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Source: Written by: Graeme Davies

Investors Chronicle – Ways to play the China opportunity


During the course of 2010 China overtook Japan as the world’s second-largest economy as it continues its inexorable rise as a global economic superpower. With the developed world struggling to achieve at best anaemic growth rates, China has powered ahead. Its economy continues to expand at a near double digit rate, with 9.6 per cent growth recorded in the third quarter of 2010.

But seeking exposure to Chinese growth remains frustratingly difficult for UK investors, not least because the performance of the Chinese companies who have come to London for a stock market listing has been, on the whole, disappointing.

The nature of many of the Chinese companies who have been enticed to London’s Alternative Investment Market (Aim) is partly to blame. Aim’s Chinese stocks tend to be smaller companies seeking capital to further their growth. As such, they are at an earlier, more risky stage of their evolution. In the main, larger Chinese companies have either sought listings on domestic markets, closer to home in Hong Kong, or on US markets such as Nasdaq.

With many UK investors having suffered disappointing returns from Aim-listed Chinese stocks, sentiment has taken a tumble. There was a mere trickle of new Aim listings from China in 2010 compared with the veritable flood of the pre-credit crunch years. Indeed, during the past year the only notable Chinese listings on Aim were Asia Ceramics and Global Lock. And several Aim-listed Chinese companies left the market, with only solar power manufacturer Renesola arguably moving on to better things by swapping Aim for Nasdaq. Already, 2011 has started on a disappointing note with the de-listing of Chinese travel company et-China from Aim on the first trading day of January.
Aim’s China opportunities

So, what are the prospects for those Chinese companies still holding out on Aim? Those who have exposure to strong themes such as natural resources or domestic consumption still retain decent prospects on the whole. For example, China Food and Asian Citrus are plugged into the burgeoning domestic consumption theme, through condiments and citrus fruits respectively. Both of these companies have recently reported growing sales, although it is telling to study their share price performances over the past year. China Food has struggled for investor attention despite its decent performance whereas Asian Citrus has enjoyed a strong run, but only since it concluded a secondary listing in Hong Kong which led to an upsurge of interest in its shares.

Operationally, Asian Citrus has performed strongly in recent months. The company has continued to ramp up production of oranges from its rapidly maturing plantations. It has also invested in its business by acquiring a juicing company which should allow it to capture more of the value inherent in its produce.

Elsewhere, China Shoto has built a business based on supplying industrial back-up batteries to the Chinese telecoms operators. This is a booming sector as mobile use in China expands at an eye-watering pace. But Shoto was caught out by a temporary hiatus in demand in 2010 after government stimulus packages wound down and private sector investment momentarily failed to fill the gap. Furthermore, the company’s communication with its UK investors has also been a source of criticism and did not help sentiment when it warned on profits.

Other sources of Chinese exposure

The somewhat mixed performance of Aim’s Chinese companies suggests investors may need to employ some lateral thinking to make the most of the Chinese opportunity. The growth inherent in China is not in doubt, but capturing it through investing in UK-listed stocks is. But with China consuming a voracious amount of the world’s natural resources, searching for companies that feed China’s need is another potential strategy. London is home to several such companies.

Green Dragon Gas is a Hong Kong based business developing coal bed methane in China, where it owns the means of production as well as pipelines and service stations which sell its gas. Its shares more than doubled in the second half of 2010, to value the company at north of £1.5bn. Other options include Mongolian oil explorer Petro Matad, which is expected to feed demand for oil from China once its oil fields are up and running - its shares more than quadrupled in 2010. Philippine copper project developer Copper Development Corporation raised £40.7m when it listed in December. Production from its project will be primarily sold to China.

Taking a more diversified approach, Origo Partners is an investment fund with significant interests both within China, and latterly in resource rich Mongolia. It offers exposure to China through a diversified portfolio, which reduces some of the risk.

Finally, on a larger scale, the recent deal done by Vallar, the cash shell run by Nathaniel Rothschild, to buy significant coal assets in Indonesia was also aimed at grabbing exposure to Chinese demand. The newly formed company, named Bumi, has created an Indonesian coal mining giant which is likely to enter the FTSE 100 and the vast majority of its production is sold into China.

IC View:

There are ways of playing the Chinese growth story without having to restrict investment to a handful of smaller companies plying their trade on Aim. China is likely to grow rapidly for many years to come and missing out is not an option.