The disaster stories aren't confined to issues with corporate governance and share prices, but now extend to acts of God. Just this month, Asian Citrus (ACHL), which saw production battered by typhoons in 2014, discovered a disease at its Xinfeng orange plantation which will “severely impact” the company's winter harvest. This stream of bad news has contributed to fairly abysmal market sentiment for Aim's Chinese stocks.
Enter stage right Aquatic Foods (AFG), a processor and supplier of fish and seafood which grew at an incredible pace in the three years leading to its February listing. Its products, which include Scottish mackerel, sea cucumbers, cephalopods and shellfish are processed and marketed under the Zhenhaitang brand to meet ballooning demand from China's middle classes. Its domestic market now accounts for the bulk of sales, but export markets (serviced by the Kanwa Foodstuffs brand) include South Korea, Japan, and the US.
This week, the group posted its first set of results as a listed company, including a 28 per cent revenue increase to RMB 856m (£89.1m) and a 17 per cent rise in net profit to £14.5m. House broker SP Angel expects net profits of £16m and cash profits of £21.8m in 2015, which means the shares, at 49p - a 30 per cent slump on the 70p listing price - trade on just three times forecast earnings. Even allowing for some discount caused by illiquidity, investors clearly think the story is too good to be true.
The growth has certainly been impressive. Between 2011 and its market debut, the group tripled profits and revenues through the expansion of its product line and distribution network, which now covers 16 provinces in China. This enormous growth was achieved with minimal borrowing. In fact, Aquatic had £20m cash on its balance sheet prior to its Aim listing, which raised £9.3m.
This begs the question why it needed the IPO. In its admission document, Aquatic said it will approach processing capacity this year, and needs capital for a new warehouse, equipment upgrades, distribution network expansion and an advertising campaign. At a total cost of £18.6m, this could have been entirely covered by cash reserves.
A London listing gives other benefits, of course, including greater working capital, access to future funds and a tradable currency in the company's shares, allowing Aquatic to circumvent tight controls on RMB and distribute profits and dividends. Claims an Aim listing would also enhance its reputation with Chinese customers and international distributors are harder to quantify, and seem puzzling given the organic growth, and the fact Aquatic already supplies Wal-Mart (US: WMT), the largest retailer in the world.
To assist it with the public listing, the group recruited Richard Sweet and Mircle Yap Ching Chai as non-executives. Both also sit on the board of Camkids, a link which may have warned off some investors given that company's disappointing recent history, but taken alone this does not blunt Aquatic's growth prospects or story. Indeed, none of the above screams 'red flag'.
All of which points to a disconnect between UK investors on the one hand and Aquatic's directors and larger Asia-based shareholders on the other. Could it be the market for cephalopods and sea cucumbers is too culturally alien for many UK investors, who may have adopted the Confucian adage that "real knowledge is to know the extent of one's ignorance"? It's doubtful, given the markets are awash with heavily-traded companies offering niche, complex or exotic services and products. And seafood isn't that complicated.
SP Angel analyst Phil Smith suggests that, ultimately, poor market sentiment for Chinese companies has unduly affected Aquatic Foods, and points to the case of Shandong-based GTS Chemical (GTS), which saw its share price fall by nearly 30 per cent after listing last August. GTS has since rebounded after positive trading statements, but still trades on less than three times forecast earnings for 2015.
