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September 23, 2015 11:24 pm

Aim’s Chinese disasters offer cautionary tale for chancellor

Kate Burgess

If the UK Chancellor wants a cautionary tale for his initiative to link London and Chinese stock markets, he should look to the Alternative Investment Market.

This week two of the 45 China-­based companies quoted on London’s junior market have either had their operations suspended or their shares. They are just the latest of a long string of Chinese disasters on Aim.JQW, which provides business-to-business web services to Chinese companies — and claims to be second only to Alibaba — has been fined and barred by the Chinese authorities from doing business for a month. Language on a site that JQW managed for a client was considered by the regulator as a pitch for a pyramid scheme, says an adviser. The company’s shares are a tenth of what they were when they floated on Aim at the end of 2013.

Shares in Vmoto, the scooter company jointly listed in Australia, were suspended on Monday ahead of a profit warning on Wednesday. Its shares have fallen by a third in a year.

Confidence in Aim has been dented by persistent evidence of the gaps between Chinese and western understanding of ownership, shareholder rights and appropriate board governance. The slowdown of the Chinese economy has only added to investor qualms.

The London Stock Exchange, which operates and regulates the junior market, has worked hard to promote Aim as a market for small Chinese companies. More than 80 Chinese enterprises have joined Aim since 2005 and a small group of brokers, nominated advisers or “Nomads” and media agencies have benefited from bringing these companies to London and selling the shares to investors.

But enthusiasm has waned. One adviser says he will never act for a Chinese company again. Another says: “It boils down to four words: corporate governance and transparency. There are massive cultural differences”.

Brokers’ reticence does not bode well for Mr Osborne’s plan to connect stock markets in London and Shanghai in a way that would help UK firms to raise funds from Chinese savers, and Chinese companies to list in London.

“The acid test for any feasibility study on linking China and London markets is if sponsors have learnt from their experience on Aim,” says the head of one international investment firm. “The initiative will only work if there are credible sponsors for entities whom local investors in London can rely on.”

Aim woes

Curtain falls on Gate Ventures’ dramatic Aim run

What do you get when you mix a man who wrote songs for Elvis, £3m, and a mysterious set of Chinese-owned offshore companies? The answer: one of the most successful London stock market flotations of all time. On first sight Gate Ventures did not appear to have the characteristics of a dynamite stock market listing. In fact, the company did not have much at all.

Read more

Aim’s Chinese IPOs have included citrus growers, forsythia farmers, a feng shui business and oil and gold prospectors. But as share prices have fallen, the flow of new entrants has slowed to a trickle. Of the 45 Chinese businesses left on Aim, the shares of only a handful — including Hutchison China Meditech and MoneySwap — have risen in the past 12 months. Shares in more than a dozen have halved or worse. These include new entrants such as Aquatic Foods, a processor and supplier of fish and sea cucumbers, which floated in February at 70p. Its shares are now 31p, cutting its market value to about £30m.

Aim’s five floats this year from the region have been overshadowed by the 10 Chinese companies that have quit the market, several because their Nomad will not act for them any more.

Aim rules state that without a Nomad a company’s shares must be cancelled.

This was ultimately why Gate Ventures, a media business and one of Aim’s most dramatic failures, did not even last a year on the market.

Conflicts over executive control have emerged again and again. Sportswear group Naibu Global was delisted during the summer after its UK-based directors lost contact with the executive team running the business in China. The board of Sorbic International, a food additive business in Shandong, lost control of its cash and corporate seals needed to do business to its chief executive, and also quit the market.

Executives and non-executives have tussled at Camkids, a clothing business, whose shares floated in late 2012 at 88p. They are now about 3p, giving the company a total market value of about £3m. The company has cash balances worth an estimated 57p a share.

 

Questions have increasingly been asked about whether Chinese companies on Aim are being used as cash machines either by executives or Chinese cornerstone investors brought in before an IPO, who then sell their stakes after the float.

Some Nomads have tried to address these concerns. Doormaker Jiasen, for example, whose founding investors retained 80 per cent of shares, promised that if the company delisted within two years of last year’s IPO, outside investors would be allowed to sell their shares at the 82p float price. The shares are now trading at 6p.

The flaws in these kinds of promises have been exposed by JQW. Its advisers agreed with cornerstone investors that they would be locked in for 18 months. However, at least two of these investors reneged on the agreement and all the company could do was express “disappointment”.