Listed on AIM for just over two years, Jersey-incorporated SovGEM is an up and coming finance house committed to investing in small- and medium-sized companies in the huge growth opportunity that is China as well as other emerging markets.

Typically, companies targeted for investment will be profitable and cashflow positive, and looking to float on a recognised exchange, or move from an illiquid exchange to a more senior, liquid one, providing good opportunities to create value for shareholders.

The board, led by chief executive Hugh de Lusignan, has access to a slew of knowledgeable advisory contacts providing a strong pipeline of potential deals and, significantly, a number of ventures on the investment radar are reaching the stage where outside capital is needed.

SovGEM, which has been generating cash from its very first half year, has already demonstrated an ability to turn healthy profits on investments. The shares are trading at an unwarranted 37 per cent discount to last reported net asset value (NAV) of 20.5p, as of 27 September. NAV even peaked at 26.7p before the market sell-off in May.
Burgeoning profits, earnings, assets, and eventually dividends, should alert investors, who should not overlook the Chinese opportunity.

Strategy
SovGEM looks to profit by providing ‘step change’ finance to smaller ventures exposed to the huge growth on offer in emerging markets. Investments are typically privately owned with profitable trading histories. Value creation occurs when these ventures progress from junior markets, such as the US Bulletin Board or PLUS, to recognised exchanges, such as AMEX and NASDAQ across the pond, or AIM.

‘An investment can take six to 18 months to mature,’ says de Lusignan, ‘and we typically take a five per cent exposure, or lower, in our investments. It is also important to note that we do not take short-term investment positions,’ he asserts.

SovGEM takes a flexible approach to its investment structure, turning its hand to equity deals or debt instruments such as convertible loan notes.

Addressing exchange rate worries or other export related risks, de Lusignan points out that SovGEM focuses on companies servicing the domestic demand in emerging economies, rather than exporters.

Meticulous investment selection is key, with only five per cent of the ‘serious’ investment prospects put to the board, despite the inevitably high pipeline of deals that make their way across the desk.

Access to the very best deals is predicated upon the experienced management team’s extensive network of advisors and associates. SovGEM has close ties with independent Beijing firms, as well as links with institutional brokers both here and in America. It also works with an array of international law firms and accountants. This spread, argues de Lusignan, further mitigates risk, as does the broad range of sectors in which the group invests. The present portfolio encompasses the energy (22 per cent), electrical and electronic (24 per cent), pharma (15 per cent), mining (seven per cent), and timber (ten per cent) sectors.

Management
Colourful company co-founder Hugh de Lusignan is an investment figure with more than two decades worth of public equity experience under his belt. He has enjoyed impressive stints as head of UK institutional sales at NatWest Securities and as head of Pan-European sales at Soci�t� G�n�rale. Three years ago, he was a founding partner of corporate finance house Sovereign Group Partners, which specialises in private equity funding. A font of knowledge concerning the Chinese opportunity and the progress of all SovGEM investments, de Lusignan’s interests are closely allied with shareholders, since he speaks for eight per cent of the equity.

Occupying the finance director’s seat is canny Scot Douglas Kearney, who brings a wealth of private equity experience to the table. Kearney was a founding director of Royal Bank Development Capital. AIM followers may associate his name with Global Oceanic Carriers, the Greek shipping enterprise where he also oversees the financials.

Other key figures include Garth Milne, chairman, who has been involved with investment in the City for more than 30 years, having formerly been head of the investment funds team at UBS Warburg. Milne is a non-executive director of Invesco Perpetual UK Smaller Companies Trust, Murray Extra Return Investment Trust, and Real Estate Opportunities Ltd.

Non-executives include Howard Bilton, chairman of the Sovereign Group, a consultancy specialising in offshore trusts and international tax advice, as well as Christopher Labrow, who boasts more than 30 years experience in financial services and investment management.

Prospects
Though the China smaller companies bubble has attracted its share of recent hostility, SovGEM looks a reassuring asset and earnings growth play, based on the undeniable long-term visibility of growth in China and its premium pipeline of deals. SovGEM already has a successful two-year track record in Chinese investment and at the June half-year reported that it had grown its net assets a dramatic 75 per cent since float, even after the global markets correction in May.

Those interims revealed positive pre-tax profit progress from �53,000 to �154,000. Earnings from ‘recognised’ gains and losses grew from 1.77p to 3.56p and, significantly for future earnings and realisations, there was a healthy improvement in unrealised gains from �350,000 to more than �658,000. Following some investment sales, cash gains were �773,410.

Major portfolio successes to date include first investment Bodisen Biotech, the AIM-listed Chinese maker of organic fertilizer that has recently encountered serious woes. Thankfully, SovGEM sold at the right time, realising a 108 per cent return over 14 months. During the investment arc, the company matured from a Bulletin Board reversal stock to the only dual-listed AIM and AMEX play.

Profitable Renesola, which smelts down old silicon wafers for recycling into silicon for solar panels, has proved a runaway success. Floated on AIM with a $50 million funding in August, SovGEM backed the business to the tune of �200,000, snapping up 250,000 shares at 78.5p – the shares are now changing hands for 267p (market value �267 million).

Part of KimCor Diamonds, backed at 15p and now lower at 13.5p, has already been sold, though the shares have been as high as 34p, which augurs well for exit prospects longer term. AIM-quoted Sinosoft, the Chinese tax software stock in which SovGEM invested at a pre-float 19p, has been partially sold down at a profit, though the price currently languishes at 16.5p on profit taking and contract delays. PLUS-listed Concorde Oil & Gas has disappointed to date.

Much of the future upside is found away from London listings, with Harbin Electric, the China-based maker of ‘linear induction motors’, having already attracted the backing of US investment giant Merrill Lynch. SovGEM’s initial $1 million investment has swiftly burgeoned to $1.75 million and a NASDAQ float is on the cards.

SovGEM sits on a super gain with its largest holding, American Oriental Bioengineering, a Chinese producer and distributor of pharmaceutical and neutraceutical products quoted on AMEX. Sales and earnings are soaring and the group has an acquisitive war chest to spend.

Forest products play Tynda, operating in Russia’s far east on the border with China, is eyeing an AIM IPO and de Lusignan is excited about its prospects. Other investments are China Natural Gas, which owns a natural gas pipeline in central China supplying households and businesses, New York-based Branded Media Corporation, and the fast growing and profitable Infosmart, a Hong Kong-based maker of writable DVDs.