Sector note

Seymour Pierce AiM China

12 March 2008 AiM

Gain on translation 1 GBP = 14.3 China Yuan Renminbi

1 US$ = 7.1 China Yuan Renminbi

Investors should consider revisiting AiM’s Chinese companies. We

think there is a realistic prospect that China will not only revalue its
currency this year but may continue to do so over the next few years,
based on a combination of political pressure, rising Chinese interest Seymour Pierce AiM China Index (-2y)
rates and inflationary concerns. In the event that we are right, many of 30
3/3/08

AiM’s Chinese companies ought to be beneficiaries. A stronger yuan 28

will bolster UK sterling translated profits. 26

24

Seymour Pierce’s AiM China Index has lost 12.1% of its value since the 22

beginning of 2008. This compares to a modest 2.5% decline for the AiM 20

market as a whole. Investors have seen negative returns from most equity 18

markets this year. Our research shows that China has been one of the 16
M A M J J A S O N D J F M A M J J A S O N D J F
SP AIM China index - PRICE INDEX

weakest markets with a 14.4% decline in the first two months of this year. HIGH 28.88 26/2/07,LOW 17.84 28/2/06,LAST 22.55 29/2/08 Source: DATASTREAM

Source : Datastream
Other markets hosting Chinese stocks have seen similar weakness. The
Singapore market hosts 140 Chinese companies. An index created by Prime Index Returns to end Feb 08
Partners captures the performance of the largest 25 constituents. It has seen
a 27.6% decline so far this year. This compares to a 12.7% decline in the

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The Seymour Pierce AiM China index contains 47 companies. They range -20%

in market capitalisation from sub £10m to £416m. Seymour Pierce provides -30%

research coverage on three of these stocks. The three companies we cover

are Chinese domestic companies which are relatively independent of the Source : Datastream

rest of the world. In this respect, there should be no impact of a Stock Target price
(p)
strengthening Chinese currency on the business model. However, these
companies would translate their Renminbi earnings into GBP at a higher China Shoto
3,5
BUY 220
rate. This could lead to earnings upgrades. 3,4,5
ET-China BUY 155

We reiterate our BUY recommendations on China Shoto, ET-China and Geong Int
3,4,5
BUY 90
Geong International. China Shoto is a battery manufacturer, ET-China is a
travel agent and Geong is a software provider. All three companies have
strong domestic market positions accompanied with appealing financial
metrics.

This is a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment
research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Jim McCafferty Amit Thakar Zhining Xu

Head of Research Research Analyst Research Analyst
020 7107 8070 020 7107 8022 020 7107 8089
jimmccafferty@seymourpierce.com amitthakar@seymourpierce.com zhiningxu@seymourpierce.com
Seymour Pierce AiM China 12 March 2008

TABLE OF CONTENTS

Seymour Pierce AiM China: Update 3

Prime Partners China Index 5

Currency translation 6

Stock picks 8
3,5
China Shoto (CHNS.L) 9
3,4,5
ET-China (ETC.L) 10
3,4,5
Geong International (GNG.L) 11

Seymour Pierce Research 2

 Seymour Pierce AiM China 12 March 2008

SEYMOUR PIERCE AIM CHINA: UPDATE

The Seymour Pierce AiM China index has started the year badly with a
12.5% absolute loss. While this sounds disappointing, we note that the
Shanghai Composite index has lost 14.4% of its value during the same
period. Chinese stocks on other markets have also seen disappointing
returns. We note that the Prime Partners China index in Singapore has lost
27.6% of its value this year compared to 12.67% for the Singapore market
as a whole.

Index Returns: 1 January 08 to 29 February 08 (%)

Prime Partners China

Seymour Pierce AiM

FTSE AiM All Share

FTSE AiM UK 50

FTSE All Share

FTSE AiM 100

FTSE mid-250

Index
China

Hong Kong

Singapore
FTSE 100

China
0%
-5%
-10%
-15%
-20%
-25%
-30%

Source: Datastream

Chinese shares on AiM did spectacularly well in 2006 with a 70%+ return.
The index did not move in 2007 which, while disappointing, was a lot better
than the 20% drop of the FTSE Small Cap index (ex Investment Trusts). We
highlight the returns made in prior years in the graphic below.

