Aim’s Red Army on the run

Indeed, such challenges as two-faced partners, corrupt government officials and disappearing multi-million-dollar bank accounts may help explain the stress-induced heart attack that Mr Clissold suffered during his 30s. In one particularly outrageous tale, the Mandarin-speaking author recounts a routine monthly visit to a factory where he found it cleared of equipment, people and money. Yet behind a large fence next door, a rival factory - producing the exact same specialist automobile parts - had suddenly sprung up.

Granted, China has come a long way since those wild West-like days. Enticingly, the country's economy - now the world's second largest - continues to grow at three times the rate of its fastest European counterpart. But there remain many differences in business practices, accounting principles and the general rule of law. That's apparent from the recent actions of several Chinese companies listed on London's Alternative Investment Market (Aim).

Red flags

Since March, Green China Holdings (GCH), Rare Earths Global (REG), LZYE Group (LZYE) and Kada Technology (KADA) have all either gone private or announced plans to voluntarily delist their shares from Aim.

This has left western investors holding shares that are essentially worthless. A piece of paper purporting to control a small percentage of an unlisted, illiquid business in China, from which shareholders will almost certainly never receive a dividend, is probably worth less than the paper it is printed on. It is also worryingly easy to end up in that situation.

To go private, Aim companies must obtain the approval of at least 75 per cent of its shareholders at a general meeting. But because the founders of many overseas companies trading on Aim only floated a small percentage of the company - retaining majority control over the shares - this isn't very difficult to arrange. The daughter of the founder of Chinese fertiliser company Green China Holdings, for example, holds exactly 75.4 per cent of its shares. Surprisingly, there is no minimum free float requirement for Aim companies; all they need is for a nominated adviser (Nomad) to declare the company's share structure "suitable".

It's not just Aim companies that get into trouble, however. Still fresh in the minds of many investors is Chinese forestry company Sino-Forest, for instance. It was valued on the Toronto Stock Exchange for as much as C$6.2bn in 2011 (£3.4bn) until short-seller Carson Block alleged it to be a "fraud" and a "multibillion-dollar Ponzi scheme". The company filed for bankruptcy in 2012.

Add in fears of a government-induced credit crunch, a property bubble and an economic slowdown in China, and negative sentiment towards Chinese companies listed overseas could hardly get lower. At its peak in around 2005, nearly 60 Chinese companies were listed on Aim. That number fell to 43 in 2012 and is now roughly 35.

The main problem today is that investors - once bitten, twice shy - have simply grown suspicious of Chinese businesses looking to raise funds in London. The wider market for small caps might be red hot but, for the Chinese, risk capital has all but dried up.

Rare Earth Global's management admitted as much in its proposed cancellation of trading notice, stating "admission to Aim no longer serves a useful function for the company in terms of providing access to capital". Management added that "the company has been unable to attract any significant investor interest and support in the UK, making a listing on Aim of limited value to the company". Green China Holdings' management concurred: "The directors do not believe that the negative view of Chinese small-cap companies on Aim is likely to alter in the near term, meaning that a likelihood of any further fundraising in the short term is non-existent. The directors consider that the costs and regulatory requirements associated with maintaining a listing on Aim outweigh the benefits."

Bargain hunting

The dearth of investors willing to take a punt on Aim-listed Chinese companies has sent the valuations of many to all-time lows. Shares in some are now looking so cheap that it's almost too hard to resist. As the Investors Chronicle's Simon Thompson pointed out in his Bargain Shares Portfolio 2014, sportswear maker Naibu Global International (NBU) is especially notable. Its shares trade below the value of the cash on its balance sheet, at a third of book value, and offer a near 10 per cent dividend yield. Similarly, with children's clothing distributor Camkids (CAMK), it's "being valued on a miniscule one time last year's net profits" after adjusting for the company's large cash pile.

One IC reader says for him investing in Camkids is like a binary bet. "There's a possibility that the company is effectively worthless....in which case shareholders lose everything. However, if the accounts are even half right, then the shares [could be] worth four or five times the current market value. As part of a diversified portfolio, that seems good odds to me."

Still, for investors who are reluctant to do the extra due diligence on Chinese Aim stocks, we think it's probably best to steer clear entirely.

IC VIEW:

Aim has always been a market for those hoping to uncover a hidden gem. Moreover, buying shares in Chinese companies listed on Aim is a cheap and simple way to gain exposure to one of the world's fastest-growing economies. But it's important to recognise that there are extra risks involved when dealing with such companies. Whether the potential rewards from investing in Chinese plays justifies the extra risks is inevitably a matter of personal judgement. The author of this article, however, remains sceptical. Other columnists, in contrast, are resoundingly positive. Ultimately, such thinking drives markets and, at the very least, it's good that Aim offers investors a chance to punt on China.

FAVOURITES:

Healthcare company Hutchison China Meditech (HCM) and Hong Kong-based Fortune Oil (FTO) are two higher-quality options for investors looking for single-company exposure (Fortune Oil's shares actually trade on the main market). But we would recommend plumping for a basket of companies through one of the many China-focused funds run by reputable western companies for example, Fidelity China Special Situations (FCSS), IC Top 100 Fund JPMorgan Chinese Investment Trust (JMC), or IC Top 50 ETF db x-trackers Harvest CSI 300 (RQFI).

OUTSIDERS:

We are wary of companies where management or founding shareholders control the majority of the shares. Likewise, those with a small market capitalisation and with only modest cash resources are are more likely to delist, potentially leaving shareholders helpless and penniless. Check the table for examples of companies with free floats below 25 per cent.