BUSINESS

Missing out on a red-hot market

ANDREA MANDEL-CAMPBELL February 12 2007
BUSINESS

Missing out on a red-hot market

ANDREA MANDEL-CAMPBELL February 12 2007

Missing out on a red-hot market

The world’s capital markets love China, but the TSX is playing coy

BUSINESS

ANDREA MANDEL-CAMPBELL

Going through the 50 or so Chinese-related companies listed on the Toronto Stock Exchange, it doesn’t take a rocket scientist to realize this ain’t no beauty contest. With some exceptions, it’s a rather motley collection of bottom trawlers and near-comatose companies, many flirting with bankruptcy or stalked by scandal. “Up until now, there’s been very little success,” admits Joe Tai, a Vancouver-based broker who specializes in North American-listed Chinese companies. But as stock exchanges from London to New York stumble over each other to woo cash-starved Chinese companies, and China’s own bourses wow the world with recordbreaking public offerings, China could be just the ticket to lift the TSX’s dampening fortunes.

But the TSX, like much of the Canadian business sector, seems to be missing the boat. Canada’s main exchange could certainly use a boost after foreigners acquired storied miners Inco and Falconbridge, lopping $36 billion off its market capitalization and taking a good chunk of its credibility as the world’s

foremost mining bourse with them. Many believe the TSX is still uniquely positioned to be the world’s pre-eminent natural resources exchange, and could cash in on China’s still vast

and untapped mining sector. But a deep ambivalence among risk-averse Canadian banks, institutional investors—and hesitancy within the exchange itself— has dimmed its prospects considerably, according to market observers.

Last year alone, London’s upstart venture exchange,

AIM, lured 26 new Chinese listings, raising $1.5 billion.

In contrast, just eight Chi-

nese-related companies have opted to list in Toronto, drumming up a meagre $24-7 million. AIM and other major exchanges are specifically targeting China as part of an aggressive drive to expand their global reach. Both the chairman and the chief executive of the London Stock Exchange visited China in 2006, as did the head of New York’s bourse, and the big exchanges all have offices and permanent staff-deployed in the region. “They’re all over there except the TSX,” says Michael Manley,

whose company, Wesbridge Capital, advises Chinese companies looking to list in Canada.

While Toronto has ramped up its efforts with two road trips to China in the last year, the world’s seventh-largest exchange has taken a decidedly tempered approach to the red-hot market. TSX officials wouldn’t divulge their budget for China, but it can’t be much, given the road shows are paid for by participating investment banks and law firms. CEO Richard Nesbitt has never been to China and the exchange has no plans to open an

office for the time being. “At some point it may make sense to have someone on the ground,” said Richard Nadeau, senior vicepresident in charge of listings for the TSX. “It would certainly help our cause.”

It certainly couldn’t hurt. The TSX is getting lost in the shuffle, say observers, as Chinese businesspeople with little knowledge of Canada bypass Toronto in favour of London and Hong Kong’s Hang Seng, which, despite its lack of market depth and indus-

try expertise, has lured seven major Chinese resource companies. “There is no reason why these companies should not be listed on the TSX—it should be like the NASDAQ of natural resources,” says Robert Kwauk, the Beijing rep for law firm Blake, Cassels & Graydon. “Chinese companies are simply not choosing TSX, not yet anyway.” Alexandria Sun, a former banker with Research Capital who struggled with the TSX’s muted international profile, agrees. “I don’t see the TSX becoming a big brand any time soon.” Nadeau acknowledges there are “visibility and awareness issues,” but many argue the exchange’s hands are tied without the support of Canadian investment banks and institutional investors. The Big Five banks have little interest in backing the smaller plays that typically make their way to the exchange. “The TSX doesn’t close the door on anybody,” says Kwauk. “It’s really the investment banks who close the door.” Canadian fund managers, who run multi-billion-dollar international funds out of New York, are similarly nonplussed. “I’ve given up trying to explain the potential of China to our institutional clients,” says John Ing, president of investment dealer Maison Placements Canada.

