January 28, 2011 6:37 pm

A cautionary tale of investing in China

By David Stevenson

“And so the saga of this troubled company continues.” Few letters to shareholders start with such candour, but the latest communication from London Asia Capital reads as a cautionary tale for private investors seeking exposure to unquoted Chinese stocks.

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After seeing 13 of its investments in small Chinese companies written down to nil-value, and its London Stock Exchange listing cancelled, the company was to have its future decided at an emergency general meeting this week. Its largest shareholder, a Singapore-based investment entity called Richpoint Overseas Group, was hoping to win a vote to restructure the company around one of it last remaining valuable assets: a small Chinese private company called Zhongying, which owns land near the town of Wuhan. London Asia’s new board opposed the vote, but it has now been postponed until February.

But the dispute over Zhongying highlights the failings of London Asia’s strategy of investing in tiny Chinese private companies and then floating them on western stock markets. Zhongying may have some residual value – the directors estimate it could be worth as much as £12m – but London Asia was valued at more than £50m when its shares were listed.

In autumn 2008, a new management team led by the Earl of Cromer was brought in by disgruntled institutional investors keen to find out what had happened to their investments in China. New chief executive Keith Nagel found the company’s London bank account had no cash in it, while no reports and accounts had been presented for three years.

By early 2010, Nagel and his fellow directors had established that 13 of the Chinese companies in which the group had invested were worthless.

Back in the middle of the last decade, the prospects for London Asia looked very different. Led by Simon Littlewood, chief executive, and Viktor Ng, chairman, London Asia was leading the charge of Chinese capitalism into the London markets. Backed by a team of non-executives that included a former Mayor of London, Sir David Brewer (currently head of the China British Business Council) and Jack Wrigglesworth (founder and former chairman of the London International Financial Futures Exchange), London Asia was the “go to” adviser for small-cap Chinese companies seeking a UK stock market listing – including China Education Group, China Biotech and China Mobilnet. Early investors included private individuals and City institutions such as Rathbones.

Since the new management took over last year, only £5m in cash has been recovered – and any hope of recouping more appears to rest on the prospects for the land owned by Zhongying.

Some shareholders believe London Asia’s troubles should serve as a warning that China is still a high-risk territory to invest in. “With the increased visibility of China as a key market, there is a belief that it is safer – this belief may be unfounded,” says Doug Steen, a private shareholder. “Unless the UK authorities sit up and take action, foreign markets will see the UK as a soft touch and investors will continue to be at risk.”

Another shareholder, John Slater, says the London Asia affair highlights the need for UK company directors to “understand the way business is done in China and have good advice on local laws and customs”.

Evidence from the US suggests these problems are not unique. Dozens of small Chinese companies are listed on Amex and Nasdaq – but a growing number are being targeted by short sellers convinced that the curse of London Asia Capital will strike. In the view of one Chinese national who now advises western investment funds on Chinese small caps: “2011 is the year it’s all going to come tumbling down.”

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