The newly launched small and medium-sized enterprise (SME) board at the Shenzhen Stock Exchange has witnessed a rage of initial public offerings (IPOs) since its establishment a fortnight ago.

But analysts have warned of the high risks associated with investing in the SME stocks due to limited liquidity.

By the end of last week, eight Chinese companies had started their IPOs.

All of them are private firms and most of them are from Jiangsu and Zhejiang provinces in the nation's east.

Zhejiang NHU Co Ltd, a producer of medicine, healthcare and flavoring products, was the first under way, starting the issuing of 30 million shares on June 2. It has scheduled a listing for June 25.

It is predicted that all of the companies that have launched IPOs on the SME board will be listed on the same day, though that has not been confirmed by the authorities. More firms are expected to start their road shows this week.

The eight are also among the first batch of IPOs at the exchange since late 2000, when it practically stopped new share offerings in preparation for a NASDAQ-style second board, which was later shelved due to risk concern - until the recent resumption.

The SME board will be a subordinate board to the main Shenzhen board until gradually being transferred into an independent market when the time is right.

The eight companies working toward listing on the SME board are of comparatively good quality, since the authorities want the new board to get off to a good start, said Peng Lixin, an analyst at CITIC Securities Co.

Most of them are from traditional industries, though they also have a high technology content, he said.

According to information released in their prospectuses, the eight companies are leaders in the chemical, material, medicine and electronics sectors.

Their price/earnings ratio is between 15 and 20 times.

More than a thousand SMEs have been lining up for listings and many won approval from regulators a long time ago.

Insiders said the authorities would attempt to control the pace of IPOs in the future, but it is still predicted that up to 40 stocks would be on the board within the year.

Analysts have warned investors to be prudent, as the limited liquidity of the enterprises listing for funding would create high risks.

Most of the eight companies looking to list would only float up to 30 million shares, which is small in size, said Peng.

Normally, such SME boards start strongly and then a market correction kicks in, so the risk involved is also high, he said.

Limited liquidity in the market, for example, would lead to more fluctuations of share prices.

Compared to the large-caps, the SME stocks will be less attractive to fund managers who operate big mutual funds, said a fund manager with Yinhua Management Fund Co.

Chinese fund management companies have a few mutual funds that target small and medium-caps, which have also been active buyers of such stocks that are already in the market over the past two weeks.

Some institutions will also take the chance to speculate in the new market, but many will wait and look for trends before making concrete moves, the Yinhua Fund manager said.

Some experts also noted that to meet the big funding demand of all SMEs in China, simply opening an SME board is far from enough.

It is estimated that about 80 percent of China's SMEs are short of funds.

(China Daily June 14, 2004)