Seymour Pierce AiM China: Annual returns

2008 till 29 Feb

2007

2006

2005

-20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80%

Source: Datastream

While China-related returns in 2008 look particularly weak, investors should

be mindful that returns in 2006 and 2007 have been, on the whole, pretty
impressive. We highlight the performance of the Shanghai B index in the
chart below.

3 Seymour Pierce Research

Seymour Pierce AiM China 12 March 2008

Shanghai B index absolute performance (-5y)

7000

6000

5000

4000

3000

2000

1000

0
2003 2004 2005 2006 2007 2008

Source: Datastream

Performance in 2008 must be viewed in the context of returns in previous

years. The Shanghai Composite index has risen five-fold between 2005 and
2007. Against this background, a 14% correction in 2008 looks fairly modest.

Seymour Pierce Research 4

 Seymour Pierce AiM China 12 March 2008

PRIME PARTNERS CHINA INDEX

Although returns from AiM-listed Chinese stocks have been disappointing,

those from Singapore-listed Chinese companies have been far worse. Data
from Prime Partners, which monitors the performance of Singapore’s listed
Chinese companies appears to suggest that Chinese companies are a
leveraged bet on the market.

At the end of February, there were 140 Chinese companies listed on the
SGX. Prime Partners China index captures 25 of these companies. The
index is a useful guide to measuring performance of those Chinese stocks
on SGX which are investible. We highlight the largest ten Chinese stocks on
SGX by market capitalisation in the table below.

Top 10 China stocks via market cap

Company Market Cap

(SGD$bn)
1 Cosco Singapore 8.6
2 Yanlord Land Group 4.3
3 Yangzijiang Shipbuilding 3.3
4 Delong Holdings 1.8
5 China Hongxing 1.6
6 People’s Food 1.2
7 China Aviation 1.1
8 China Energy 1.1
9 China Sky Chemical 1.1
10 Ferrochina 1.0

Source: Prime Partners

So far in 2008, the Prime Partners China index has delivered a negative
return of 27.6% compared to an index loss of 12.67%. This contrasts with
previous years when the Prime partners China index has delivered double
the positive return of the market as a whole. This is highlighted below.

Prime Partners China Index: Absolute Returns (%)

2006

2007

2008 (first 2 mths)

-40 -30 -20 -10 0 10 20 30 40 50 60

(% Return)

PPCI STI

Source: Prime Partners

5 Seymour Pierce Research

Seymour Pierce AiM China 12 March 2008

CURRENCY TRANSLATION

We believe that the Chinese authorities will be under pressure to conduct a

gradual revaluation of the Renimbi this year. This is because there are
sound domestic economic reasons to let the currency appreciate which have
sufficient urgency to prompt some action. We think that the Chinese
authorities are concerned that inflation is beginning to rear its ugly head.

Chinese inflation – since 2006

8
7
6
5
4
3
2
1
0

May-07
Aug-06

Sep-06

Oct-06

Nov-06

Dec-06

Jan-07

Feb-07

Mar-07

Apr-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08
Source: Datastream

Inflation in January 2008 was 7.1% which is the highest in China since
September 1990. Last year, the Chinese central bank increased interest
rates on six occasions in order to temper this inflation. However the effect
appears to be benign. This is partly explained by one-off increases in food
prices. We think that the exchange rate is another instrument which the
authorities can manipulate in order to drive inflation out of the Chinese
monetary system.

We see the revaluation of the Renminbi as a by-product of a continuous

slowdown in the US which is resulting in loosening monetary policy and thus
weakening the dollar. The dollar’s weakness and the inflationary pressure
will result in authorities in China embarking on a slow but continuous
revaluation of Renminbi by 5% to 10% annually for at least the next 3 years.
This is consistent with the Renminbi being 30% overvalued according to
PPP.