“FLOATING A CHINESE DEAL in Canada is really tough now,” acknowledges John Pennal. He would know. The Toronto lawyer with Ogilvy Renault had to deal with two massive scandals that rocked the TSX between 1995 and 2000 and would arguably put anyone off

investing in China. Pennal advised Lei Kat Cheong, a Chinese mainlander living in Hong Kong, in the reverse takeover of a TSX-listed shell company—the preferred method for most Chinese listings.

The company, Noble China, was able to raise $100 million to buy three mainland breweries on the claim it had the exclusive licence for Pabst Blue Ribbon beer in the People’s Republic. It did not. A nasty legal battle ensued and investors lost millions. “It was definitely not one of the triumphs

of the capital markets,” admits Ing.

Investors signed up yet again for a company called South China, which in partnership with the southern municipality of Guilin, manufactured tires. The Canadian side, which included Pennal, left control of the factory operations in the hands of local officials and a group from Hong Kong. Some $30 million disappeared. The Canadians had little choice but to sell the factory back to the municipality, which agreed to buy it for a fraction of the price, only to renege halfway through. Pennal took the case to international arbitration in Beijing and won, but the damages had to be awarded by a judge in Guilin, who, being an employee of the municipality, explained how it would not be in the best interests of his career to enforce the ruling.

These days, Chinese listings are still plagued by pump-and-dump penny promoters out of Vancouver, while a number of mining deals are mired in a web of opaque regulations and political machinations. Mundoro Mining had its project put on hold in the wake of heavy local opposition. HMZ Metals is expected to go to arbitration after its Chinese partner helped himself to $1.8 million from company coffers.

“Business practices and transparency in China still very much leave something to be desired,” says Ing. Chinese companies have yet to fully embrace the concept of capital markets, note China watchers. Many don’t see the value in cultivating investor relations or hiring auditors, strictly seeing the market as a way to get quick cash. Yet Canadians

share an equal portion of the blame, they say, for naively jumping into China and blithely ignoring local realities. “Nobody in Canada had ever done business in China,” says Pennal, whose TriNorth Capital (formerly South China) is trading at 16 cents a share. “We took the collective decision to leave our partners in charge—it was a really stupid idea.” And the market has paid the price—unable to raise anything close to what it did in the mid-1990s. “The struggle is to have a couple of home runs and so far they

really haven’t emerged,” says Douglas Betts, a veteran of the Chinese listing scene.

Some suggest the best way to increase Toronto’s profile is to get a big Chinese state-run resource company to list. While that might be a little more difficult given the Harper government’s spotty relations with Beijing, the move would spotlight the TSX’s strength as the source of 60 per cent of the world’s mine financing. “Canada has a unique and absolute advantage,” says Tommy Cheng, head of Neo Alliance Minerals, a mainland mining concern listed on the TSX Venture Exchange. “Why not leverage it?” In particular, the TSX could be leveraging people like Cheng, born in Hong Kong but educated in Edmonton, to break into the market. Already, the majority of Chinese listings brought to the TSX are by Chinese Canadians, who also represent a substantial investor base.

Unfortunately, a number of Chinese Canadians, disappointed with the reception they’ve received at home, are telling inquiring Chinese companies not to bother with Canada. Rui Feng heads up arguably the most successful TSX mining play to come out of China. His company, Silvercorp Metals, is one of the few foreign-owned producing mines, and it shows in the $16 share price—but no thanks to Canadians. While more than 20 American mutual funds have visited the mine site in China’s Henan province, not a single Canadian has made the trip, says Feng, who plans to list Silvercorp in Hong Kong this year.

Chengfeng Zhou is also looking for greener pastures. A native mainlander who’s been living in Canada for 16 years, Zhou lost a small fortune on the South China venture but returned to the market as chairman of the venture-listed China Education Resources Inc, a purveyor of online teacher training material. With the stock hovering around 65 cents, Zhou, at the urging of his U.S. investors, is looking to list south of the border. “Many Chinese approach me to do deals in Canada. I tell them don’t waste your time, go to the U.S.,” he says. “I fully understand how Canadian investors feel—I lost money too. But they don’t realize that China is different than it was 10 years ago.” M

Andrea Mandel-Campbell was awarded a Media Fellowship by the Asia Pacific Foundation of Canada to travel to China.