To make money, avoid investing into S-chips (in general)...

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To make money, avoid investing into S-chips (in general)...

Post by Dennis Ng »

24 Jul 2010

WE know that buying into an S-chip, or China companies listed on the Singapore Exchange, has generally been a bad investment strategy. But how bad is it?

I've tallied up the performance of all the S-chips companies listed on SGX since their IPOs, and compared the return to the FTSE Straits Times All Shares Index.

As you can see from the chart, it is not a pretty picture. If you had bought all the S-chips which came onto the market in the last 11 years, you would have been down about 17 per cent, assuming that you put an equal amount into each of the 150-plus stocks.

A few super outperformers lifted the average number. Had we looked at the median total return, it was a more atrocious 60 per cent negative total return.

Then there is the opportunity cost. If we compared the performance of these S-chips to the general market during the same period, they as a group underperformed the market by an average of 34 per cent. The median underperformance is a whopping 66.7 per cent.

The stocks declined by an average 16.6 per cent a year. The median annual equivalent is -18.9 per cent.

So what's the odds of hitting on a winner? Well, the probability is 23 per cent. Hitting on an S-chip which outperformed the market is that much harder, with a chance of only 19 per cent.

Is there one vintage that is less bad than the rest? In other words, was there variation in the performance of S-chips listed in different years?

There doesn't seem to be much difference, although the crop from 2005 appears to suffer less loss than IPOs from other years, in terms of median performance.

Meanwhile, the 1999 vintage has yielded the biggest number of S-chips outperformers. It produced three out of the top 10 best S-chips in terms of total return, namely Cosco, Tianjin Zhongxin Pharmaceutical and China Merchant Pacific Holdings. Cosco, which entered the market via a reverse takeover, has rewarded investors with a return of 30 per cent a year as the parent company in China injected assets into the Singapore-listed vehicle. Tianjin Zhongxin, meanwhile, only surged ahead in the last one to two years, and a patient investors had been able to enjoy a 14.9 per cent return a year since 1999.

These are the first batch of S-chips to land on our shores, and arguably, the quality control then was more stringent.

Another outstanding S-chip, which when we look at the annualised return is the best to date, is Midas Holdings. The aluminium extrusion manufacturer which focuses on serving the rail industry has returned a whopping 42 per cent a year since its IPO in 2004. The other gem from 2004 is Luye Pharmaceutical, formerly known as Asia Pharm.

But based on this data alone, are we able to conclude that S-chip as a group is all but rotten? After all, they underperformed the FTSE Straits Times All Shares Index by such a significant margin.

Well, the blue chips carry quite a bit of weight in the All Shares Index. And blue chips as we all know, have always proved more resilient be it going into a downturn, or emerging from one.

If we had tracked the performance of all the stocks listed during the same period, would they also have underperformed so severely?

Well, I did an analysis back in 2006. Back then, any stocks with China operations were hot. S-chips which came to the market in 2005 and 2006 significantly outperformed their local peers as at May 2006. But those which went IPO in 2004 did no better than the non-China stocks by May 2004.

Just by glancing through the list of stocks listed during those years, I suspect their median performance would not be as bad as the S-chips.

So it appears that, just like in 2006, there is in general, a limited 'shelf life' for S-chips when they are good to invest or trade in, and beyond that when they turn bad. Of course the global financial crisis of 2008 didn't help matters. But it is undeniable that S-chips seem to be hit harder.

Would a more stringent screening process have weeded out the bad apples? Back in 2006 and early 2007, S-chips were the toast of the town. There were even the 'Eight Beauties', the market darlings.

All eight have since been suspended for various corporate governance issues. They are Sino Environment, China Milk, Jiutian, Ferrochina, Celestial, Fibrechem, China Sun-Biochem and Beauty China. The first four were introduced to the market in 2006, the next three in 2004 and Beauty China the earliest, in 2003.

The lead managers for each of the issues were respectively Genesis Capital, HL Bank, OCBC, Westcomb, SBI-E2 Capital, HL Finance and Stirling Coleman, SBI-E2 Capital and HL Bank.

