China crisis as firms quit Aim

REED SMITH

BEFORE the onset of the economic downturn, there seemed to be no end to the approaches being received by London Aim advisers from Chinese companies seeking an admission to Aim.

Since then, however, regulatory changes in China concerning overseas listings and the depressed nature of the world equity markets in 2008 and 2009 have brought a halt to the number of new entrants to the market. Yet the most significant development recently is the number of Chinese companies leaving London’s junior market. Twelve companies with their operations centred in China have left Aim since 2008. Macau Property Opportunities Fund departed for the main market, China Biodiesel was bought out in a tender offer, and West China Cement is expected to move to Hong Kong later in the year. Many of the 48 Chinese companies remaining on Aim will also be considering their options.

But what are the alternatives available for these companies considering delisting from Aim and how can this sudden change in attitude towards the junior market be explained?

If used properly, Aim can be a platform for senior markets and is likely to remain a good home for growing technology and resource companies. Perhaps, then, the first and most obvious option available is for Chinese companies to remain on Aim, but to change their approach to the market in order to make better use of it. In the first instance, they need to acknowledge that to improve their performance on the market they need better investor relations and communications with the market and must address issues of disclosure and poor corporate governance.

With solid and consistent management and good trading history, some Aim-listed Chinese companies have sufficient track record to move up to the main market – another option for those considering delisting from Aim. Listing on the main market would certainly address some of the liquidity and profile concerns many Chinese companies have about Aim, but the reluctance to disclose information, and the resistance to acceptable levels of corporate governance, would remain problematic. Additionally, majority ownership in many cases remains with the original founder, which will always restrict liquidity, hold back the introduction of suitable governance structures, and limit opportunities for transition to the main market.

A seemingly innocuous problem, which is often overlooked, is the lack of English-speaking finance directors and executive directors in these Aim-listed Chinese companies. Investors cannot be expected to develop an interest in a stock if the executive directors are unable to communicate the opportunity effectively.

This becomes less of an issue for those companies pursuing the further alternative strategy of a dual listing on Aim and in Hong Kong, as demonstrated by surveillance and security systems specialist RCG and orange plantation owner Asian Citrus. This is an attractive option for some as it provides an opportunity to access alternative sources of capital in a market that is closer to home and where the language barrier is less problematic. For RCG and Asian Citrus, trading volumes have increased significantly and higher valuations have been achieved since completing their dual listing in Hong Kong. Some owners may see this as an opportunity to sell down their holdings at higher multiples but there are challenges and costs associated with a dual listing that may prevent this being a viable strategy for some.

Many will cite the low valuations, high costs and lack of interest in Chinese small cap companies as good reasons to leave Aim. Many owners will take advantage of the current depressed market valuations to take their companies private, whereby the listing and associated advisers’ costs will be saved and management time can be focused on developing a domestic Chinese market position rather than convincing investors that an international growth strategy is a realistic prospect. For companies that do progress a delisting from Aim, it is unlikely that they will be able to come back to the UK markets (unless any exit takes out the minority external investors at an acceptable level). Merely cancelling the listing would be perceived as a very negative step.

Chinese companies are not the only ones deserting Aim. In June 2010, 16 companies left Aim, with others planning to cancel their listing very soon. Therefore it is clear that Chinese companies are not the only ones to have failed to fulfil their potential on Aim – perhaps Aim also has some work to do if it wants to continue to attract and retain foreign entrants.