East meets West at the China Shoto AGM.
Earlier this week, at the well-attended Mello dinner organised by Carmensfella, I discovered someone who does not like Kate Humble (no names, but if you are reading this Catriona, I like your new hairstyle).
Well, I am one of the many millions who loves her bubbly personality, and in homage to Kate I have, in the last few weeks, carried out a Springwatch survey -- I have been searching far and wide for the LSPI (the acronym for the lesser-spotted private investor).
Bad news, the species seems to be in decline, at the China Shoto (LSE: CHNS) AGM in 2007, five LSPI's turned up, last year two turned up, this year there were none in the audience (if I ignore myself).
This is a great shame because the directors of China Shoto are genuinely keen to meet up with private investors, the majority of the executive directors make the journey from China to central London in the hope of meeting up with the LSPI (and to shop at Harrods). Today they could not have been more friendly, lots of handshakes and beaming smiles from the time I walked into the offices of Tavistock Communication's to the conclusion of the meeting.
Language is no barrier
Although none of the executives can speak English fluently, with the possible exception of the executive chairman Mr Cao, several interpreters were on hand to ensure that there were no language problems.
The LSPI should make an effort to attend a Chinese-located AIM-listed company because it does give a flavour of how different the world of business is in China compared to the UK. Famously, at the first China Shoto AGM, the executive chairman stood up and walked out of the room when it came to voting on his re-election, he did not wish to embarrass anyone who wanted to vote against his re-election. Democracy is a fragile flower in Mainland China. This year no directors walked out of the room when it came to re-election resolutions.
In fact, the directors are now much more confident in negotiating the possible treacherous waters of an English AGM, we were able to rattle through the resolutions reasonably quickly, notwithstanding each resolution being announced in both English and Mandarin. I was impressed with the language skills of Cao Guifa, the executive chairman -- he has certainly been working on these in the last two years.
After the formal part of the meeting was completed, the directors were more than happy to take questions, and we had a most enjoyable Q&A session.
Company crib sheet
Before I go through the 'highlights' of the Q&A session, let us take a step back.
What is China Shoto?
- Incorporated in the UK in 2005, the company's principal place of business is in Mainland China.
- Size? Shares in issue 23.3m, share price 200p, so market cap £47m.
- Business? The largest China producer of back up batteries.
- Objective? As a China Environment Friendly Enterprise, China Shoto intends to become a green energy solution provider through enhancing R&D and progressing of the green energy storage product.
Highlights of 2008 included:
- Revenues increase by 70% to £183m;
- Net profit up 79% to £10m (excluding minority interests);
- Net cash flows from operating activities were greatly improved to £39m (2007: outflow £3m);
- Diluted EPS up 79% to 43p; and
- It even pays a dividend -- 5p for 2008.
Anything to dislike?
The shares are illiquid as the directors own 58% of the shares, with the CEO alone owning 46%.
China Shoto's advisers need to start advising in my opinion. My main gripe with the advisers is that they should tell the company to report both in sterling and renminbi. To date all the figures presented both in the accounts, RNS announcements and presentations are in pounds, shillings and pence. So interested parties have no idea what the impact of foreign exchange movements has been. The auditor did say at the 2009 AGM that the foreign currency translation movements are shown on page 22 of the 2008 report and accounts, but this is as practical as a paper bucket.
My next gripe with the advisers is that they should encourage the company to produce more timely financial information -- China Shoto is one of the better Chinese companies listed on AIM, and they do produce trading updates from time to time, but it would be more useful for everyone if the preliminary results were issued within three months of the financial year end rather than the current four.
Q&A
Turning to the Q&A session:
- Yes, the tax rate will increase.
- In China it is difficult to borrow money, so once a loan is drawn down, it is better to keep it outstanding rather than repay it, as a result China Shoto has both substantial deposits, £51m, and substantial borrowings, 33m, on the face of the balance sheet.
- Lead is the key raw material component. China Shoto continues to maintain a price leakage scheme with telecom operators and OEM customers which effectively reduces its exposure to price fluctuations.
- Yes, the directors are excited about 3G.
Turning to the bugbear of Chinese companies (and many other AIM-listed companies) -- corporate governance.
Non-executive directors include Bernard Asher, who used to be a bigwig at HSBC and for some reason always reminds me of the Northern Spotted Owl, and Peter Crystal, who was a co-founder of the legal firm Memery Crystal and lectures on corporate governance. As mentioned above, the CEO owns just under 50% of the company.
Although poorly paid by UK standards, the CEO did take home £429,000 in 2008 while three other executive directors took home £153,000 each. The non-executive directors took home £10,000 each, so possibly they did not spend too many weeks in Mainland China over the course of the year.
Calling all LSPIs
Returning to Springwatch and Kate Humble, it is a shame that the lesser spotted private investor does not migrate from what he calls the box room and what even an estate agent would call a cupboard from time to time. Not only does both the box room begin to smell if the LPSI spends all his time there but if he does not migrate to the habitat of the AGM, the AGM will fade away and die.
This is a great shame as most directors are willing to make AGMs a good environment for LSPIs to spend some time in: there is food, water, sometimes presentations if you are lucky, and Q&A sessions.
Without the presence of the LSPI, the directors will stop leaving out biscuits and water, will stop preparing presentations, will allocate only a few minutes to the AGM. We will then be left with analyst presentations, one-to-one's with fund managers, and the LPSI living in the box room.
On a related subject, is anyone who attended the Nighthawk (LSE: HAWK) AGM surprised by the events of the last few weeks at that company?
Finally, returning to China Shoto, I close by saying that market expectations for 2009 are for earnings per share of circa 40p.
More of Alice's AGMs:
At the time of writing, AliceInWonder owned shares in China Shoto.