Investors have lost buckets in these stocks. But up till today, no one has yet to be held accountable for some of these fiascos. The numerous investigations into the suspended companies have yet to yield any satisfactory results.

Yes, we are in a caveat emptor, disclosure-based regime. But the fact that the first four ran into trouble within three years of their listing is rather disconcerting.

A lot more needs to be done to restore investor confidence in the S-chips sector. Would making the lead managers accountable help raise the quality of companies brought to the market?

Since the adoption of the disclosure-based regime some 12 years ago, SGX has relinquished the responsibility of vetting the companies that come to market to the issue manager.

The issue manager is supposed to be the gatekeeper. But the over-riding goal of these outfits is to make money. The reputational risk of bringing in a bad company does not appear to be a big enough deterrent. Perhaps a better defined accountability, with a more weighty punishment for not performing the proper due diligence would do the trick.
Cheers!

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
lootster
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Post by lootster »

The Business Times
6/3/2010

AN ISSUE manager told me recently that once, he went through the list of S-chips or China companies listed on the Singapore Exchange and found about half of them to have good potential.

I asked what he meant by 'good potential'.

'For me, good potential means good business models, in sectors that are still growing strongly, and with sound management,' he said. 'And I would go so far to say there were companies where the cash per share sometimes exceeded market value.'

'But then, you question whether the cash is really there?' I asked.

'Well, everybody keeps throwing that back at me. Then I say look at the bottom, who signed it. If it's Ernst and Young, what are you saying then?

'And I think the SGX actually put up a statement saying that they have reviewed and they are satisfied (with the bank balances of these Chinese companies).

'I don't think they would dare put up statements like that if they haven't actually looked and assured themselves. This is a common question, but it is a lazy question.

'So you ask yourself: Are they the top-tier auditors? If yes, dare they allow these things to happen? It's their reputation, you know,' the issue manager said.

Well, the thing is, sometimes it is not a question of whether these top-tier auditors 'allowed' accounting shenanigans to happen under their noses. Sometimes, they might have been hoodwinked themselves, or might not have been that alert to the minor signs here and there.

How else do we explain the fact that PricewaterhouseCoopers, one of the world's largest accountancy firms, missed a systematic US$1 billion fraud at Satyam, the Indian information technology outsourcing giant, for as long as seven years?

B Ramalinga Raju, the former chairman of Satyam, shocked the world in early 2009 when he confessed to inflating the company's profitability, which led to more than US$1 billion in fictitious cash and other assets on its books.

The 'cash pile' that Satyam did possess was, in fact, just US$78 million, Mr Raju disclosed in a letter to the board.

Satyam's bogus accounts had been audited by Price Waterhouse, the India-based auditor which is a member firm of PricewaterhouseCooper International, since the financial year 2000-2001.

The company's balance sheet as at March 31, 2008 was signed off by Srinivas Talluri, a partner of Price Waterhouse in Hyderabad, the southern Indian city where Satyam is based.

In Singapore, Oriental Century requested a suspension of its shares after KPMG contacted the company's chief financial officer on March 9, 2009, saying that it had difficulties seeking the reconfirmation of the bank balance and that there were doubts about the authenticity of a bank confirmation received earlier by KPMG.

Wang Yuean, the executive chairman and chief executive officer of the company, subsequently confessed to the board that he had over the years inflated sales and cash balances and had diverted unspecified sums to an interested party.

Oriental Century was listed in mid-2006. KPMG - a big and reputable international accounting firm - has been its independent auditor since then.

In the 2007 annual report, KPMG gave the opinion that Oriental Century Group's consolidated financial statement and the balance sheet of the company 'are properly done up in accordance with the provisions of the Act and Singapore Financial Reporting Standards to give a true and fair view of the state of affairs of the Group and of the Company as at Dec 31, 2007'.

It also expressed the opinion that 'the accounting and other records required by the Act to be kept by the Company have been property kept in accordance with the provisions of the Act'.

More recently, China Milk Products Group announced that it had the cash to repay its bondholders some US$146 million after they exercised their early put option to sell back the bonds to the company. The snag was that it hadn't received clearance from China's State Administration of Foreign Exchange (SAFE) to remit US$170.6 million in principal and interest payments out of the country.

