Not the Right Stuff: Shanghai-based mould firm TJ Innova was one of just two original applicants not winning GEM listing approval. Photo: TJ Innova

ONE GETS the sense that the regulators overseeing day-to-day operations and approving new listco candidates on the new Shenzhen Growth Enterprise Market (GEM) board have finally seen enough of a good thing.

After steady average share price gains by the 28 Chinese SMEs listed on the new board in the country’s southern financial center, as well as triple digit price-to-earnings (P/E) ratios by a few members, the capital raising platform’s overseers have lately been showing far more reluctance to green-light board hopefuls.

The new board’s listco candidate approval rate tightened to just 57% in the month of November, with only eight of 14 SME candidates granted preliminary approval, PRC newspaper Caijing said.

This may still seem generous by global standards, but it is a much narrower approval rate than the 93.5% witnessed in September and October.

And with around 300 Chinese firms eventually expected to raise money on the new platform over time, this stricter scrutiny of applicants could extend that goal by months, if not years.

“A cold wind has blown through the bourse with the recent run, suggesting that approval issuing officials should be more particular in adding new listcos,” the newspaper said.

The first 28 approved and currently listed firms on the Shenzhen GEM faced relatively smooth sailing in the authorization process, but this ease of entry is likely a thing of the past – at least for the time being.

At the time of the original batch of listcos on October 29 this year, only two firms which made it to the final stage of consideration were denied approval: Shanghai-based TJ Innova Engineering as well as a Nanjing-based electric power equipment firm.

“This more exacting look at listcos credentials and potential allows us to breathe a sigh of relief,” the newspaper cited one official with the approval committee as saying.

This will certainly come as some relief to GEM board investors who were worrying about overly lax approval processes for listco newcomers and the erosion in liquidity this usually engenders.

And with more rigorous scrutiny of candidates, it might take a bite out of the fear that P/E ratios would continue to add new members to the Century Club, as already three of the GEMs members had triple digit ratios at last count.

In comparison, the average historical P/E ratio of Shenzhen-listed shares is 39 times and that of stocks on the main Shanghai Stock Exchange is 27. This compares against a recent average of just 17 times for Hong Kong-listed shares.

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