ChiNext, a market of fortune and fluctuation

Most of the first 28 companies listed on ChiNext, China's Nasdaq-style stock market, are hi-tech and service enterprises that show great potential for growth.

ChiNext, as a growth enterprise market which differs widely from the A-share market, may face sharp fluctuations.

High P/E ratios

Most of the first 28 companies listed on ChiNext are hi-tech and service enterprises. Compared with the listed enterprises on China's A-share market, they are showing great potential for growth to investors.

Distinct from the A-share market, enterprises listed on ChiNext have their unique businesses. Ultrapower, an IT-service provider, is an outsource service provider of China Mobile's instant messaging software "Fetion". Centre Testing International (CTI-Cert) is a third-party testing, inspection and certification body. Sichuan Jifeng Agricultural Machinery Chain Co., Ltd. operates an agricultural machinery sales network. Huayi Bros. Media Group is China's top film and TV series producer. Aier Ophthalmology is a linked eye hospital group with the most competitiveness in China.

The market has been anxious that the IPO prices of these 28 enterprises are too high. Calculated from their 2008 annual reports, the average price-to-earnings ratio (P/E ratio) of companies listed on ChiNext tops 53.1, two times higher than that of the A-share market.

However, according to these companies' quarterly reports of Q3 2009, their total net profits increased by 75.58 percent year on year and average earnings per share jumped by 64.36 percent, easing market anxiety.

Wang Guoping, an analyst from China Galaxy Securities noted that there were various valuation methods for enterprises listed on the growth enterprise market worldwide. Taking growth potential into consideration, valuation of companies listed on the ChiNext should include not only common measures such as P/E ratio and price-to-book ratio (P/B ratio), but also their high expansion speed.

Growth enterprise markets in other countries have also showed different price formation mechanisms from the main board. The P/E ratios of 56 Chinese innovative enterprises that made IPOs in the U.S. between 2004 and 2007 ranged from 10 to 500.