Delisting system ends the era of high PE valuations for VC/PE: 10 times warning line

　　The ChiNext delisting system officially came into effect on May 1st. In response, the ChiNext market reacted in advance, with the stock prices of most listed companies falling sharply, and even newly listed companies could not escape the fate of breaking even. However, while the delisting system makes demands on companies, it is also affecting the development of an industry, namely the healthy development of China's PE/VC industry.
　　At the time of the launch of the ChiNext delisting system, a reporter from the Securities Daily interviewed relevant personnel in the PE/VC industry. How do they view the industry's development, the ChiNext delisting system, and the approval system's impact on the future development of the PE/VC industry?
　　Ding Jihong, executive director of the China Venture Capital Research Institute, stated at the 2012 Bohai Rim Equity Investment Summit that the implementation of the ChiNext delisting system does have an impact on the PE/VC industry, mainly reflected in the fact that future PE investment valuations will not be so high.
　　The End of the High PE Valuation Era
　　As we all know, since the establishment of the ChiNext board, China's PE market has ushered in a scene of nationwide PE enthusiasm. Faced with the continuous influx of LPs and GPs, some new venture capital institutions have emerged. As a result, the PE market has seen a situation of scrambling for projects and sky-high PE valuations. In the view of industry insiders, the entire PE market has become a "crazy investment" market. The "three high" ChiNext companies were nurtured under such a vicious cycle of interests.
　　Now, the implementation of the ChiNext delisting system has also provided a good opportunity to clean up the disorderly venture capital market. In interviews, most people expressed the view that the PE industry is about to undergo a reshuffle. Under the rules of the game where the superior survive and the inferior are eliminated, a group of strong venture capital companies will remain in this market, while a large number of venture capital companies will leave the stage. Companies that emerged around the launch of the ChiNext board will pay a price for their previous investments made under high PE valuations.
　　Zhao Xiaobing, executive director and president of Dacheng Capital, in an interview with a Securities Daily reporter, stated that the ChiNext delisting system has a particularly significant impact on the venture capital industry.
　　In Zhao Xiaobing's view, previously, China's ChiNext companies, under the "three high" model, had already overdrawn their future development. Therefore, after listing, their sustainable development cannot be seen, which will also affect investors' judgment of the companies. The decline in company stock prices is directly related to company performance.
　　In addition, with the improvement of the system, institutions that do not have investment banking qualifications will leave the industry, and the future of venture capital institutions that entered the industry 2-3 years ago is not optimistic. Teams composed of brand-name funds will ultimately remain.
　　Hu Bin, managing director of Infinity Group, an Israeli-backed company, in an interview with a Securities Daily reporter, stated that the implementation of the ChiNext delisting system is a policy that promotes the healthy development of the venture capital industry, making the industry more rational.
　　In Hu Bin's view, venture capital institutions that previously relied on relationships and unfair competition to obtain projects will find it more difficult in the future. This will have a greater impact on institutions that focus on financial investment, while the impact on institutions investing in early-stage projects will be smaller, because they have already given the companies a reasonable valuation when investing, so the impact will not be too large.
　　Zhou Jun from Binghong Capital, in an interview with a Securities Daily reporter, stated that the ChiNext delisting system has a significant impact on the industry. First, the fantasy of high PE valuations will be shattered, and valuations in the secondary market will certainly fall.
　　In Zhou Jun's view, in the future, venture capital institutions will first choose companies with good financial indicators when investing and will stay away from over-packaged companies. In other words, investments will be more cautious. Institutions will invest in early-stage projects, and moving investments forward is something that many institutions are currently considering and doing. This is also a normal "return to basics" approach.
　　Dr. Li Yi, partner of Bioveda China Fund, in an interview with a Securities Daily reporter, stated that there will be a short-term impact, but in the long run, it will play a role in promoting the healthy development of the PE/VC industry, because this industry also relies on a healthy capital market. Only when the capital market is regulated can the PE/VC industry develop in a healthy direction.
　　Gao Tejia's executive partner, Guo Haitao, in an interview with a Securities Daily reporter, stated that the short-term impact is significant, but the long-term impact is not very large, because their investments are stage-based investments. The future trend of the PE/VC industry is the survival of the fittest. Under the dual system of the ChiNext delisting system and the approval system introduced by the regulatory authorities, the decline in PE valuations is an inevitable trend. The reshuffle of the PE/VC industry has just begun, and only by investing in high-quality and sustainable companies can venture capital companies go further.
　　Valuation Below 10 Times is More Reasonable
　　Under the "three high" model of ChiNext companies, the strange phenomenon of listed companies having valuations as high as tens or even hundreds of times has continuously emerged. However, with the improvement of the system and the baptism of the capital market, the valuations of ChiNext companies are also returning to normal.
　　According to statistics, the current price-to-earnings ratio of ChiNext companies is around 30 times, but the valuations of newly listed companies are still relatively high. In the view of industry insiders, the overvaluation of ChiNext companies stems from the high valuations in the primary market. Under the "new policy," the price-to-earnings ratio of ChiNext companies will fall significantly, and investments in the primary market will become more rational. So, what PE valuation is reasonable for PE/VC investments?
　　In Li Yi's view, the previous nationwide PE craze made the industry become impetuous and severely inflated, and the continuous occurrence of the "three high" phenomenon in ChiNext also affected the development of ChiNext and some good companies in the capital market. After the continuous improvement of the ChiNext system, ChiNext can be built into a good platform for high-quality companies to list and achieve sustainable development. The integration of primary market investment and the capital market by PE/VC will not deviate from its value.
　　Du Li, general manager of Shenzhen Investment Holdings' Shandong region, in an interview with a Securities Daily reporter, stated that the long-term impact of the ChiNext delisting system on the PE/VC industry is positive. Regarding the appropriate PE multiple, Du Li believes that this should be determined by the market.
　　In Zhou Jun's view, future PE/VC valuations will be below 10 times, and the entire investment process will become increasingly difficult. Regarding what PE valuation is reasonable in the future, Zhao Xiaobing stated that a valuation not exceeding 10 times is reasonable, and 10 times is a warning line. Dacheng Capital mainly makes strategic investments, mainly investing in companies in the growth stage.
　　In addition, in Guo Haitao's view, although investment PE multiples are continuously decreasing, due to differences in industries, the valuations currently given also differ. In the healthcare industry, valuations of 12-15 times exist, but 6 times is considered high for poor-performing industries.
　　Dong Hongjie, chairman of Qingdao Rongdao Company, one of the organizers of the summit, believes that with the rapid development of the venture capital industry, companies in second- and third-tier cities need more attention and support from capital.
　　Dong Hongjie, in an interview with a Securities Daily reporter, stated that Shandong has many high-quality small and medium-sized enterprises, but the connection between these enterprises and capital is not sufficient. The purpose of the Bohai Rim Equity Investment Forum is to attract more people to pay attention to Shandong and Shandong's high-quality enterprises.
　　Regarding the implementation of the ChiNext delisting system, Dong Hongjie believes that with the implementation of the ChiNext system, venture capital institutions have become more rational in their investments in the face of reality. Many institutions have begun to focus on early-stage projects, and more institutions will invest earlier in the future. PE valuations will also decrease as the price-to-earnings ratio of listed companies in the secondary market decreases.