The number of Chinese listings doesn’t look as if it will exceed 2007 in terms of number or funds raised. According to investment bank and stockbroker Seymour Pierce, 17 Chinese companies launched on the small-cap market last year, raising a total of £820 million collectively. Among them were a number of large fundraisings, including China Real Estate Property (£260 million), China Central Property (£151 million) and Pacific Alliance China Land (£200 million).
This year’s fare are somewhat more modest. Hichens, Harrison & Co, an active AIM broker and nomad, helped to float PAQ, a Chinese manufacturer of own-brand bags for mobile phones and laptops, and Sweet China, a Chinese chocolate maker.
PAQ raised £1 million, which will kick-start its expansion plans in China and the UK. Sweet China, originally floated as a cash shell in 2005 and subsequently delisted, returned to AIM with the £4.3 million acquisition of Essential Box and a £2.7 million placing.
Daniel Briggs, head of corporate finance at Hichens, observes that AIM IPOs have slowed to a trickle. “The smaller companies with a sub-£10 million market value have really moved away from the market because investor appetite isn’t there any more. What people are looking for is companies with market caps of between £25 million and £50 million.
“PAQ and Sweet China gave us the ability to raise funds from private clients, rather than institutions. This would have been much harder.”
Nick Martin, head of corporate finance of Evolution Securities China, tends to agree: “We’ve got a couple of bigger IPOs in the pipeline. We are trying to be choosy about the companies and the sectors because investor sentiment isn’t great in general. But if you can get the right company, it can still be successful.”
Jack Clipsham, partner at accountancy firm BDO Stoy Hayward which has brought a total of 16 Chinese companies to AIM – including China Wonder, the first Chinese AIM float in 2004 – adds: “The capital markets are quiet at the moment. In fact, some people would say they are closed. Unless you are an oil and gas, or a natural resource company, it is difficult to get a float away or raise money at a sensible valuation.”
Of the 1,700 AIM-listed companies, 53 are Chinese. Of these, David Snell, partner at PwC, says: “The performance of Chinese companies listing on AIM has been patchy. Some have done very well, such as ReneSola. They used AIM as a platform and since then have dual-listed on the NYSE.”
ReneSola, a manufacturer of solar wafers used by the solar power industry, raised £26 million at 79 pence per share in August 2006 to pursue its organic expansion plans. Its current share price is 378.50p. Another incontrovertible success story has been Green Dragon Gas. This coal-bed methane business floated in August 2006, raising $25 million (£12 million) and an initial value of $525 million. Its current market value is $860 million.
However, Snell notes: “For every one of these “shining lights”, there are two or three businesses that have done very poorly. There are cultural problems and difficulties understanding market issues. I think some Chinese companies listing on AIM hadn’t though it through properly and this has generated investor nervousness about investing in more China stock.”
Looking elsewhere to IPO
Hong Kong is still the market of choice for Chinese companies looking to list. That said, the two years needed to complete an IPO – compared with the four to six months needed to list on AIM – is a lifetime for Chinese companies in a hurry to grow.
The lengthy process is partly explained by the role of the Hong Kong Listing Authority in the admission process. The body vets every listing document to avoid poor-quality Chinese floats.
“The Hong Kong admission document, which is four to five times longer than the document used here, goes back and forth with every query, which extends the process considerably,” Clipsham observes.
Speed is one of the reasons why AIM has caught the eye of companies, in addition to its international investors – both Shanghai and Hong Kong have predominantly retail investor bases. However, IPO numbers are slowing and some believe this comes on the back of valuation concerns.
Briggs observes: “At the moment, the multiples of valuation that Chinese companies are achieving in London are much lower than the multiples they could get in their local markets. Everyone is keen on achieving the highest valuation for their company, and sometimes AIM isn’t the market for this.”
Clipsham adds: “It may be better for smaller companies to look to domestic markets to raise funds. If you have an international company with operations in a number of countries and are looking to raise between £15 million and £50 million from a different investor base, they should put AIM top of their list.”