Singapore listed Chinese Companies - S Chips

Some of my friends asked me what i think of Singapore listed Chinese Stocks know as S chips, I shall do a brief writeup about my personal views :

Many of the S chips listed in Singapore are now trading at low PE (share price to EPS ratio) or near cash per share because :
1. Despite some signs that the global financial crisis may be over, recent reported financial results remain weak (eg profit continue to decline or margins have not recovered)

2. Confidence were badly shaken due to the accounting scandals or corporate governance issues affecting some S chips

Let’s look at the above 2 points separately.

Point 1 - this is a more general reason which can affect all companies, not just S-chips, so all we have to do is do more homework and analyze the financial results of the companies, and look for signs of recovery. One of the early signals which I use sometimes is look for “sequential” earnings recovery, rather than year-on-year recovery. Sequential means comparing the latest net profit (eg 3Q09) to that 3 months ago (eg 2Q09) and if you see the company profit improving due to better operating performance (rather than forex gains or unusual items like writebacks) than this is the first thing that will get my attention.

Point 2 - i personally think that the entire S-chips sector have been “over-punished” by the actions of a few bad apples. Bear in mind that be it accounting scandals or frauds or corporate governance issues, all these happen to all stock markets, even in Hong Kong and US stock markets. But the interesting part is how the people “react” to it when it happens.

In Hong Kong, when you see certain negative news about the market, the press will just report it (usually in smaller column) and move on. Hong Kong press seldom devote a large section of the newspaper to play up the issue. In Singapore, I saw the press devoting half a page to highlight certain things and continue to highlight these issues for many days. Doing it and over-doing it is a fine line…….. to me hong kong press just do it but singapore press may have over-done it.

If the press over-report certain negative aspects, then it will hit the core of investor confidence, that they will think ALL S-chips are bad and this will bring down the valuations of ALL S-chips.

In Hong Kong and even US, we have seen the press reporting certain fraud cases but they do not over-report it and quickly move on to other matters. Investors take these incidence as part and parcel of the stock market, fraud are things that have happened and will continue to happen in the financial markets. One should not react as though it is incomprehensible that fraud can happen to listed companies in Singapore. This is one of the possible reasons why the PE of china companies in hong kong has recovered much “faster” compared to those China companies PE in Singapore. I use the word “faster” because HK listed china companies PE are usually higher than S-chips.

What’s done is done, so what to expect next for Singapore S-chips…..

If you look at the PE S-chips are at now ie trading 3 to 5x pe, these valuations to me are pre-ipo valuations and we know that pre-ipo valuations means High risk High returns.

These means “some” of the s-chips may yet blow up due to the high risk associated with but “some” who survive will give high returns later from the low valuation they are at now. One good example would be an S-chip called Sinotel. The lowest price was around 7c (when EPS was about 10c) this means the stock was trading below 1x PE haha, we can laugh now in hind-sight. But when smart money realize the rediculous under-valuation, the stock price start to recover and recently went to as high as 70c (10 bagger is the high return some pre-ipo projects may give).

So when we look at S-chips now, we should adopt they way PE (private equity) fund invest in pre-ipo project…..they expect high risks and high returns, so they DIVERSIFY.

PE fund usually try to go in at 2-4x pe before ipo and wait to make few baggers when the ipo goes through.

But if the ipo is stucked or failed, their money may go up in smoke.

So they usually try to spread their money evenly in a few projects such that as long as some make it, they will still make money at the end of the day.

In summary, look at s-chips as pre-ipo projects (high risk high return), and learn to diversify when you put money in s-chips with the expectation that some may still blow up in your face ;)

Before I sign off, let’s not forget the quietly growing number of I-chips (Singapore listed Indonesia Owned) listed in Singapore share market and the “thrill” that they are giving us now………hmm sounds familiar eh

Happy Trading

Rooney

Singapore stock market update

24th Sept 2009 China Animal proposed placement of new shares

Singapore listed company China Animal Healthcare just announced that the Company has entered into a placement agreement dated 24 September 2009 ("Placement Agreement") with DBS Bank Ltd. as placement agent ("Placement Agent").

Pursuant to the Placement Agreement, the Company proposes to issue up to 100,000,000 New Shares and (in the event the Upsize Option is exercised in full) up to 20,000,000 Additional New Shares (together with the New Shares, the "Placement Shares") for purposes of a private placement at an indicative issue price of S$0.215 per Placement Share (to be finalised). No prospectus or offer information statement will be lodged by the Company with the Monetary Authority of Singapore in connection with the Placement.

The Company is undertaking the Placement as a strategic initiative to further enhance its financial flexibility and competitive position. In particular, the Placement will provide the Company with additional financial strength and capacity to pursue suitable acquisitions and opportunities arising in its key markets.

Singapore Share Market S-chips update :

Composition of the Merrill Lynch S-shares index
BBG Code Short Name Market Cap (USD MM) Weight Sector

COS SP Cosco Corp Singapore 5,462 6.63% Industrials
YZJ SP Yangzijiang Shipbuilding 2,175 6.63% Industrials
FRC SP Ferrochina Limited 734 6.63% Materials
CHHS SP China Hongxing Sports 842 6.63% Consumer Discretionary
LHCF SP Li Heng Chemical Fibre 817 6.63% Consumer Discretionary
YLLG SP Yanlord Land Group 2,823 6.63% Financials
CEGY SP China Energy Ltd 429 6.63% Materials
CENU SP Celestial Nutrifoods 371 6.63% Consumer Staples
CXLX SP China Xlx Fertiliser 568 6.04% Materials
SINOT SP Sino Techfibre 423 5.28% Consumer Discretionary
CMILK SP China Milk Products 414 5.22% Consumer Staples
SINE SP Sino-Environment Tech 348 5.04% Utilities
SYNF SP Synear Food Holdings 431 4.67% Consumer Staples
SVC SP Sunvic Chemical 158 3.75% Materials
CZAI SP China Zaino International 378 3.59% Consumer Discretionary
DLNG SP Delong Holdings Ltd 1,286 3.34% Materials
MIDAS SP Midas Holdings Ltd 560 3.13% Industrials
JIUC SP Jiutian Chemical Group 163 2.70% Materials
PAG SP Pine Agritech Limited 360 2.13% Consumer Staples
FBCM SP Fibrechem Technologies 434 2.09% Consumer Discretionary

Source: Merrill Lynch Equity Derivatives Strategy
Weights as of 30-Jun-08