Beijing bourse will shorten IPO process time and reduce costs

Tong Honglei, chairman of a Beijing-based smart archive provider, was pleasantly surprised when he heard of China's decision to set up a stock exchange to improve financial services for small and medium-sized enterprises like his business.

"I was excited to hear the country was establishing the Beijing Stock Exchange," said Tong, chairman of the Beijing Roit Intelligent Technology Co Ltd, which provides digital archive search solutions as well as services that enable automatic location and fetching of physical materials.

"The Beijing bourse is undoubtedly the first-choice listing venue for innovative SMEs like Roit," Tong added. "It will help us access capital in an easier, faster and more cost-efficient way."

The new bourse is projected to shorten the time it will take for Roit to get listed from three or four years to about two years, Tong said. It will also halve the financial costs of doing so, to more than 10 million yuan ($1.55 million).

President Xi Jinping announced on Sept 2 that China will set up a stock exchange in Beijing and build it into a major base for serving innovative SMEs. It will bring the total number of national stock exchanges to three in the Chinese mainland, including those in Shanghai and Shenzhen, Guangdong province.

Officials, experts and business leaders said setting up the Beijing bourse marks a major milestone for China in perfecting its multilayered capital market system while also supporting innovative SMEs and deepening the "dual-circulation "new development paradigm, the cornerstone of the country's latest five-year plan.

Xiao Chunan, executive director and sponsor representative of the China Renaissance Securities' investment banking department, said he has included the BSE as a new listing option for his corporate clients who are under pre-IPO tutoring.

"This is not only about adding one more listing option. It means that SMEs can consider filing an IPO earlier than before, thanks to the Beijing bourse's easing of listing requirements," Xiao said.

"Many of them no longer need so many rounds of pre-IPO financing as before. Instead, they are considering obtaining finance after getting listed, which will be much easier than as an unlisted company."

As of Sunday, the new bourse has been established. It released key rules including listing and investment thresholds, and has run two technical tests to get market players ready for its trading commencement. The bourse is yet to specify the date of market opening.

Listing requirements and trading rules of the Beijing bourse are friendlier to SMEs than those of its Shanghai and Shenzhen peers. It is also more inclusive of the companies' greater development uncertainties and stock price fluctuation.

As an example, the BSE requires a minimum valuation of 200 million yuan for applicants to be listed, much lower than the 1 billion yuan minimum valuation threshold of the STAR Market and the ChiNext board.

Experts said the new bourse will not only make it easier for SMEs to float shares, but also facilitate the financing of smaller firms yet to become qualified for IPOs, especially those traded on the new third board.

The new third board, officially known as the National Equities Exchange and Quotations, is a national equity trading system that debuted in 2013 but was not deemed as an exchange market. It has suffered from lukewarm liquidity condition, voluntary exits of firms, and relatively poor functioning of financing.

The Beijing bourse was founded based on the NEEQ Select, the highest tier of the new third board, which means all of the 66 NEEQ Select-traded companies will become BSE-listed firms.

Share prices of the 66 firms surged by an average of 39.01 percent in the week following China's announcement to set up the exchange, according to Essence Securities.

Additional companies to be listed will come from those previously traded on the Innovation tier, the NEEQ's second-highest tier, for 12 consecutive months. They must also meet BSE's listing requirements. Companies on the Innovation tier in turn come from qualified ones on the NEEQ's lowest tier, the Base tier. Some companies enter the Innovation tier directly.

Li Zhenhua, a partner with private equity fund management platform Cloudview Capital, said the accessible exit channel provided by the BSE will motivate more investments in smaller firms, benefiting the more than 7,000 NEEQ-traded SMEs.

According to Li, though the STAR Market and the ChiNext board receive IPO applications from NEEQ Select-traded companies, few of them have actually gone public on the boards. That is because the listing requirements remain strict for them, which in turn limit private equity and venture capital funds' interest in the NEEQ system.

"Now the BSE has allowed enterprises at an earlier development stage and of a smaller scale to get listed, expanding the exit channel for PE and VC funds' investments in those companies," Li said.

This will boost investors' interest in smaller firms and therefore facilitate the financing of SMEs, especially those within the NEEQ system, he said. 

In addition to the easier listing thresholds, the BSE will lend support to the cash-thirsty SME sector on the grounds of a shortened IPO time frame and reduced issuance costs, Li said.

This is because the BSE has adopted the registration-based system, which streamlines the IPO review process. For BSE-listed companies, the bourse also offers easier financing channels, including the mechanism that a couple of issuances can be made through one issuance registration, Li said.

Many NEEQ-traded firms have stepped up efforts to tap into the development opportunity offered by the BSE, including Roit, which entered the NEEQ Base tier in 2015.

"We are confident that we will maintain an average annual growth of 50 to 70 percent in revenue in the coming three years," Tong said. "Our confidence is backed by our research and development fruits as well as the expected financing boost from the BSE."

Ben Jinfeng, chairman of Jilin Boda Pharmaceutical Co Ltd, said the generic drugmaker based in Liaoyuan, Jilin province, whose controlling stake is held by Cloudview Capital, plans to raise money via the NEEQ first and then file for an IPO on the Beijing bourse to empower its business transformation.

According to Ben, although the company entered the NEEQ Base tier in 2017, it still relied primarily on its own cash flow for R&D due to lackluster financing conditions on the NEEQ. The lack of external financing has combined with the company's undiversified product line to restrict its growth.

To address the developmental bottlenecks, Ben said the company has undergone major adjustments and requires hundreds of millions of yuan in external financing over the next three years to transition from a generic drugmaker to one that also specializes in innovative medicine development.

"The BSE is likely to play a big role in facilitating our financing plan," Ben said. "The bourse has not only made it easier for the company to be listed in the future but also to obtain financing at present as it has boosted PE and VC investors' interest in smaller firms."

Calvin Fu, chief economist at the International Financial Centre Federation, said, "All in all, the establishment of BSE is a significant step for China in strengthening financial support for the building of the new development paradigm."

The paradigm, in which the domestic market is the mainstay while the domestic and international markets support each other, stresses achieving sustainable and inclusive growth, a process that entails thriving innovative industries and a booming SME sector, Fu said.

Fu added that the lack of liquidity that once plagued the NEEQ is unlikely to be replicated on the BSE, thanks to its legal status as a real exchange and enhanced arrangements to boost liquidity, such as lightened investment thresholds.

Any retail investor qualified to trade on the BSE should have at least 500,000 yuan worth of assets in securities accounts, a reduction from 1 million yuan of the NEEQ Select, according to the bourse.

The registration-based system of the BSE may also improve from those trialed in Shanghai and Shenzhen, as the new bourse will leverage more of the market mechanism in screening information disclosure, said Xiao with China Renaissance Securities.

According to Xiao, market players are expected to supervise the disclosure quality of a firm during at least one year of NEEQ trading before it files for an IPO. Doing so will help strengthen its quality of information disclosure later as a listed company.

Nevertheless, experts still called for more institutional innovations to ensure the bourse is a success, especially when it comes to introducing more qualified investors, ensuring listed companies' quality and safeguarding investor protection.

"Though highly anticipating the BSE, many investors will still take a wait-and-see approach and await its actual market performance," Xiao said.

To make the bourse a strongly competitive listing venue, Xiao said he is hopeful that it will provide enough tolerance to applicants' financial performance fluctuations in the IPO review process and make institutional innovations to attract foreign investors who are experienced in growth startup investments.