ChiNext Turns Down First IPO Applicant Since Listing Revamp

China’s tech-savvy ChiNext board in Shenzhen rejected a share sale application filed by a Jiangsu-based software developer, the first such decision since the decade-old board revamped its listing regime in August to allow registration-based initial public offerings (IPOs).

The ChiNext board of the Shenzhen Stock Exchange said Wednesday that it turned down the IPO application of Jiangsu Netin Technologies Co. Ltd. citing the applicant’s failure to meet requirements for listing and information disclosure.

The rare decision sparked speculation that the board is tightening control over new share sales after a listing boom since it adopted the more market-oriented IPO system. The ChiNext board replaced its old approval-based IPO system in August with a new registration-based system, a move seen to compete with the newly created Nasdaq-style STAR Market in Shanghai.

The revisions by the ChiNext board, a market with $1.3 trillion of asset value, were seen as a key test on the path to expanding the registration system to the overall A-share market, market analysts said. The ChiNext revamp fueled a frenzy of listing on the board and a record-setting surge of newly debuted shares, sparking concerns over market volatility and excess speculation.

As of Wednesday, there were 433 companies queuing up for IPOs on the ChiNext board. Yi Huiman, chief of China Securities Regulatory Commission, recently called for efforts to improve the quality of listing companies and safeguard market entrance.

The rejection of Jiangsu Netin’s listing plan followed ChiNext’s request for the company to further explain its shareholding structure. Jiangsu Netin is a software developer specializing in smart city solutions. The company reported 436 million yuan ($65.9 million) of sales and 67.4 million yuan of profits in 2019. About 90% of sales came from business with the Kunshan government, the prospectus showed.

Jiangsu Netin is majority owned by Kunshan Yangcheng Lake Culture, Commerce and Tourism Group, a company wholly owned by the Kunshan city government, according to the prospectus. But Jiangsu Netin disclosed that the controlling shareholder has no decisive power in the company’s business operation. Instead, an individual named Pan Chenghua has ultimate controlling power.

In response to regulators’ inquiry, Jiangsu Netin said Kunshan Yangcheng Lake is a financial investor that doesn’t participate in the company’s operations.

Regulators also questioned the company’s highly volatile cash flow and concentrated revenue source. Jiangsu Netin attributed the fluctuation to spending on major projects and changes in accounts receivable.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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