London Asia Chinese Private Equity, a China-focussed investment fund quoted in London, has seen trading in its shares temporarily suspended after failing to publish its audited accounts on time.
The delay has been caused by the auditors requesting independent valuation of the companies in LACPE's investment portfolio, most of which are private companies operating in China.
By itself, one should not read too much into the delay. Indeed, its comforting to see that the auditors are erring on the side of caution by seeking independent valuations of the Chinese companies in which LACPE has invested.
Nevertheless, valuing small Chinese companies is more of a black art than a science. EngagingChina has always been somewhat sceptical of the valuation techniques used for unquoted investments. In the case of start-ups and other companies with insignificant revenues, losses or negative cash flows, valuations can have a great deal of “hope” value built into the price.
For publicly quoted companies, it is the market that ultimately decides the real worth of a company and as we have seen with former high-flying China plays like Bodisen Biotech or Monstermob, those valuations can come crashing down with the first dose of bad news.
But in the case of private companies, disappointing trading or contract delays do not have to be publicly disclosed, and so fund managers have to keep a much close watch for developments that could impair the valuations of the companies in their portfolio — which is difficult if the companies are on other side of the world.
LACPE is currently invested in a dozen Chinese companies, mostly in the environmental and energy technologies sectors. One of its most successful investments has been China New Energy, which joined London's Plus market last year and has just reported its maiden set of financial results. The Guangzhou-based company makes ethanol production equipment and is looking increasingly to overseas markets.
LACPE paid just £2.2m for a 25% stake in China New Energy, whose market capitalisation is now almost £37m.
China New Energy's share price is currently 4% above the IPO price of a year ago, so investors who bought after the IPO must arm themselves with patience. Nevertheless, the pedestrian post-IPO performance suggests that the IPO was priced right. And at the end of the day, the only certain way to discover the true value of a private company is through an IPO.