Small and medium-sized enterprises (SMEs) on the mainland may have a better overseas listing choice in a few years as Hong Kong is beginning to take action to cure its ailing secondary board.

 

Hong Kong Exchanges and Clearing (HKEx), operator of the world's second-largest listed bourse, proposed last week to allow only companies with at least HK$100 million market capitalization and HK$20 million cash flow to list on its Growth Enterprise Market (GEM).

 

Though appearing to impose hurdles for listing candidates, the proposals, analysts said, is in fact aimed at revitalizing the lifeless board by introducing more quality listings.

 

And therefore, "listing candidates, including those from the mainland, will benefit in the long term", said Kingston Lin, an analyst from Hong Kong-based Prudential Brokerage.

 

The new requirements, which will be put under consultation before taking effect, do have some impact on listing candidates, said Castor Pang, a strategist of Sun Hung Kai Financial Group. However, that impact would "only be psychological".

 

The new requirements would work better than the existing ones, he said, adding that people have lost confidence in a market with too low an entry barrier.

 

Launched in 1999, the GEM was known for its low listing threshold. Companies that have been in operation for only a year can apply for a listing on the GEM, while Hong Kong's main board asks for at least a combined HK$50 million profit over three years and a HK$200 million market value.

 

The loose regulations have resulted in a lack of quality listings, and as a result the board has been plagued by low turnover and poor reputation for years. It has not seen any new listings so far this year, while a number of quality companies opted to switch to the main board in the past years.

 

"If we let the GEM carry on like this, the situation will get worse," said Prudential's Lin.

 

An executive from a GEM-listed mainland company told China Daily that the firm has been trying to transfer to the main board regardless of costs.

 

"People trust us when they come to know that we are listed in Hong Kong. But that trust wanes when they are told that we are listed on the GEM," said the executive, who did not want to be named.

 

Bank of China (Hong Kong) said in a research report last year - when HKEx sought opinion to revamp the GEM - that the board could have a bigger role as many mainland hi-tech companies are in great need of capital to feed their growth.

 

However, analysts believe more measures are needed to save the GEM and it would take time for the board to regain its reputation and become attractive again.

 

(China Daily June 5, 2007)