Seymour Pierce Research 6

 Seymour Pierce AiM China 12 March 2008

China lending rate: a one-way trend

C H IN A LE N D IN G R A TE 1 Y TO 3 Y - MID DL E R A TE
7 .6 0 F ROM 3/3/06 T O 3/3/08 DA ILY

7 .4 0

7 .2 0

7 .0 0

6 .8 0

6 .6 0

6 .4 0

6 .2 0

6 .0 0

5 .8 0

5 .6 0
M A M J J A S O N D J F M A M J J A S O N D J F M

H IG H 7 .5 6 2 1 /1 2 /0 7 L O W 5 .7 6 3 / 3 /0 6 L AST 7 .
5 6 So u r c e : D AT AST R EAM

Source: Datastream

There has been much lobbying from the US to see the Chinese currency
strengthen to increase the cost of Chinese imports and control US
consumption of Chinese goods. This lobbying has not been effective as
there have been no one-off movements in the Chinese currency in response
to this political pressure. However, we note that the Chinese Yuan has
appreciated by 14% since the currency was last revalued in 2005. One of the
reasons we expect to see a further revaluation this year is that there is an
offshore forward currency market which is discounting an 8% appreciation of
the RMB this year.

We think there is now a confluence of external factors and internal factors

which will cause a currency event this year. The Chinese inflation problem
would be eased if the RMB were to strengthen. This would be driven by
reducing the import prices of raw materials and foodstuffs. Additionally we
note that the Chinese Renimbi devaluation which took place in 1994 acted
as a major stimulus to the Chinese economy. This 30% devaluation helped
cause the Asian crisis in 1998 by the imposition of a competitive pricing
advantage for China over its neighbours. The reverse effect of a devaluation
event might be considered deflationary in the light of the 1994 experience.

We do not expect to see a one-off shift in the value of the Chinese currency.
This is because a move close to purchasing power parity could cause a
major global shock. China’s biggest trading partner is the USA. China’s
extensive foreign exchange reserves are mostly held in US dollars. A major
one-off shift of even 5% could be very detrimental to the relationship
between China and the USA.

Since the beginning of October 2007, the Chinese Yuan has appreciated at
an annualised 13% against the dollar. This is happening in a discreet way
without causing major headlines. We think this trend is set to continue in the
current year.

7 Seymour Pierce Research

Seymour Pierce AiM China 12 March 2008

STOCK PICKS

The Seymour Pierce AiM China index is heavily weighed to its largest
constituent. We calculate that the top ten constituents account for some 73%
of the index market value. AiM-listed Chinese companies are all, to a certain
extent, beneficiaries of a strengthening domestic currency. However,
investors should be aware that a stronger Chinese currency will hurt Chinese
exporters. We highlight the top ten companies in our index below and
comment on each business with respect to its currency exposure.

Seymour Pierce AiM China: Top ten companies

Company name CODE MV Impact of stronger

(£m) Chinese currency
China Real Estate Opps CREO 416.1 positive
ARC Capital Holdings ARCH 337.4 positive
Green Dragon Gas GDG 311.5 positive
Renesola SOLA 309.3 indifferent
Asia Citrus Hdg ACH 221.1 positive
China Central Properties CCP 201.6 positive
Griffin Mining GFM 198.8 negative
Prosperity Minerals Hdg PMHL 180.0 indifferent
RCG Holdings RCG 171.3 indifferent
Jetion Holdings (DI) JHL 95.9 indifferent

Source: Seymour Pierce

Our comments are based on a brief consideration of each business model.

We believe that property companies should be beneficiaries of a stronger
Yuan as balance sheets are translated back into sterling. We believe most of
the company property assets are located in China.

Some of the companies do not necessarily benefit from a stronger currency

as their trading with other countries could be stifled by a less competitive
exchange rate.

