Exposure to China? Try this tip for size

Exposure to China? Try this tip for size

A slew of company results for 2009 has given precious little help to stockbrokers looking for guidance about the year ahead.

Skip additional linksThe market is deep in financial reporting season – and most companies accompany their figures for the year just gone with a statement about their prospects.

But the vast majority admit they remain uncertain or uneasy about 2010, so the dominant mood in the market continues to be one of caution, tempered with occasional bouts of optimism.

Origo Partners
Epic: OPP (Aim market)

One region where optimism is far more in evidence is China, whose economic growth seems to outpace expectations on a regular basis. It is not always easy to gain access to this economic miracle but Origo Partners offers an interesting opportunity to investors who fancy participating in the country’s extraordinary growth.

Origo joined Aim in 2006 and it is run by Chris Rynning, an impressive Norwegian entrepreneur, who graduated from business schools in Paris and Chicago and has worked in China for 15 years.

Rynning spent his early years in China working for large multinational businesses, including the accountancy firm PricewaterhouseCoopers.

In 2004, he founded Origo, which buys stakes in privately-owned, fast-growing Chinese businesses that are looking for money to help them expand.

Rynning tends to invest between £2 million and £6 million per company, in return for which Origo is given a stake of typically between 15 and 20 per cent. Rynning also insists that each company takes on an Origo executive director to help them with accounts and other administrative work. In this way, Origo is able to monitor how companies operate on a daily basis and make sure they are properly managed.

Origo currently has stakes in 16 businesses, the majority of which are connected to natural resources, such as mining, or so-called ‘clean technology’ – companies involved in environmentally-friendly sectors.

The idea behind Origo is simple in theory but complex in practice. Much like private equity firms, Origo hopes to buy stakes in businesses, help them grow and become more profitable, and then make money when they are either sold or floated on a stock exchange.

Generally, these projects take between three and five years to execute but market conditions have been less than optimal over the past two years and China is a tricky place to do business. Nonetheless, Rynning hopes that two of the companies in his portfolio will float over the next six to 12 months.

The first is Gobi Coal & Energy, a coal mining operation based in Mongolia. The company has proven reserves of coal and Mongolia borders China, which is one of the largest consumers of coal in the world.

Generally, China has to ship the fuel from places as far flung as Australia or Brazil. Having it on the doorstep makes transportation substantially cheaper and easier.

Origo bought a 21 per cent stake in Gobi last November for $15 million (£10 million). The seller needed cash so Origo got the investment at a jolly good price, so much so that when Gobi floats on the Hong Kong Stock Exchange later this year, as it is expected to do, the value put on Origo’s stake alone is forecast to be larger than the company’s entire valuation on Aim – currently £40 million.

Origo’s second promising investment is a 17 per cent stake in a Seattle-based water purification business, Halo Source. The group makes cartridges which are inserted into fridges and sinks to make water pure and drinkable. These household appliances are sold in the US but they are also extremely popular in China and India, where drinking water is in real demand. Halo also makes textiles that kill bacteria so it is involved in the manufacture of apparel for doctors, nurses and certain members of the US armed forces.

Origo bought its stake for $17 million but should make a lot more when Halo floats, possibly on Aim, in the next six to 12 months.

Origo is involved in several other investments as well and is actively looking at ventures connected to the prolific growth of electric cars in China.

Midas verdict: Origo may sound rather risky and, to a certain extent it is. However, Rynning is a cautious man who knows China well and only invests in ventures with a reasonable track record. The company’s shares are trading at 18p but its assets are valued at around 40p, it has £20 million on its balance sheet and no debts. Investors looking for exposure to China could do a lot worse. Buy.