Why penny shares need to get their story out there

Small companies – even successful ones – can often find themselves being ignored by investors who simply don't realise they have a good story to tell, says Tom Bulford. Here's one innovative Chinese advertising and media operator suffering from precisely that problem.

The world of penny shares is full of strange anomalies. That's why we love it! We've just got to find the gems in the rough and that's what I spend most of my waking hours looking for.

Problem is, there are flaky outfits with nothing more than a business plan and a persuasive team of directors that see their shares soaring. And then you've got worthy companies which slog away to produce rising profits, only to find themselves ignored.

It's an environment that breeds cynicism of the City and has executives shaking their heads. Last week, two of them rang me to express their bewilderment. One of them is chief executive of an extremely undervalued gold mining play which I recommended some time ago to readers of my newsletter, The Bulford Files.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The other was Cheong Chia Chieh, MD of a company I've mentioned here before called Red Hot Media (RHM) which is, by the way, no relation to Red Hot Penny Shares.

Cheong spent some time explaining to me that London was the epicentre of the civilised world and that property prices here would soar after the Olympics, just as they did in Beijing. Then he bent my ear on the subject of the London broking community.

How London's brokers have let this penny share down

He told me how certain denizens of this shifty world had promised they could raise several million pounds to fuel the expansion of Red Hot Media only to let him down. To his credit, Cheong did not sound bitter. Instead, he seemed to view this in the same way that we view the Chinese relish for eating chickens' feet not a matter for criticism but just an instance of the mysterious ways of foreigners. "I am still learning", he told me.

I covered Red Hot Media as an intriguing story in Penny Sleuth on 19 May: How can the market ignore stocks like this? Last week it announced its 2010 results (not before time) and these maintained the record of rapid growth.

Year on year growth in RHM's core advertising and media operation rose by 96% in Malaysia and 70% in China and Hong Kong. RHM's pre-tax profit doubled to £1.8m.

It's an interesting company with an innovative business model that builds on its original business of buying advertising space for its clients. Called AxChange this model goes one step further by helping its customers to find sales outlets. In RHM's own words this is "a large network of Clientele and Business Affiliates with unlimited potential of aggregated business demand ie,a result-focused marketing ecosystem".

That has evidently made sense to Porsche, Borders and Canon, which are amongst many international businesses to attack Asian consumer markets with the help of RHM. Now RHM has done a deal that should strengthen its presence in China.

The deal involved RHM selling out its media businesses in return for a 69% stake in the Kuala Lumpur-listed arm of Founder Group. This is a Chinese conglomerate that is 70% owned by Peking University. Impressively, Founder is both "the second largest IT manufacturer in China and one of the largest healthcare and pharmaceutical enterprises".

Why RHM needs some help getting its story out

But apart from vague promises about tackling the vast Chinese consumer market, the rationale for this deal is not especially clear. RHM's own version is as follows: "RHM's presence in China's market is an anchor for riding on the golden opportunity that Chinese markets create by focusing on China Asean cross marketing and is expected to increase profitability and commercial returns for the group and its shareholders".

In its presentation about the future, RHM makes a number of other promises. That profits will double over the next four years; that RHM will set up a joint venture company to own roadside billboards; that it is "ready for mergers & acquisitions with a health media company which owns 873 media panels in 152 first-class hospitals throughout all major cities in China"; and finally it hints at a deal with social media company AdExcel that capitalises on "current trends synergistic to end-buyer's interest and value-added attractions".

If this makes little sense to you, you're not alone. It makes little sense to me either. RHM may have a good story to tell but it desperately needs some coaching in the art of presentation to get that story out there.

It also needs some help from the London broking community. Most of RHM's shares are held by Asian investors. And, with no interest from UK investors and little help from its advisors, as things stand its London listing is a complete waste of time.

This article is taken from Tom Bulford's twice-weekly small-cap investment email The Penny Sleuth .

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.