Rising up to the listing challenge

Getting onto stock exchange in London involves two-way process

With Chinese companies Rare Earth Global, Naibu and Auhua Clean Energy recently failing to raise as much money from UK investors as they had hoped, some in the City of London argue that the outlook for Chinese companies wanting to list on the London Stock Exchange's Main Market or Alternative Investment Market (AIM) remains tough.

That said, the inherent benefits of and rationale for listing in London remain very compelling, for the right sort of Chinese company.

International investors want a piece of the China growth story, but too many have been burnt before for there not to be a large dose of skepticism in the market - especially when incidents such as Sino-Forest persist.

The new wave of Chinese companies considering coming to the London market should not be afraid to rise to the challenge, however, as the long-term benefits to their profile, prestige and reputation far outweigh the time and cost involved in adopting the necessary best-practice international disclosure levels.

Fundamentally, if Chinese management teams realize why foreign investors often have negative sentiment toward Chinese companies before they embark on the listing process, and are prepared to address the issues up front, this will stand them in good stead for what can be a challenging and intense period in the evolution of their company.

According to a recent report by HanTime Capital, in 2011 there were only four Chinese IPOs and two introductions on the AIM. Of the total funds raised by Chinese companies on the London Stock Exchange last year, only 6 percent, or 8.1 million pounds ($12.6 million, 10 million euros), were for "new money", and 94 percent of the funds raised were via secondary offerings.

The paucity of IPOs is not however exclusive to China-based firms, as overall equity capital markets activity in London has remained depressed for some time, with relatively few companies coming to the market in 2011.

Specifically, investors have concerns about the following issues that have dogged many Chinese stocks on the LSE and have resulted in the number of listed Chinese companies shrinking from more than 70 in 2008 to 44 at present: (a) skepticism and lack of trust surrounding publicly provided financial information; (b) the often opaque decision-making process; (c) a lack of commitment by Chinese management to investors and media relations on the ground in the UK, and (d) poor liquidity and high volatility in share prices, accompanied by weak financial performance of some Chinese listed firms post IPO.

But, if management are prepared to adopt a Western or UK standard of corporate governance and be open and transparent with their investors and advisers - and if they have a compelling equity growth story that is sufficiently differentiated from its peer group - then there is no reason for them not to pursue a listing in London.

Chinese enterprises, State-owned or private, should expect advisers - NOMADs, brokers, lawyers, reporting accountants, financial PR consultants, etc - and investors to request they have the following in place: (a) English-speaking management; (b) UK-based auditors who go out to China to verify assets and accounts; (c) a commitment to UK accounting standards; (d) a sufficient free-float of shares to help liquidity in the after-market; (e) a commitment to UK corporate governance best-practice standards and (f) expect a higher level of scrutiny from press and investors than back in China.

Being a listed company on the LSE is a two-way process, whether you are from China, the UK or elsewhere. It requires effort on the part of management, especially the CEO and CFO, to dedicate time communicating in person with key stakeholders in the city and building up trust with the investor base. It should not be treated as a CEO vanity project for audiences back home.

The "going global" ambition of Chinese companies shows no sign of abating and an IPO in London is a great way to raise capital and profile for corporates. With a pipeline backlog for those companies seeking a domestic listing in China, and a comparatively fast listing process in the UK, especially on the AIM, the opportunity presents itself for the right companies to float and thrive on the London market.

Developing a reputation for being trustworthy and open is key, and embracing a proactive financial PR and investor relations strategy will reward those Chinese companies embarking on what is a key stage in their development.

The author is head of China practice at the UK-based consultancy Maitland.

(China Daily 06/15/2012 page7)