Current Issue

2008-09-22

Current Issue: NewConnect: expectations vs reality

Ewa Oleksinska

NewConnect is a Polish stock market based on the alternative turnover system, guided by Warsaw Stock Exchange. There are ten such markets in Europe, all of them guided by Federation of European Security Exchanges (FESE). There is EN.A in Athens, Entry Standard in Frankfurt, IEX in Dublin, AIM in London, MAC in Milan, Axess in Oslo, NewConnect in Warsaw and Dritter Markt in Vienna.

NewConnect started to operate on August 30th 2007 and it was intended for financing development of new enterprises, which due to the focus on innovative technologies have a high growth potential. The considerable cash input would enable full exploitation of the R&D potential of the young and dynamic enterprises and, as a result, give them chance for significant development. On the other hand it is also an interesting option for investors who are willing to accept higher risk for a potentially high profit from an investment.

Because of the specificity of its eminents, NewConnect offers more liberal formal demands and information duties, thus it enables cheaper cash winning. NewConnect was made for companies that have big growth dynamics, exist no longer than 4 years, have estimated capitalization around 20 million PLN (6.6 million Euro) and are looking for a capital between few hundred thousand to few million PLN. It is intended for enterprises from innovative sectors, based on non-tangible assets (e.g. IT, electronics, telecommunications, biotechnologies, environment protection, alternative energy), which will possibly debut on main stock exchange market in near future.

„Due to not fully developed Venture Capital and Angels of Business in Poland there is an existing barrier that does not let to alleviate requirements of young (2-3 years old) companies whose biggest problem is falling into financial blank. “ – says Ludwik Sobolewski President of GPW Stock Exchange.

According to him, presence on the alternative market, enabling those companies getting onto a stock market will improve the situation. Sobolewski estimates that until the end of 2008 there should be over 100 companies on NewConnect. “There is an innovation and enterprise potential” said Sobolewski “and NewConnect is innovative by itself”

Amount of listed enterprises granted NewConnect the fifth place on the alternative markets rank list. At all alternative markets, capitalization and turnover value are much lower than on regulated markets. One year old NewConnect has the lowest capitalization value and turnover among other alternative markets.

However optimistic, prognosis made by president Sobolewski about NewConnect perspectives, may not happen. Until now, only 62 companies debuted on this market and plans for few hundred companies on NewConnect within 3 years seem not possible.

NewConnect index falls in a rapid pace (60% fall since January 2008). At the beginning of NewConnect activity analysts had high hopes for big financial institutions would search for investment opportunities there. However, it appears that over 90% of NewConnect turnover is generated by small investors and an average value of their orders vary between 1000-5000 PLN. That means it is almost impossible to attract financial institutions like TFI and OFE. The rates of the majority of companies are below their initial debut value. Joint capitalization of all businesses is just 1.3 mld PLN, which is similar to the value of a single company from WIG 20 index (Warsaw Stock Index).

When the share index of enterprises falls, investors become impatient and they can sell discounted shares, what together with a very low fluency make those falls even bigger. Liberal character of NewConnect enables almost any company to get into the market, even if it was established few weeks before. Investors buying shares of such companies are taking a huge risk, especially when 70% businesses do not survive their first year. After a year of operation it may appear that the company has spent all the money, but has registered only losses, not profits. Therefore, successful investors are those who took part in private emission of the shares, but only if they managed to sell the shares straight after the company debut. Unfortunately during private placement share price is usually much lower then the price during quotation.

- At this moment NewConnects chances to attract big funds are very low. Mostly because there is no share fluidity, businesses present doubtful fundamental value and some of them have been rated extremely high-risk investments. It is rather a place for speculators with a smaller level of knowledge - says Adam Gawlik, manager of PZU Asset Management.

Similarly to Warsaw Stock Exchange also in NewConnect, experienced investors will find few businesses that would make a use of received funds and will surprise with their financial results. One of such enterprises may be Euroimplant, a company focused on tissue engineering. The company is working on a technology for skin tissue transplant production and when it will release its products on a market, the profits should be considerably high.

The final question is if such companies, after their success, will still be rated on NewConnect or will they move into the main market.




Editorial comment:

According to the Warsaw Stock Exchange CEO, Mr Ludwik Sobolewski, falling down NewConnect could not avoid consequences of a global recession. This dependence results form the presence of more or less same investors on both, regular and alternative, markets. Nevertheless, NewConnect activity resulted in Poland in establishing new, highly specialized institutions like Privilege Capital Management form Wroclaw. We have to be patient to observe the real effects of NewConnect appearance on Polish market.