A Study On IPO Pricing Model For High-tech Companies In GEM

September25,2009，with first10listed companies starting to IPO subscription,China’s Growth Enterprise Market (GEM) was launched formally and enter into asubstantial operation. By the end of August31,2013, there were355companies listedon GEM. The concept of GEM is becoming a hot topic for people to discuss. GEM is anew market established to meet demands for new economy and needs for high-techindustries’ development, to make up for functional deficiencies in the current stockmarket. It’ll be a notable symbol for China to establish a multi-level capital market, andit’ll provide a growth and development platform for SMEs particularly high-techstart-ups to in our country. IPO pricing of GEM is an issue problem which receivesattention from theory circle and practitioners. This is not only related to the coordinativedevelopment between primary market and secondary market of GEM and how well theGEM to play the role of optimizing the allocation of resources in the future, but alsorelated to the GEM market’s ability to long-term, standardized, and healthy development,and thus also will make a far-reaching impact on enhancing the investment philosophyof China’s securities market, improving overall quality and operational efficiency of thesecurities market and promoting China’s securities market to standardization,maketization and internationalization.On the basis of summing up basic theories and methods of related research in thewhole world, this thesis expounded the basic principles of IPO pricing and distributionmethods, analyzed internal and external factors affecting IPO pricing. This thesisre-defined high-tech, high-tech industries and high-tech enterprises. It analyzed thevaluation price characteristics of GEM companies. Stock prices with more informationaffecting the intrinsic value of companies will be more reasonable, or they’ll be lessreasonable. Based on the analysis of reasonableness of high-tech companies’ pricing ofboard, this thesis used regression analysis to analyzed companies intrinsic value variable.The regression goodness of fit indicated the reasonableness of stock price. It analyzedthe multi-collinearity problems between company’s profitability, management capacity,solvency, capital structure and indicator variables related to the intrinsic value. Themain ingredient regenerated was used for regression as new independent variablesinstead of the original ones in order to overcome the interference of multi-collinearity.Thus, this thesis uses principal component regression analysis to study high-tech company’s IPO issue price and secondary market prices’ reasonableness. This part ofthe study was to examine whether high-tech companies’ of motherboard market pricingIPO reasonably and provide a more solid foundation of studying GEM’s high-techcompanies’ IPO pricing model and method.In this thesis, the analysis of high-tech company GEM’s IPO involved the interestsof all parties on the basis of the balance of the issuers, we research on IPO issuing scaleof expectations and general investors’ weak situation in the benefit equilibrium. Wederived the underwriters for the IPO issuing scale that raises the amount of expectationsas well as the IPO value of institutional investors on the high-tech company, and gavethe related model of inference. At the same time, IPO underpricing problem is analyzedfrom another angle. This paper analyzed High-tech enterprise in China by the life cycleand value characteristics. High-tech enterprises’ life cycle was divided into research anddevelopment, Start-up, early growth, accelerated growth, stable growth, and maturityperiod of six stages, and a high technology companies have four value characteristics:high-risk, high growth, high cost and high value-added. It proposed equity cash flowand other related financial targets and analyzed these indicators’ change characteristicsin different development stages of enterprises. It also set up high-tech enterprise’s IPOpricing analysis model which adapts to securities inquiry and takes equity cash flow andequity cost of capital as the main variables and conducted an empirical study. The Studyshowed that the pricing model reflects the investment value principles andmarket-oriented principles of GEM high-tech companies’ IPO pricing under the inquirysystem. Aimed at the characteristics of high-tech companies, it analyzed the economicvalue-added of high-tech companies and their value characteristics in different lifecycles, then it proposed another method for high-tech companies’ IPO pricing. Theeconomic value added (EVA) theory was used to analyzed IPO pricing. On the basis ofexisted theories, it established the EVA-based high-tech company IPO pricing modeland used the model in actual cases’ analysis and calculated a reasonable IPO pricing.Finally, this thesis presents multi-stage venture investment project’s compoundoption valuation model in line with high-tech companies’ characteristics and GEM IPOpricing method with a combination of stochastic dynamic simulation, and it made athree-phase analysis of the model solution. Combining with noise suppression basedIPO pricing method of high-tech companies, this thesis calculated pricing separately topractical examples and then draw the appropriate inquiry interval. Through randomfluctuations Monte Carlo simulated pricing and noise under pricing model, we can find that the traditional IPO is under pricing, so it is not suit for high-tech companies whichare high-risk and high-yield. For high-tech companies, noise suppression based IPOpricing is higher than the random fluctuations Monte Carlo. It showed that there’s toomuch noise traders in China’s stock market, and our stock market is not yet mature andbubbling atmosphere is too strong. Besides, this thesis introduced trigeminal tree modelof real option pricing methods. On the assumption that there are three developmentstates of listed companies: up; unchanged and down, and on the basis of taking thewhole process as a multi-stage European call option, it established a IPO pricing modelaimed to special industry of high-tech class. And it illustrated the feasibility of themethod through calculation. As the high-tech enterprises’ IPO pricing research in Chinais still in its infancy, in actual operation, we should consider the real situation andparameters in theoretical model, such as acquisition of comparable companies’ marketvalue, the feasibility of relevant parameters’ accurate estimate. Besides, IPO pricingmethods should be combined with distribution methods such as "call-back mechanism"and "green shoe option" in order to explore the true value of high-tech companies onGEM better and improve resource allocation efficiency of China’s capital market.