Shares digital

An imminent entrant to Aim points a way in to unquoted Chinese companies

by Simon Keane

Aim is about to get its second private equity investor in Chinese companies with the imminent float of China Private Equity (CPE) later this month. CPE, which will have a market capitalisation of around £14 million, joins Origo Sino-India (OSI:AIM), although investors might hope for a better share price performance from the new entrant.

Planning to raise £4 million at the time of flotation, the company wants to build on its current sole investment in Fortel Group, an online content distribution platform founded by CPE chief executive Duncan Chui. Chui currently owns almost 60% of CPE’s shares, although this holding will drop once new shares are issued at admission.

Chui, who has Patrick Macdougall, a former director of Far East investment specialist Jardine Matheson, as his chairman, believes CPE can capitalise on his 15 years’ experience in the Chinese private equity industry. The aim is to consolidate the country’s emerging online content distribution sector.

Fortel, which acts as a platform for other content providers to broadcast their material and collect payment, is itself still at an early stage having recorded a post-tax loss of HK$5.9 million (about £434,000) on revenues of HK$4.5 million (£329,000) in the 15 months ending 31 March 2008. The directors, however, are confident China will become the ‘world’s largest market’ for electronic publishing.

CPE stresses its good relations with the Chinese authorities, who famously censored search engine Google, saying it has all the necessary state licences to operate in the country. Content distribution will be just one theme at CPE, which plans to invest right across the technology, media and telecoms (TMT) sectors as well as well early-stage financial services companies.

Management says it already has agreements in place to invest in three companies, including rights to plough $3 million into China School Resources Holdings, a distributor of educational content to elementary and middle schools. CPE will primarily invest in unquoted companies and plans to hold investments for three to five years, eventually exiting through a flotation or trade sale.

The company, which is domiciled offshore in the British Virgin Islands, is targeting an internal rate of return of at least 30%. Origo Sino-India, which has invested in the Chinese software and bio-energy sector, at 41p, is down 38% from a year high of 66p, although sentiment towards all Aim companies has taken a battering with the FTSE Aim All-Share off 30% in the past 12 months.

Chui, along with Fortel Group’s other shareholders, ‘sold’ a stake in Fortel to CPE on 8 September, and currently owns 57.4% of the private equity group’s shares, while Macdougall has taken a small holding representing about 0.6% of the current share base.

Shares says: This is high-risk, and even more so given the company is overseas-domiciled. However, for those intent on getting exposure to China it may be worth a look.