It's getting toward midnight when Guocai Liu, chief executive of the Migao Group, a mid-size Chinese fertilizer company, arrives at the Holiday Inn in Markham, on Toronto's northern outskirts. After two exhausting days of meetings about listing his two-year-old company on the TSX Venture Exchange, Liu will be flying home to Beijing in the morning. But before he heads for bed, he's got yet another meeting. This one's with Pei Wei Ni, president of Markham-based Wesbridge Capital Corp., which specializes in helping Chinese firms secure Canadian listings. Ni's been working overtime for months planning Liu's strategy to buy a dormant Canadian mining firm and take over its TSXV listing.
Huddled in a hotel lounge, the two well-dressed men, both in their early 40s, review their plans. Liu says he wants Ni to finalize Migao's English-language business plan, formalize arrangements with Canadian lawyers, get investor relations kick-started, and select a venture capital brokerage. It's already a formidable task list when Ni mentions a pair of further problems. “Under TSX rules, we've got to get moving on finding Canadian directors, especially a CFO who can speak Chinese,” he says calmly. “And the TSX rules also stipulate that we'll need a Canadian management team.”
As if securing a TSXV listing for Migao Group isn't enough of a challenge, Ni is also shepherding another China-based firm–an Internet B2B drug sales company–toward a berth on the Toronto exchange. And in November he'll be heading to a mining conference in China where, along with TSX senior vice-president Kevan Cowan, he'll be recruiting more candidates for Canadian listings. Several Chinese mining companies have already expressed interest, Ni says. “All these companies have huge growth prospects in China,” says Ni, who emigrated to Canada as a student in 1986 and made his first fortune brokering deals for wealthy Chinese investors looking for Canadian real estate. “Because Chinese financial laws constrain small and mid-size [non-state-owned] companies' access to capital at home, they're desperate to raise money on foreign stock markets.”
In many ways, says Ni, his role at Wesbridge, as adviser to Chinese companies aiming to charm investors in Canada, isn't so different from his previous role as a real estate agent for wealthy Chinese investors. “My job is to get to know these businesses in China through my contacts there,” says Ni, who hopes Migao will be his first breakthrough after two years with Wesbridge. “Once I get to know and trust them in China, I'm ready to help them tap into Canadian capital markets.”
As he has ferried Chinese clients around Toronto–and, inevitably, to and from Niagara Falls–in his large BMW in recent months, Ni says he seen a steadily growing interest among TSX officials in the investment opportunities Chinese companies can offer Canadian investors–as well as in the hefty annual fees they can offer the exchange, which is itself a public for-profit organization with its very own TSX listing. That's a suggestion Cowan warmly supports. “China is a long-term build for us,” he says. “In China, we're relying largely on intermediaries, and we're looking to work much more closely with people like Pei Wei.”
At a recent gathering of several hundred Chinese executives travelling with President Hu Jintao on a visit to Toronto, Cowan emphasized the TSX's leadership in opening capital markets to small and mid-size companies while dwarfing other exchanges in the energy and resources sectors. Cowan also suggested the TSX offered Chinese firms “a gateway to enter U.S. capital markets with lower compliance costs.” On his upcoming trip to China, he will be delivering those messages to Chinese executives again.
The message seems to be getting through: although the earliest Chinese listing in Canada dates to 1969, the number of such listings has almost doubled since 2003. The TSX and TSXV now list 30 firms whose business activities and key executives are China-based. Most of these companies are small, but almost a third are valued over $50 million, and their combined market cap is well over $1 billion. Although in China the TSX aims to build on its strength as a world leader in energy and mining, its current Chinese listings are surprisingly diverse: the companies include businesses active in the pharmaceutical, manufacturing, technology and telecom sectors. There's also a company that operates a private high school, and another that runs a travel service.
It's no great surprise Chinese companies are stampeding off the mainland in search of capital. Even while the Chinese economy continues to deliver superheated growth rates, the country's two stock exchanges in Shanghai and Shenzhen are suffering from disastrous political interference and dismal performance records. With some US$25 billion in stock sold so far this year (China Construction Bank Corp.'s recent IPO raised US$8 billion alone), China has overtaken Europe as the world's second-largest market (after the United States) for initial public offerings. And with the Chinese government expected to privatize wave after wave of its state-owned industries under World Trade Organization rules, China watchers say lots more IPOs can be expected. So far, the Hong Kong Stock Exchange has handled most of these offerings, including recent heavyweights such as China Shenhua Energy Co., China Bank of Communications and China Cosco Holdings Co. Ltd., a shipping company. But exchanges in Singapore, New York and London are now openly competing for slices of the China IPO market. “I'd say there's a race on for these listings,” says the TSX's Cowan. “A lot of stock exchanges are spending a lot of money in China these days.”
That said, the TSX's decision to assign only one staff person to Chinese business development strikes Ni as a too-tepid approach. That's a criticism Cowan rejects. “We're taking a measured approach with China,” he says. “We just don't see the point in spending a lot of money competing in a haphazard way.”
Given the notoriously complex, often inscrutable business conditions that still prevail in China, Cowan's caution may well prove to be a virtue, says Anming Zhang, an economist at B.C.'s Sauder School of Business, who studies Chinese business conditions. “Chinese stocks have been a disappointment for many investors, both in China and on foreign exchanges like the New York Stock Exchange,” Zhang says, noting that bureaucratic control over much of the Chinese economy heavily skews conditions for even the most market-oriented companies. Zhang warns that corporate transparency and shareholder accountability remain little understood and rarely applied in China.
Zhiwu Chen, an expert on Chinese stock markets at the Yale School of Management, offers an even blunter warning: “In the early years of Chinese IPOs, everyone knew the companies were making up numbers to satisfy regulatory requirements. I'm not sure that's changed much.” In a recent study of Chinese IPOs, Chen concluded practices such as “tunnelling,” in which controlling shareholders use listed firms to buy worthless or overvalued assets from state-owned companies, are common. Chen also warns that Chinese executives who engage in fraud are seldom punished. He suggests Canadian investors should keep such liabilities in mind when considering Chinese stocks. “I'd suggest investors look for companies that actually sell products in Canada,” says Chen. “They may be less likely to mess up recklessly.”
Yet another call for prudence. At the Canada China Business Council in Toronto, executive director Margaret Cornish argues that because most listed Chinese companies–including “national champions” in the manufacturing and electronics sectors–are relatively new organizations with strongly top-down though dynamic leadership, they may be risky bets. “There has been a significant improvement from the early days of Cowboy Capitalism in China,” Cornish says, “but companies learning to operate in global markets are going to make mistakes.” Still, the advantage of buying a Chinese stock listed abroad, says Cornish, is that there is “a double layer of accountability.” And if the Chinese stock is listed on the TSX, Canadian investors can take comfort in knowing that the second layer of accountability–vested mostly in the Canadian board members and Canadian managers stipulated under TSX rules–answers to Canadian law.
For Guocai Liu, the business model behind the Migao Group is simple enough: “The most important thing is that we've got a major market for tobacco fertilizers, and we've got the expertise and the connections required to make money.” Resting on those words is his hope that Canadian investors will be willing to sink up to $30 million into his company. For now, as the clock ticks toward midnight and Liu finally heads upstairs to his hotel room for some much-needed sleep, that's all he has to offer. Rest assured, though, his company's Canadian management team is in the works.