In this report, we highlight those companies which ought to benefit from the
appreciating Yuan. These are China Shoto, Et-China and Geong. The
currency appreciation would not affect China Shoto and Geong, but the
companys’ shareholders would see the positive translation benefit of a
relatively weaker sterling. Et-China, on the other hand, could be a
beneficiary as the overseas travel would become relatively cheaper. Whilst
we have not built the currency appreciation in our forecasts, indications are
that overseas travel, particularly to S.E. Asia and Australia by Chinese
tourists is growing fast, owing to the wealth effect. All three businesses
derive most of their trading activities from domestic China with the exception
of China Shoto which also exports into India.

Annual reports from all three of these companies reveal that the companies
used an average Renminbi/Sterling exchange rate of 15.

Seymour Pierce Research 8

 Seymour Pierce AiM China 12 March 2008

China Shoto 3,5 (CHNS.L)

Engineering and Environmental Technology BUY 136.5p
Investment thesis Share price performance

CH INA S HOTO 12/3/08

220
China Shoto is now a major industrial concern with a very strong
position in the rapidly growing domestic Chinese markets. It is
210

200
also beginning to develop its export business, as evidenced by
190
the £5m order secured in India, for delivery this year. We expect
180
high growth rates to continue in 2008 and beyond.
170

160
The group now has a two year track record of delivering results
150
in accordance with expectations. The rating of the group is at a
140
substantial discount to western industrial businesses, which are
130
likely to find such high growth rates harder to come by.
120

110
M A M J J A S O N D J F M A M J J A S O N D J F
P RICE
P RICE REL. T O FT SE ALL S HARE - P RICE INDE X
Source: DATASTREAM

Source: Datastream

Business description Revenue by activity

China Shoto is a leading Chinese producer of industrial batteries

and power supply systems, and has commenced sales of
batteries for the electrical bicycle market which is growing 100
90
exponentially in China. Since float, the group has built a large 80
new production facility for bicycle batteries. China Shoto's 70
60
industrial batteries are sold primarily as back up power supply 50
systems to the telecoms sector. Principal customers include 40
30
China Mobile and China Telecom. 20
10
0
2006 2007 2008

Sales EBIT

Source: Company data

Major shareholders (%) Chairman and executive directors

Two Stars Invest 47.1 Cao Guifa Exec Chairman

WIT Invest 5.1 Yang Shanji Chief Executive
Zhou Weigang Finance Director

Source: Argus Vickers Source: Company data

No. shares (m) Market cap (£m) Net debt (£m) EV (£m) 12m hi/lo (p)

23.2 31.7 1.3 33.0 181.5 120.0

Year end Dec 2006A 2007E 2008E 2006A 2007E 2008E

Sales (£m) 66.5 80.0 95.0 EV/sales (x) 0.5 0.4 0.3
EBITDA (£m) 7.0 8.0 9.0 EV/EBITDA (x) 4.7 4.1 3.7
Op profit (£m) 6.2 7.0 8.0 P/E (x) 7.0 6.1 5.4
PBT (£m) 5.4 6.2 7.3 Div yield (%) 3.3 3.3 3.7
Tax rate (%) 15.0 15.0 15.0
EPS (p) 19.5 22.5 25.5 1m 3m 12m
DPS (p) 4.5 4.5 5.0 Price relative (%) 11.64 12.3 -9.3
Source: Seymour Pierce Limited estimates

Jim McCafferty jimmccafferty@seymourpierce.com 020 7107 8070

9 Seymour Pierce Research

Seymour Pierce AiM China 12 March 2008

ET-China 3,4,5 (ETC.L)

General Retailers BUY 119.p
Investment thesis Share price performance
E T-C HINA .C OM IN TL.HD G. 12/3/08
150

We remain confident that ET-China is on schedule to meet our

net profit target of £1.1m for the financial year 2008, with all the 140

divisions showing strong growth in 2007. Significant marketing 130

spend was incurred in the latter half of 2007 and, as a result, our 120

2008 profit forecast could turn out to be conservative. An

additional bonus has been the unrealised gain of £6.8m on one 110

GZL's long-term investments which will be recognised in the 100

2007 financial accounts.

