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A worker makes packages of fertilizer at the plant of Hanfeng Evergreen Inc. in Jiangyan city, Jiangsu Province, China on 16 Oct 2010. Photo by Kevin Lee for Globe and Mail (Kevin Lee/Kevin Lee for Globe and Mail)

A worker makes packages of fertilizer at the plant of Hanfeng Evergreen Inc. in Jiangyan city, Jiangsu Province, China on 16 Oct 2010. Photo by Kevin Lee for Globe and Mail

(Kevin Lee/Kevin Lee for Globe and Mail)

15lf1TSX firms look to China, Hong Kong for second listing Add to ...

Hanfeng was at the front end of a trend when the Chinese company listed itself on the Toronto Stock Exchange back in 2004. Now, the fertilizer firm could be on the front-end of a new trend, as it considers a second listing in mainland China or Hong Kong.

The appeal of tapping into China's massive investor base is luring a number of Toronto-listed firms. Compared with North America, getting on a stock exchange in Hong Kong or Shanghai can be a difficult and time-consuming process. But companies are being drawn to Asia by the potential for higher price-to-earnings multiples, arising from strong demand and tight supply.

The price-to-earnings ratio for the S&P/TSX composite index is about 20, according to Bloomberg data. The corresponding number for the Shenzhen Stock Exchange composite index is about 40. (The Shenzhen, like its larger sibling in Shanghai, essentially lists domestic companies for domestic investors.)

One of Hanfeng's Chinese rivals, Shandong Kingenta Ecological Engineering Co. Ltd., is now listed in Shenzhen, and demonstrates the valuation gap between China and North America.

"[It's a]very similar company to ours," Hanfeng chief financial officer Paul Begin said. "Last time I checked, their valuation was somewhere between 25 to 30 times forward-looking earnings per share. Our valuation on the TSX is somewhere around nine or 10."

Last month, about a dozen analysts, investment bankers and investors from Canada and the U.S. went on an all-day bus tour through China's Jiangsu province to see Hanfeng's facilities first hand. Some of them were attending several such tours, as Toronto-listed companies with operations in China hosted show-and-tells for Western investors.

"If there's a permanent disparity between Hong Kong or Asian listings and the TSX in terms of multiples, absolutely I'd expect more Canadian companies to list here. How else do you answer your shareholders? You have to look at it," Mr. Begin said.

Hanfeng and fertilizer producer Migao Corp. have hosted these events in the past, but say they now work harder to combat North American investors' skepticism, which suppresses valuations in Toronto and New York.

"It's becoming more and more apparent that Canadian and U.S. investors are looking further into how companies are run, how the boards are constituted, who the auditor is," said Kevin O'Connor, a partner at Spinnaker who is assisting Hanfeng with its investor relations.

"Six months ago, Paul and I were out marketing and we never got a question on internal controls, the board, whether there's a Western CFO. Now those are question one, two and three."

Tight Supply

Chinese investors have no such qualms. They have fewer stocks to choose from because they face restrictions on investing abroad. There are only about 885 companies listed in Shanghai, considered the most successful exchange in mainland China, compared with 2,420 listed on the New York Stock Exchange.

"It's a lack of product - there's limited supply," Mr. O'Connor said.

Foreign firms are restricted from listing on mainland Chinese exchanges, but officials have said that they are working on establishing an international board on the Shanghai exchange. HSBC Holdings PLC, already listed in Hong Kong, is likely to be among the first foreign companies to list in Shanghai.

Teck Resources of Vancouver has just added its name to the pool of companies that have said they would like to seek a listing in China.

"We want to be one of the earliest [overseas]companies to list in China's stock markets," Teck CEO Don Lindsay told Chinese media last month.

Inter-listing on more than one stock exchange can be an intriguing option for many firms, said Kevan Cowan, who runs TMX Group Inc.'s equities business.

"We've certainly noticed that as companies do inter-list in other places, there's a strange phenomenon where one plus one tends to equal three," he said. "We usually see that overall trading volumes go up."

Toronto now houses more than 300 international companies on its exchanges, nearly half from the U.S., followed by more than 50 from China and more than 30 from Australia.

If trends persist, it may find itself frequently being used as a stepping stone to Asia.

Avi Grewal, the CEO of Toronto-based Cinaport Capital Inc., is in the midst of helping Hua Hong, a Chinese firm that sells prepaid phone cards, try to obtain a listing on the TSX Venture Exchange. Hua Hong has become a test case for a group of investment people who are looking to help companies list on the TSX Venture Exchange, graduate to Toronto's main board, then seek a dual listing in Hong Kong.

"Initially, it's much easier for these companies to get listed on the TSX," Mr. Grewal said.

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