Keran Lin, managing partner of EELION Capital, a tie-one China-based private equity fund focusing on industrial technology investment, said the CDR system is a positive news, but it takes time to prove the viability of the system and he is not in a hurry to change his firm’s investment strategy.
“We will seriously examine a new policy and see its potential effect. If there is indeed a opportunity window, we will consider accelerate our pace to capitalize on it,” he said.
He said if the opportunity could be seized it would greatly shorten the time span of recovering the investment.
Chinese government in end-March offered a fast track for overseas funded Chinese technology behemoths to raise funds on mainland stock exchanges. The State Council endorsed the Chinese Depository Receipt (CDR) mechanism via which tech firms could either float additional shares, or launch initial public offerings on the A-share market.
The State Council said for those that haven’t been listed in overseas market, qualified innovative companies should be those with valuations of no less than 20 billion yuan (US$3.2 billion) and annual revenue of at least 3 billion yuan.
Lin said companies that meet these requirements are high-quality firms with good profits and sound cash flow, so the State Council policy will be a boost for successful companies, instead of those that haven’t realized their potential.
Existing IPO policy requires profitable companies with three consecutive years of high-growth, and once an applying firm see a slowdown in profit growth, their chance of being approved will be greatly affected, Lin explained.
“Now we see regulators have basically dropped the requirement on profitability,” he said.
While regulators opened the door wide open for leading innovative companies, it shunned doors for those traditional firms that do not fit into China’s strategic priority. There are cases that regulators asked appliers that not on their priority list to quit.
“The applying scenario has changed from ‘queueing’ to ‘selective IPOs”, “said Lin. “Even if they meet the profitability and growth requirements, it would be difficult to list if they don’t have technological edges, or with low gross margin.”