90

80

70
SE P OCT NOV DE C J AN FE B
PRICE
PRICE RE L. T O FT SE A LL S HARE - P RICE INDE X
Source: DATASTREAM

Source: Datastream

Business description Chinese total Travel and Tourism market size

ET-China is a leading travel services provider based in

Guangzhou, Guangdong province. The company provides air 5000 Total T&T revenues
and hotel reservations services via its call centre, website,
4000
payment kiosks and city offices to Chinese Frequent
Independent Travellers, corporate travellers and package tour 3000
Rmb bn

groups.
2000

The company is planning to embark on an ambitious growth and 1000

marketing campaign that seeks to take advantage of not only the 0

Chinese's increasingly voracious appetite for travel, but also the 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 20011E 2012E 2013E 2014E 2015E 2016E

difficulties faced by their smaller competitors. Total T&T revenues

Source: Company data

Major shareholders (%) Chairman and executive directors

Gandhara Master Fund 31.91 Ian Smith Non-exec Chairman

Mintpine Pty Ltd 28.97 Matthew Ng Chief Executive Officer
MAP et-china Pty 5.57 Robert Drummond Non Exec Director

Source: Argus Vickers Source: Company data

No. shares (m) Market cap (£m) Net cash (£m) EV (£m) 12m hi/lo (p)

32.9 39.2 10.0 29.2 129.5 76.5

Year end December 2007E 2008E 2009E 2007E 2008E 2009E

Sales (£m) 114.7 160.3 205.7 EV/sales (x) 0.3 0.2 0.1
EBITDA (£m) 0.5 5.0 10.3 EV/EBITDA (x) 58.3 5.8 2.8
Op profit (£m) -1.3 4.6 9.5 P/E (x) na 42.2 14.0
PBT (£m) -1.5 4.2 8.9 Div yield (%) 0.0 0.0 0.0
Tax rate (%) 30.0 30.0 30.0
EPS (p) na 2,7 8.5 1m 3m 12m
DPS (p) 0.0 0.0 0.0 Price relative (%) 55.9 57.6 na
Source: Seymour Pierce Limited estimates

Amit Thakar amittahakar@seymourpierce.com 020 7107 8022

Seymour Pierce Research 10

 Seymour Pierce AiM China 12 March 2008

Geong International 3,4,5 (GNG.L)

Technology BUY 62.5p
Investment thesis Share price performance

GE ON G INTE R NA TION AL 12/3/08

100
The research and development has continued as the business
has flourished. SmartBox and PortalAge are both now available 90

in English. With an agreement signed in Canada and US, 80

GEONG is moving beyond China. This may tend to ensure 70

additional future growth which we have not factored in our 60

forecasts.
50

We believe the group has the platform to sustain steady organic 40

growth of at least 40% at 40% gross margin for the foreseeable 30

future. But it also has substantial capacity and resources to 20

surpass that growth level with judicious and earnings enhancing 10

acquisitions. M A M J
PRICE
J A S O N D J F M A M J J A S O N D J F

PRICE REL. T O FT SE A LL S HARE - P RICE INDE X

Source: DATASTREAM

Source: Datastream

Business description Revenue breakdown FY2007

Geong International, based in Beijing, is the 40th fastest growing Customised

technology firm in China, according to Deloitte's "Technology 50%
Fast 50 China 2006".

Geong's product range can be broadly split into two - PortalAge

for large enterprises and SmartBOX suitable for SMEs. Geong's
products and services are provided to more than 50 large
License
enterprises - Chinese and international multinational corporations 20%
based in China. The client list includes the top 5 Chinese banks -
MA
customers also include IBM, Dell, Lenovo, Shanghai Airline and 30%
Shanghai GM.

