Chinese opportunities on AIM

Despite recent damaging shocks, investors can still find well-run, profitable ventures among the array of Chinese AIM counters.

Spectacular corporate debacles, such as lottery operator Betex and business park developer Canton Property Investments, have damaged perceptions of Chinese companies on AIM, while some strong performers, including orange grower Asian Citrus, are looking to other stock markets, such as Hong Kong, for better ratings and liquidity. But investors can still find sound, well-run companies among them.

Just as China has been a magnet for many British businesses, so London’s junior stock market has become a magnet for Chinese companies seeking to attract Western capital. Even now, after the credit crunch and recession have changed many perceptions and rudely interrupted China’s serene growth path, Malaysian Chinese entrepreneur Adrian Yong is understood to be contemplating raising £25 million on AIM for his CSF data centre concern. Meanwhile, there is talk that Junhong Xiong, head of Chinese pig farm and pig feed company Agfeed Industries, already quoted on the US Nasdaq market, might be looking at London, too.

‘A path to gold’ – for some

Chinese companies, from solar power wafer manufacturer ReneSola (also quoted in the US) to petrochemical, speciality chemical and biochemical group HaiKe Chemical and West China Cement, have become a familiar feature on the AIM scene. As Frank Lewis, chairman of AIM-quoted investment company China Evoline and a member of the AIM Advisory Council, puts it, ‘To be listed on AIM brought great prestige in China, and before the crunch, people there thought it was a path to gold’.

However, that path has not always proved so golden for investors. The People’s Republic’s sharp economic slowdown has interrupted progress for many, though the government now has afoot an ambitious recovery programme – stimulated by this month’s 60th anniversary of China’s communist revolution – and the Chinese currency, the renminbi, has recently been strengthening.

Several companies have thrived in the current environment. Pharmaceutical and biotech specialist China Medical is seeing rising consumer demand and West China Cement has witnessed buoyant turnover and profits. Condiment, sauce and paste concern China Food Company is expanding despite setbacks, fast-expanding travel agent et-China has attracted the attention of a major European partner, while Sinosoft Technology, a cash-rich software specialist, is seeking acquisitions.

Others, however, have turned out to be major disappointments, often tightly held and controlled by families and other groups not reconciled to public company disciplines, though in some cases efforts are being made to put things right.

Some of these more disappointing stocks include LED International, ZTC Telecommunications, now renamed China Evoline, Betex and Canton Property Investments. Hong Kong-based lighting specialist LED International, controlled by the Chinese Strong Base Group, became mired in controversy after its £2 million float at 10p three years ago.

There were suggestions of misleading representations about the site of the company’s factory and problems with a £2.3 million loan to a subsidiary in Shenzhen, over the border from Hong Kong. The shares collapsed to 0.20p, but Strong Base took action, the management team was changed and respected deputy chief executive Dennis Ow is working to revive the company’s fortunes.

LED now has a factory, is building a new one and is winning business. Close observers suggest the company may even show a profit soon, and the shares have rallied to 2.88p.

At China Evoline, Frank Lewis, an entrepreneur with a clutch of directorships under his belt, has set himself a challenge. He created the company out of Shenzhen-based mobile phone maker ZTC Telecommunications after its former chief executive officer and majority shareholder Charles Huang and his brother-in-law, head of the company’s China operating subsidiary, had gone missing.

Born into a Chinese business dynasty with one uncle in charge of another mobile phone concern listed on the US Nasdaq market, Huang had raised £14 million at 20p by floating ZTC in London. But, says Lewis, problems arose over a personal loan with ZTC shares pledged as collateral, and ‘he decided he did not want to lose face’.

The Chinese authorities had closed the company’s factory and the outlook seemed grim. But ‘we got hold of the man the shares were pledged to and sorted it out’, recalls Lewis.

Now China Evoline, which has two directors in Shanghai, Michael Lui and Australian Mark Saropoulo, brimming with ‘tremendous schemes’, is looking for assets in resources or other sectors. The shares have more than doubled from 21p to 52.5p and Lewis, who lives in South Africa and Britain, expresses high hopes.

