China's New Nasdaq Is Only Taking Profitable Firms for Now

China’s experiment with a new Nasdaq-style board is looking a lot less revolutionary than expected.

Even though regulators relaxed listing rules to allow loss-making companies to go public, the first batch of applicants to make it onto the new Shanghai technology board’s review list suggests not much has changed -- yet. Out of the 111 firms that got to the application stage as of Monday, all but one posted a profit last year. The listing of the outlier, Ninebot Ltd., is on hold.

“China wants to ensure the first listings are successful and of good quality,” said Fu Gang, a fund manager at Shanghai RiverEast Asset Management Advisory Ltd. “The strict vetting process will remain in place, before China gradually relaxes its regulation over the board.”

While this may result in higher-quality listings, companies have found the process less simple than they may have hoped. Many filings have been mired in scrutiny, after the exchange peppered applicants with questions due to what it saw as insufficient detail.

The exact start date for the new technology board remains unknown, and could be affected by the ructions in China’s stock market amid the trade war with the U.S. Nonetheless, the Shanghai exchange has said it will review listing applications of three companies at its first IPO review meeting on June 5, a sign that it may soon issue the first approvals.

The Shanghai exchange designed five sets of listing rules to tailor to the various types of tech and innovative firms that wish to list on the new board, the bourse said in a written response to Bloomberg questions. The rules are more tolerant of companies yet to make a profit or those with dual-class share structures, it said.

Firms generally need a three-year track-record of profitability before they can apply for an A-share listing. China’s earlier attempt at a Nasdaq-style board, the ChiNext, has a more lenient requirement of two years, or one year if the applicant’s latest full-year revenue meets a threshold. The new board aims to be less demanding, allowing loss-making firms as long as they meet other criteria, such as raking in sufficient revenue and maintaining a steady cash flow.

Tech board applicants that posted profit in 2018 and 2017 saw corporate earnings grow by an average 76% last year, according to Bloomberg calculations. That compared with 25% growth for companies on the benchmark Shanghai Composite Index, or a 16% expansion rate for those listed on ChiNext.

Tech board applicants are also allocating a larger proportion on research and development spending than their ChiNext counterparts. They allocated about 9.2% of their 2018 revenue on R&D, the median of Bloomberg calculations show, compared with 5.2% on the ChiNext board. Those listed on the Nasdaq Global Select Market allocated 14.7% of revenue last year.

A total of 78 firms -- or 70% of all applicants so far -- sought to raise less than 1 billion yuan from listing on the board. China Railway Signal & Communication Corp., which currently trades in Hong Kong, tops all applicants with a plan to raise 10.5 billion yuan.

Among the 38 brokers that have been advising tech board applicants, CSC Financial Co. is on top with 16 deals, followed by Citic Securities Co. and China International Capital Corp., which both have 11 applicants.