is up 39 percent since its launch and has more than doubled since its all-time low in December.

Some remain relatively optimistic about the exchange. According to People’s Daily, CITIC Securities chief analyst Mao Changqing does not expect the ChiNext bubble to burst anytime soon, but a correction may be due. Mao said ChiNext differs from the NASDAQ in several key ways. First, investors are more aware of bubbles now and there are no signs of irrational exuberance in the market yet. And unlike the internet bubble era, most of the companies are supported by real earnings.

But he warned investors against entering the market now, given the average PE ratio of ChiNext shares has reached an alarming 60 times. 

The total first-half profit of the 355 listed companies rose 1.61 percent a year earlier to just 12 billion yuan, about the same as Minsheng Bank (01988.HK, 600016.CN) makes in a quarter, the 21st Century Business Herald reported.

“Though the earnings of these companies are improving, the growth is not enough to support the recent surge,” Mao said. The restart of IPOs might also be a trigger for a major correction, he said.

– Contact the writer at [email protected]



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