Demand Will Correct Shanghai Star Market's Buoyant Price-to-Earnings Ratios, Insider Says
Liao Shumin
DATE:  Jul 16 2019
/ SOURCE:  yicai
Demand Will Correct Shanghai Star Market's Buoyant Price-to-Earnings Ratios, Insider Says Demand Will Correct Shanghai Star Market's Buoyant Price-to-Earnings Ratios, Insider Says

(Yicai Global) July 16 -- The exuberant price-to-earnings ratios of the firms that aim to go public on Shanghai's new Star Market will and should be tested by market forces, according to an industry insider.

The inclusiveness of the Star Market will make the board healthier even if some of the investors may lose money, SPD Silicon Valley Bank's Vice President Lu Jue, who participated in advising the new board, told Yicai Global at a financial forum. If the financial launch pad focuses on marketization, great companies will emerge, Lu added. 

The average P/E ratio of the first 25 companies to be listed on the board on July 22 is 46.2, which is more than twice the mean P/E of other initial public offerings on China's mainland. The reason is that contrary to other boards, the Star Market IPO-hopefuls do not need approvals from regulators to set their share prices. This serves the market's original purpose of easing tech firms' access to funding.

The current P/E ratio does not mean that the company behind it will grow by 70 percent or 80 percent each year as the future valuation depends on how a tech firm's products can change people's lives, said Li Huaiyu, chief executive of private equity fund Starthub Partnership. Listees should look for sustainable valuations, Li added.

China's new Nasdaq-style board may take heed of other markets. The valuation of US tech firms has been growing in recent years while their profitability has decreased, causing debates about how to control these bubbles from bursting, said Lu.

Investors should pay attention to the macroeconomic environment, sector-specific factors, and the core competitiveness of the company when placing their bets as buying stocks means investing in future, He Xinwen, managing director of the investment banking department at Changjiang Financing Services.

Editor: Emmi Laine 

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Keywords:   Star Market,PE Ratio,IPO