Aim’s love affair with China reignites

Hohhot, capital of Inner Mongolia, is not the obvious place to hold a seminar on the attractions of Aim.
But early last week 11 companies gathered there to hear John McLean, chairman of The China Food Company, expound on the necessary requirements to seek a quote on London’s junior market. Mr McLean is also chairman of Albany Capital, a private equity company seeking new investments in northern China. He was invited to stage the seminar by the mayor of Hohhot, who is responsible for attracting investment to the region.
Then at the end of last week 17 companies from Shandong province arrived in London to meet the China-Britain Business Council, of which Mr McLean is a member. A memorandum of understanding was signed, and a CBBC delegation is in September going out to Shandong, where The China Food Company operates, to strengthen business links with the province further.
Such activities suggest that this column may have been premature to pronounce on the end of Aim’s love affair with China when RCG Holdings, the specialist in fingerprint and facial recognition systems, decided at the beginning of this year to quit Aim for Hong Kong. Maybe the affair was merely going through a rough patch.
The China Food Company knows all about such difficulties. It reversed on to Aim in 2007, raising £4m at 50p a share. The main business was the manufacture and distribution of animal feed, which was hit by what Mr McLean calls the “economic tsunami” at the end of 2008. Pre-tax profits in 2009 were £2.8m on turnover of £30.1m, down from £7.5m on turnover of £38.2m in 2008.
However, the company has long seen its future in its soya sauce business, which helped to drive profits ahead to £3.8m on revenues of £35.9m last year. It has invested £43m in a new factory, which opened in May and doubled capacity to 50,000 tonnes. Further increases in capacity can be made on the same site, and the animal feeds business is now seen as non-core. FinnCapp, its broker, is forecasting pre-tax profits this year of £5.5m on revenues of £49.5m.
What can other Chinese companies with aspirations to join Aim learn from the company? The most obvious lesson is patience. It arrived on Aim four years ago and raised its first new money – apart from convertible loan notes – this year at 53p a share. The shares are now below that level in spite of the promised introduction of a dividend this year.
Nevertheless, the company is at last gaining traction with London institutions. The shareholder structure is certainly more attractive than that of some Chinese companies. The founder’s holding is only 20 per cent; the biggest shareholder is Hermes Holdings, quoted on the South Korean stock exchange, with 21 per cent; and Albany Capital, which was behind the original reverse takeover, has 14 per cent. Other investors include Standard Life, Henderson and Amati.
Mr McLean stresses the importance of corporate governance and transparency. It takes two years or more to prove that management can deliver on its promises. So with his Albany hat on, he was advising Inner Mongolian companies not to consider floating on Aim unless they have £30m of assets, a three-year audited financial record, and a compelling growth story. They should not be over-optimistic about valuation, should initially raise only a small amount, then concentrate on developing communications and credibility.
The headquarters of The China Food Company are in Singapore, and board meetings are in English. Its chief executive is a Singaporean, and the latest non-executive is Thomas Coley, who has experience of sales and marketing throughout Asia with Nestlé. Like China Wonder, as described in this column last month, it looks like an example of globalisation on a minor scale.
In spite of the size of the country, Chinese businesses that meet the requirements for an Aim quote are likely to remain few and far between. But perhaps – just perhaps – the love affair between China and Aim is about to develop into a more mature relationship.
Tough quoting on Aim
Meanwhile, candidates for Aim continue to demonstrate how tough it is to get a quote. Shares in TomCo, which is planning to produce oil from shale in Utah, are due to start trading on Thursday after a six-month struggle to raise £3.5m. Stephen Komlosy, chief executive, said the first company flotation he was involved in 40 years ago featured a prospectus of 30 pages for a full quote – TomCo’s prospectus ran to 250 pages.
And MyCelx, which has developed a patented polymer that removes hydrocarbons from water for the oil industry, is continuing to try to raise $30m to fund expansion. The shares were due to start trading on Monday, but the flotation has been suspended until later this month.

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