Pitfalls facing listings of SMEs
By Zhang Jin (China Daily)
Updated: 2004-07-14 09:35

China's private small and medium-sized enterprises (SMEs) have expressed their growing desire to go public at home and abroad in an effort to reduce exposure to bank loans.

But experts cautioned that they should think twice and be prepared before pursuing going public.

"We are dreaming of getting listed," said Lu Deguo, general manager of Shandong-based Taishan Ceramics Co.

"We have come of age in business expansion," he said. "But funds shortage impedes our development."

Lu's experience was typical among private SMEs, which are eager to grow along with a new wave of investment.

Bank loans, which usually go to large players in the market, cannot meet their money demand.

An increasing number of SMEs thus look at listing as a major financing channel.

Some anxious small-scale firms, after being disappointed by the traffic jam heading towards the main board on the mainland, have even showed greater interest in overseas listings such as Hong Kong and Singapore.

Data showed that, in January and February, more than 200 private players in South China's Guangdong Province consulted local agencies over pursuing listings in Hong Kong.

The private SMEs' listing spree was fully activated by the launch of the SME board in South China's city of Shenzhen in late May.

They are eying any development of this NASDAQ-style sub-board, viewing it as a ladder to quicker and easier listing.

"The SME board will be our first choice," said Lu. "Its requirements are not as strict as the main board."

The porcelain ware maker is improving its shareholding structure and plans to kick off the listing campaign early 2005.

The firm notched up sale revenues of 48 million yuan (US$5.8 million) and is plugging into real estate and catering markets.

Analysts said the recent bank loan tightening-up has also made more private SMEs think about getting financial help by listing themselves.

Although the tightening could be temporary, it is accelerating the small players' desire to go public, said Yuan Chengda, president of China Council for the Promotion of Private Economy.

Despite the listing spree, analysts warned against the risks if the chasing the listing is improper or heedless, saying they should complete prior work before becoming subjected to the stocks market.

Companies should first get familiarized with listing procedures, said Yuan.

"Many SMEs only have very superficial knowledge about listing, and know little about overseas capital markets," he said.

Thorough studies and appraisals should be launched before going public, he said.

And the cost for going public could be big for small-scale players in the market.

A Hong Kong listing usually costs US$2.6 million, said senior banker Xue Zhaokun, and total expenditure would be higher if the cost of internal restructuring needed for a listing is added.

Yuan said that the outdated management mode of many SMEs would be a big hurdle to their going public dream.

"Many of these firms are still run as family enterprises," Yuan said. "It would take time for them to be transferred into shareholding ones."

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