(Recasts lead and headline)
* Investors wary of Chinese IPOs after scandals
* Corporate governance focus in rebuilding trust
* Interest in listing in London expected to grow
LONDON, March 14 (Reuters) – Frustrated by a long wait
to list at home, and enticed by the chance to boost their
reputations abroad, Chinese firms are turning to London as the
place to raise capital.
But those looking to float in Britain will need to prove
their corporate governance is up to scratch if they are to win
over investors scarred by past scandals involving Chinese
companies in the UK and North America.
Chinese companies accounted for a third of all global
initial public offering volumes in 2011, raising a total of
$54.2 billion, according to Thomson Reuters data.
The vast proportion of this was raised on Chinese exchanges,
but a lengthy backlog there – and specialist knowledge of
particular sectors in London – is drawing people towards the
British capital, where investors are still wary after the last
flurry of Chinese IPOs proved disappointing.
“Investors still want exposure to China but they were burnt
a few years ago,” said one investment banker.
“There are plenty of companies that could get a London
listing done, but they have to be really, really focusing on the
governance as if you talk to any UK investor there will be a
deep concerns about governance levels … there is a lasting
suspicion you don’t necessarily get the full picture.”
Lottery operator Betex delisted from London’s Alternative
Investment Market (AIM) in 2007, just 19 months after its 12.5
million pound ($19.7 million) IPO. Its shares had been suspended
after Chinese authorities detained two senior members of staff
for illegal gambling.
Others who ran into trouble include mobile phone handset
maker ZTC Telecoms, whose chief executive and majority
shareholder disappeared in 2008 after using shares in the
company as collateral for a loan. Under new leadership and a new
name, the company was readmitted to AIM six months later with
the intention of completing a reverse takeover, but its listing
was cancelled in late 2010 after it failed to do so.
A spate of scandals involving Chinese companies in North
America last year is also fresh in the market’s mind. Shares in
Nasdaq-listed China MediaExpress Holdings, which provides bus
advertising, plummeted after fraud accusations. Trading in the
company has been halted since March last year.
GETTING GOVERNANCE RIGHT
Getting investors to take a punt will require convincing
them that the next wave of companies are ready to cope with the
rigours of a London listing, including regular communication
with investors, and that they have the right structures in place
in terms of board composition and financial reporting.
Chinese sportswear brand Naibu and mining services group
Rare Earths Global (REG) are both currently marketing listings
on AIM.
For REG, whose chief executive Simon Ong said they had
chosen London over alternatives such as Hong Kong because of the
city’s abundance of mining specialists, the focus on corporate
governance has been central.
The company, which is hoping to raise $50 million to expand
its operations in China, has appointed three non-executive
directors and plans to appoint a further UK-based director with
AIM experience following its listing.
It will also set up audit and remuneration committees, and
adopt some aspects of the UK’s Takeover Code, despite not having
to be subject to it as an overseas company.
Naibu has taken a similar approach, appointing three British
non-executives, including Giles Elliot who previously worked
with asset manager Schroders in Asia and David Thomas, who has
experience of Chinese companies on AIM, its spokesman said.
Luke Webster, director at Charles Stanley Securities, which
is working on REG’s listing, said a run of more successful
listings could help boost the number of Chinese IPOs in London.
THREE-YEAR BACKLOG
There are 43 Chinese companies listed on AIM, more than a
third of which joined in 2006 during a flurry of activity from
Chinese firms. But the experience of high-profile failures like
Betex and ZTC has dampened investor appetite.
“What it needs is a couple of really good solid Chinese
businesses to demonstrate good corporate governance,
transparency and build a track record for delivering results
with investors,” said Webster, a former manager of the AIM
regulation team at the London Stock Exchange (LSE).
Interest has been increasing, said Webster, particularly
from retailers and manufacturers as Hong Kong and other Asian
markets are already saturated with firms in these sectors.
The suitability of AIM, half of whose 1,122 companies each
have a market capitalisation of less than 25 million pounds, for
high growth companies and the opportunity to boost their
international profile are also important drivers.
For Naibu, which plans to raise up to 50 million pounds to
build new factories, being able to list quickly enough to
exploit current growth opportunities in China was vital.
There is a long queue of companies waiting to IPO in
Shanghai, with the Chinese government keeping tight control over
the number of companies that can list. At the moment, capital
markets lawyers say the backlog stands at around three years.
That puts the LSE, which has a Beijing office, in a good
position to attract those frustrated with the domestic market.
The growing presence of Chinese investment banks in London –
China International Capital Corporation (CICC) became the LSE’s
first Chinese member firm in May last year – is also likely to
help boost the flow to London.
“As these banks expand their London capabilities and staff
numbers, it is likely that they will want to bring more Chinese
companies to market in London,” said Tracey Pierce, director of
Equity Primary Markets at the LSE.
($1 = 0.6355 British pounds)
(Reporting by Kylie MacLellan; Editing by Jodie Ginsberg)