The aims of the Growth Enterprises Market (GEM), due to be launched this October, are,
some might say, ambitious in a climate of bearish sentiment.
They include
providing a venue for growth enterprises (mainly SMEs) to raise public capital to finance
business expansion and to develop GEM into an important growth market of international
repute similar to the New York Stock Exchange's NASDAQ market.
Singapore and
Taiwan has one so it's about time the Hong Kong SAR had one. Or is it?
Dr Lo
Ka-shui, Chairman of the GEM Working Group and Deputy Chairman and Managing Director
of Great Eagle Holdings, is optimistic that a second-board could boost the economy
particularly for hi-tech companies.
"I don't
like to call it a 'second-board'. It is not an alternative market. It is of equal standing
like NASDAQ is to the New York Stock Exchange's main board," he said.
GEM is aimed at
SMEs in Hong Kong because the minimum public float will only be 10 per cent of the issued
share capital or HK$30 million - whichever is higher.
"Obviously
technology companies are a major target but we deem anything which has high potential
growth suitable for listing on GEM," he said.
Technology
companies require much funding in the start-up stage and continuously need capital
injection. GEM would provide a funding source to help them and SMEs develop value-added
services.
The Singaporean
Government offers cash subsidies to hi-tech companies equal to 30 per cent of their
R&D costs.
"Maybe the
Hong Kong Government should consider the same thing if they want to pursue the dream of
turning Hong Kong into a hi-tech hub," he said.
Dr Lo said many
venture capitalists (business angels) would like to invest in upstart hi-tech companies.
The trouble is, when they do invest, they find years later they still own a minority stake
(20 per cent or so) and have no exit route. Being listed provides an exit route thereby
encouraging investment.
"With GEM
venture capitalists are able to sell shares or invest more so they have flexibility. At
the moment many will not dare invest because they cannot get out. In the long-run GEM will
help capitalise technology investment in Hong Kong," he said.
Although market
sentiment is still bearish GEM will be launched on schedule.
However, GEM
may not be very active due to this poor market sentiment.
Prudential
Portfolio Managers Asia Regional Director, Andrew Look, said the GEM would only be
successful in a bull market.
"In a
downtrend investors will not be interested in buying small companies shares," he
said.
Hong Kong
Stockbrokers Chairman Dannis Lee agreed: "Currently there are many second or
third-liners in the main board that do not have any trading at all," he said.
He said that
investors will be more cautious about investing in GEM. He said the $50,000 minimum
transaction size _ already reduced from $250,000 _ was too high for many retail investors
and, as a result, the market would lack liquidity.
The Stock
Exchange aims to cut the minimum transaction amount on GEM from $50,000 to $30,000 or
lower the bid to allow more retail investors to take part. Mr Lee agreed the Exchange
should set a minimum transaction size to remind investors of the high risk of GEM
companies. In overseas markets, up to 70 per cent of second board companies failed.
However, GEM is
an excellent way for SMEs to raise funds, as banks are usually reluctant to lend to
companies without a profit record or assets.
Dr Lo and GEM
executives have been proactively marketing GEM.
"We have
been going into Taiwan and China to promote the GEM to venture capitalists, investors and
issuers. We found that issuers are very interested from those regions. Taiwan is the most
enthusiastic," Dr Lo said.
The exchange is
looking for 20 to 30 high-quality companies to form the first batch of listings. Companies
from Taiwan, Hong Kong and China have expressed interest - including hi-tech companies
manufacturers and service companies.
The exchange
might allow GEM trading in US dollar subject to further study. Taiwan has 40,000 mainland
projects valued at US$40 billion many of which need to raise capital in Hong Kong as the
island's second board bans companies from raising funds for Mainland projects.
"Taiwan
companies are quite technology-heavy and they are at a stage where they need more capital.
Hong Kong is a natural place and stepping stone for Taiwan companies to raise money for
Mainland projects," he said.
There are
280,000 SMEs in Hong Kong needing funds for expansion. The US$8.8 billion venture capital
funds managed in Hong Kong also need an outlet.
Plus, there are
eight million Mainland enterprises including 20,000 hi-tech companies and 500,000 joint
ventures, which would be possible listing candidates.
"The
Mainland will ultimately be the biggest market of issuers especially private enterprises
and the smaller state-owned enterprises. Private enterprises account for 51 per cent of
total output of the country and these are profitable. They need continuing capital
injection to grow further.
"When I go
round the world investors tell me they want China's enterprises listed in Hong Kong. Why?
Because Hong Kong can provide the analysis with its close proximity to China and give
information to investors. Hong Kong is the natural 'home market' - we have a special
role to play," Dr Lo said.
There are also
negative points to GEM.
"The
companies will be small and less liquid so they are more of a risk. Also, Hong Kong has a
much smaller economy and market compared with the successful NASDAQ. When NASDAQ started
they already had 1,000 over the counter companies that transferred over night _ we don't
have that.
"Right now
we have talked to over 30-50 companies that are interested. But it's all up to the
investors who put the money in - within half a year you should see that. The economy
is getting better and confidence is coming back," he said.
As a start-up
GEM may not be immediately profitable, and may require government support in terms of tax,
immigration legislation and money.
"Delinquent
behaviour and poor corporate governance would be more prevalent among smaller issuers.
Ramping of shares by manipulators trapping uninformed retail investors must be policed.
Education of companies and investors is very important," he said.
Dr Lo said that
there should be a higher risk warning as failures are bound to be more prevalent in
smaller companies.
GEM will have
lower listing requirements but tougher disclosure measures than the main board. However,
resistance to improve disclosure requirements remains.
There is also a
worry that fund managers may move from Hong Kong to Singapore.
Deloitte Touche
Tohmatsu Tax Partner, Anthony Tam, said the 1999-2000 Budget offered no tax incentives to
the fund-management industry. "Singapore gave fund managers a special profit tax rate
of 10 per cent which is lower than the 16 per cent profit tax charges in Hong Kong. It
will encourage more fund managers to switch their base from Hong Kong to Singapore,"
he said.
Mr Tam also
said the Government should reach an agreement with Beijing to waive tax collected on
dividends given by Mainland enterprises to attract investment into Chinese companies
listed on the GEM.
Dr Lo hoped to
complete the drafting of the rules and trading mechanism of the new market by June.
The first
listings of the GEM will establish the reputation of the GEM failures in the early phase
will be disastrous for future growth.
"GEM will
provide more choice for overseas fund managers. The main-board blue chips are dominated by
property companies. GEM will expand the local markets dimensions to include more hi-tech
companies and manufacturers," Dr Lo said.
Dr Lo said GEM
would serve as a ground for educating SMEs in Hong Kong, the Mainland and Taiwan on
corporate governance and that this would raise investor confidence in the long run.
The Exchange
has set up a separate team of new staff headed by Frankie Kan to handle listing
affairs for GEM.
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