Attempting revival

Also making hopeful noises about reviving one of AIM’s Chinese corporate corpses is Jeremy Longley, long-suffering chief executive of London-based Betex, which won market favour four years ago with its lotteries operation in gambling-mad mainland China. Founded and chaired until recently by Hong Kong-based Dr Johnny Hon – a well-connected figure with a PhD in psychiatry from Cambridge among an impressive array of qualifications – the company thrived until the Chinese police arrested two of its senior Beijing executives in 2007 and charged them with illegally gambling on their own account.

The shares were suspended and Longley recalls that Betex itself was eventually exonerated. But the process took so long that AIM delisted the company. Longley has been working to restructure and tidy up Betex, offloading ‘the hopeless bits’ and rebranding the lotteries. The company is in dispute with the Global Group, a constellation of companies run by Dr Hon, claiming debts of £600,428, and, though Dr Hon is no longer chairman, Betex – angered by his private sale of a big chunk of its shares – recently moved to relieve him of his title of honorary president.

According to Longley, Betex is now ‘strong and profitable’ and negotiating to expand its operations in China. He is contemplating potential acquisitions in the technology sector in China and hopes to have the shares relisted in the spring.

As yet, Longley has not decided whether the company will accompany its hoped-for stock market comeback with a fundraising or takeover, or indeed, whether it will seek to go back to AIM at all. Just as Asian Citrus is fixing a secondary listing in the liquid Hong Kong market, he says ‘we are looking at a number of exchanges’ and suggests ‘it will come down to price’.

Across the water

The Hong Kong stock market also looks attractive to Wong Ben Koon, boss of Prosperity Minerals, based in the former British colony and active in the Chinese cement and iron ore sectors. He has taken steps to transfer his effective controlling stake to another company he dominates, Prosperity International Holdings, which is listed in Hong Kong and whose share price performance has significantly outstripped its AIM cousin’s.

So far, no such happy prospect seems to have manifested itself for another AIM delister, Canton Property Investments. This venture raised money on AIM as an investor in shopping centres and business parks in and around the southern Chinese city of Guangzhou (formerly Canton) and recruited Sir David Brewer, a previous Lord Mayor of London, as a non-executive director.

Once visited by prime minister Gordon Brown on a visit to China, Canton Property boasted a portfolio of assets worth £578 million. But the picture clouded a year ago, when the company had its shares suspended, saying its then executive chairman, Keng Wong, had ‘recently been absent from the company and uncontactable’.

Brewer and others resigned and speculation later bubbled about alleged loans of £444 million from China’s Bank of Communications to Wong. Now also in the picture is Dr Hon, who lists himself as executive chairman of Canton Property Investments (BVI) as from this year and who will have done well if he can restore the situation.

Dr Hon is described as ‘indomitable’ by colourful small company player Andrew Greystoke, whose firm Atlantic Law was adviser to another of his companies, PLUS-quoted entertainment mini-conglomerate Global Entertainments, until earlier this year. Global Entertainments delisted from PLUS soon afterwards.

Tackling the ‘China discount’

Dramas of this sort do little to burnish the reputation of Chinese companies in London, however sound the performances of companies such as Sinosoft Technology, based in Leeds but doing well as a specialist software provider in the People’s Republic and seeking suitable acquisitions there on which to spend a useful cash pile.

John Maclean, chairman of China Food Company, which has suffered ‘a year’s delay’ but is enlarging its £15 million soya sauce factory and moving upmarket, claims to see an upturn in consumer confidence after interim pre-tax profits down 65 per cent to £1.2 million. But he is so concerned about what some term the stock market’s ‘China discount’ that he has been trying to persuade his peers to agree on a new corporate governance code for Chinese and China-focused companies on AIM.

Directors of several other China AIM companies, including HaiKe Chemical, now returning to profit after a 2008 loss, have backed this initiative. However, it is proving a slow business bringing some key players into line.

Frank Lewis at China Evoline agrees ‘China companies have an image problem’, which he partly puts down to cultural differences. Two months ago he attended a meeting of chairmen of Chinese companies to discuss Maclean’s plan, but ‘I have not heard about it since’.

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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