Cover Story: S-chips fall out of favour as corporate scandals surface

Tags: FTSE Straits Times China Index | S-chips | Singapore Stock Exchange

Written by Kathy Fong

Monday, 01 June 2009 00:00

While Malaysian investors are eagerly waiting for companies based in China to list on Bursa Malaysia, their counterparts across the Causeway have plenty to complain about over Chinese firms that have floated their shares on the Singapore Stock Exchange (SGX).

Their complaints aren’t just about the sharp plunge in share prices when global equities markets went skidding in October last year. It’s worse than that: Corporate scandals have been surfacing among S-chips — the common name for the China-based companies listed on the SGX — in recent months as a result of the economic crisis.

In Hong Kong, Chinese-based companies, which are known as H-shares, are the main draw on the local stock exchange. Due to the restrictions on foreign money flowing into China’s stock markets, institutional fund managers see the H-shares as a good proxy for China, the sweet spot for economic growth in Asia, especially in the current downturn.

That isn’t the case for Singapore, where nearly 170 Chinese-based companies, ranging from shoemakers and food manufacturers to renewable energy producers and property developers, are listed.

The SGX initiated efforts to woo Chinese-based companies to raise equity funds in Singapore in the late 1990s. This was aimed at developing the capital market in view of the limited number of companies in the island republic, given the size of its economy.
The exchange has inked MoUs with the provincial governments of Zhejiang, Shandong and Liaoning, as well as the Wuxi municipal government to facilitate the listing in Singapore of companies from those areas.

The S-chips were investors’ darlings in 2006 when China started to open its doors, allowing domestic investment funds — which are called Qualified Domestic Institutional Investors (QDII) — to invest abroad. The Chinese government had set a quota of US$14 billion (RM49 billion) for such funds to be invested overseas.

Investors were shovelling money into S-chips on the expectation that these counters would be the priority choice of China’s QDII funds too.

The enthusiasm faded when the earnings of these companies fell short of expectations, compounded by the start of the downturn. The S-chips have now fallen out of favour among investors, and many have had their fingers badly burnt when share prices tanked as accounting fraud and bankruptcies started happening.

Oriental Century Ltd, China Sun Bio-Chem Technology Group Company and Fibrechem Technologies Ltd are among those that have been hit by alleged accounting irregularities. FerroChina Ltd has halted production in China and filed for bankruptcy. The steelmaker is facing 206 lawsuits from creditors that are claiming RMB4.82 billion (RM2.5 billion).

China Sun Bio-Chem Technology Group Company’s auditor, PricewaterhouseCoopers (PwC), says it has difficulties in completing its annual audit of the company. PwC adds that it isn’t able to establish the authenticity of the bank confirmation received on bank balances of RMB592 million.

In another shocking case, the husband-and-wife management team of China Printing and Dyeing Holdings Ltd went missing after its parent company went bust in China.

The auditors of companies like Celestial NutriFoods Ltd and Sino-Environment Technology Group Ltd have also raised doubts in their audit reports over their ability to continue operations.

There is a growing fear that some companies will just vanish into thin air when their inflated sales figures, empty coffers and huge debts come to light as the crisis continues to bite.

“The rosy picture that the management had painted earlier has now been proven wrong. Investors are wary of the S-chips as it is so difficult to judge which are the good ones and which are black sheep,” says a fund manager in Singapore.

“Fund managers visited their plants and offices in China, met the management regularly, and made other checks. In the end, some still turned out to be con jobs. Many investors have decided not to touch the S-chips to avoid the risks,” he adds.

Nevertheless, the performance of FTSE Straits Times China Index (STCI), which tracks the S-chips, isn’t too far off from the benchmark Singapore Straits Times Index (STI), which has surged nearly 30% since the beginning of 2009.

The STCI has soared about 25% year-to-date. It managed to rebound from its historical low of 129.5 points in mid-March although it is still 54% below its peak of 510 points.

The recovery of the STCI shows that not all S-chips are bad. There are companies that have delivered spectacular results. Stellar examples are Midas Holdings Ltd, Yanlord Land Group Ltd and shipbuilder Cosco Corp Singapore Ltd.

Yanlord is considered the gem among the S-chips. The property developer has been riding high on China’s economic growth. Its net profit nearly doubled in three years, to S$225.8 million (RM542 million) for FY2008 ended Dec 31, from S$122.2 million in FY2005. Its share price has more than doubled since the start of the year to S$1.94, indicating the market appreciates quality Chinese companies.

Likewise, the profits of Midas and Cosco have shot up over the past few years while their share prices have climbed in tandem with the improved sentiment worldwide.

Rampant corporate scandals among Chinese companies have made the Singaporean authorities wary. Auditors in Singapore have been told to be more cautious about Chinese firms.

Last month, SGX held meetings with 14 audit firms, issue managers and independent directors, urging them to step up checks on listed companies’ cash holdings, accounts receivable, off-balance sheet items and other areas of “heightened risk” following several accounting scandals in recent months.

But SGX’s senior executive vice-president and head of risk management and regulation, Yeo Lian Sim, is quoted by Singapore’s Business Times as saying that the exchange was not singling out S-chips or reacting to scandals.

“This has gone out to all listed companies,” she says. “The exchange is not targeting one [company] or the other. Instead, it was a ‘timely reminder’ as it was the end of the year when many of the listed companies do the annual audit.”

No matter how carefully SGX sounds the caution, it is undeniable that the rising number of accounting irregularities among S-chips has raised the alarm on the quality of Chinese companies. In the public’s mind, there is also the question of whether the SGX has compromised on the quality of companies to attract initial public offerings (IPOs) from China.

The dual role that the SGX is playing has always been the subject of debate. The SGX is a profit-driven entity and doubles up as the regulator of the stock market. It can be argued that there could be a conflict of interest between the two roles.

That said, the SGX has made it clear that it is not going to put a brake on its efforts to woo more foreign IPOs, including Chinese companies. “Our efforts to attract foreign listings, including China listings, will continue in line with SGX’s Asian Gateway position to provide an international capital platform for Asia-centric companies seeking funding,” SGX’s head of listings Lawrence Wong told the media earlier this year.

This article appeared in the Cover Story page of The Edge Malaysia, Issue 757, June 1-7, 2009.

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