Source: Company data

Major shareholders (%) Chairman and executive directors

Pershing Keen 42.7 Henry Tse Executive Chairman

Henry HakYan Tse 11.3 Wang Weidong Chief Executive Officer
Weidong Wang 11.8 Bo Yuan Non-exec Director
HSBC Global 10.5 Peter Williamson Non-exec Director

Source: Argus Vickers Source: Company data

No. shares (m) Market cap (£m) Net cash (£m) EV (£m) 12m hi/lo (p)

31.5 19.7 6.8 12.9 93.0 51.0

Year end March 2007A 2008E 2009E 2007A 2008E 2009E

Sales (£m) 8.1 17.6 21.1 EV/sales (x) 1.6 0.7 0.6
EBITDA (£m) 1.9 3.0 5.3 EV/EBITDA (x) 6.8 4.3 2.4
Op profit (£m) 1.7 3.0 5.3 P/E (x) 10.8 8.0 4.3
PBT (£m) 1.7 2.9 5.3 Div yield (%) 0.0 0.0 0.0
Tax rate (%)
EPS (p) 5.8 7.8 14.4 1m 3m 12m
DPS (p) 0.0 0.0 0.0 Price relative (%) -7.9 -8.1 9.5
Source: Seymour Pierce Limited estimates

Amit Thakar amitthakar@seymourpierce.com 020 7107 8022

11 Seymour Pierce Research

Key to material interests
1. The analyst has a personal holding of the securities issued by the company, or of derivatives
related to such securities.
2. Seymour Pierce Limited or an affiliate owns more than 5% of the issued share capital of the
company.
3. Seymour Pierce Limited or an affiliate is party to an agreement with the company relating to
the provision of investment banking services, or has been party to such an agreement within
the past 12 months. Our corporate broking agreements include a provision that we will
prepare and publish research at such times as we consider appropriate.
4. Seymour Pierce or an affiliate has been lead manager or co-lead manager of a publicly
disclosed offer of securities for the company within the past 12 months.
5. Seymour Pierce is a market maker or liquidity provider in the securities issued by the
company.
6. Seymour Pierce is party to an agreement with the company relating to the production of
research recommendations.
Distribution of ratings
Our research ratings are defined with reference to the amount by which we expect the absolute
return to change over the next 12 months:

Rating Definition
Buy Absolute return expected to increase by more than 10%
Outperform Absolute return expected to increase by between 5% and 10%
Hold Absolute return expected to change by between -5% and +5%
Underperform Absolute return expected to decrease by between 5% and 10%
Sell Absolute return expected to decrease by more than 10%

As at 31 December 2007 the distribution of all our published recommendations is as follows:

Proportion of Proportion of these provided with

Rating recommendations investment banking services
Buy 40% 57%
Outperform 21% 17%
Hold 28% 24%
Underperform 6.5% 27%
Sell 0.5% 0%

Important Notes

Our research recommendations are issued and approved for distribution within the United
Kingdom by Seymour Pierce Limited only to eligible counterparties and professional clients as
defined under the FSA rules. Our research is not directed at, may not be suitable for and
should not be relied upon by any other person. The information contained in our research is
compiled from a number of sources and is believed to be correct, but cannot be guaranteed. It
is not to be construed as an offer, invitation or solicitation to buy or sell any securities of any of
the companies referred to within it. All statements made and opinions expressed are made as
at the date on the face of the material and are subject to change without notice. Where prices
of securities are mentioned, these are the mid-market prices as at the close-of-business on the
business day immediately preceding the date of the research. The meanings of our research
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carrying each rating, is set out on our website at www.seymourpierce.com. Seymour Pierce
Limited and/or its associated companies and ultimate holding company may from time-to-time
provide investment or other services to, or solicit such business from, any of the companies
referred to in research material. In addition, they and/or their directors and employees and/or
any connected persons may have an interest in the securities of any of the companies in the
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