But in February, after the resignation of its chief financial officer, company secretary and an independent director, China Milk admitted that it did not have enough cash in its bank accounts outside China to repay its bondholders.

Last week, it changed its statement again to say that it had enough cash to repay the US$170 million debt. In its last two audited balance sheets as at March 31, 2009 and March 31, 2008, the cash and bank balances were listed as 1.63 billion renminbi (US$240 million) and 1.74 billion renminbi respectively. The notes to the accounts, however, did say that the cash was deposited in banks in the People's Republic of China and hence was not freely convertible into foreign currencies.

But then, one wonders why China Milk took on the debts when it has such a big pile of idle cash sitting around in the banks in the PRC.

Grant Thornton is China Milk's external auditor.

Other S-chips which have reported accounting irregularities such as China Sun-Bio Chem and Fibrechem had PricewaterhouseCoopers and Ernst & Young as their auditors. However, it was E&Y which said that it couldn't finalise an audit of Fibrechem's trade receivables and cash balances for the year ended Dec 31, 2008 that subsequently led to the suspension of Fibrechem.

E&Y was appointed Fibrechem's external auditor at a special general meeting in September 2008 to replace Deloitte & Touche, not too long after the latter was reappointed the company's auditor on April 29, 2008.

Deloitte was Fibrechem's external auditor for the year ended Dec 31, 2007.

Meanwhile, numerous accounting fraud cases in the West also happened under the watch of reputable external auditors. This leads us to only one conclusion: a good brand name external auditor does not always guarantee fair and accurate accounting representation by the companies they audit.

An extension of that logic is that: if all auditing firms are equally likely to miss the detection of accounting frauds, then the probability is such that firms with more clients are more likely to see their names associated with fraudulent companies!

I've done a tally to see which firms have the biggest audit market share among the S-chips. The firm with the biggest market share is Grant Thornton in Hong Kong with a 17 per cent share, or 25 companies. Deloitte & Touche is second at 13.6 per cent or 20 companies. E&Y comes in third with 11.6 per cent share or 17 companies. Foo Kon Tan Grant Thornton in Singapore and KPMG are tied at fourth position with 8.2 per cent market share, or 12 companies each.

Hence, the next accounting irregularity, if ever there is one, has a very high chance of being audited by one of the five firms mentioned above!

Teh Hooi Ling
The writer is a CFA charterholder
Dennis Ng
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Post by Dennis Ng »

I myself also got "conned" by this Celestial Nutrifoods...I bought in the Financial Crisis at 30 cents...thinking the stock will recover when the Crisis recovers...but the stock got suspended instead...the lesson learned is I better do NOT believe the Balance Sheet of China Companies listed in Singapore, commonly known as S-Chips...you'll be better off buying Potato Chips (at least can eat, even though not healthy. haha, not bad, I can laugh at my own mistakes.

Nowadays, I rather invest into Shanghai Stock Exchange index through UOB SSE 50 instead of buying S-Chips.

Cheers!

Dennis Ng

Celestial Nutrifoods (Suspended)
Jul 14, 2011
Liquidator finds governance lapses at Celestial Nutrifoods
By Jonathan Kwok

THE provisional liquidator of beleaguered Celestial Nutrifoods yesterday disclosed troubling governance lapses by the firm, such as its transfer of funds to a third party while it appeared to be insolvent.

At one stage, $16.7 million was sent to a British Virgin Islands (BVI) firm.

Celestial also completely transferred ownership of its China operating subsidiaries to external parties without disclosure to the Singapore Exchange, said FTI Consulting's Mr Yit Chee Wah, provisional liquidator for the China-based firm.

Former market darling Celestial, whose shares reached $1.95 at their height in 2006, has been suspended from trading since 2009. It has since been told to delist and faces a winding-up petition.

The maker of soya and biofuel products owes bondholders more than $200 million. It could not pay them when they tried to redeem the debt in May 2009.

But Mr Yit said via an SGX announcement yesterday that investigations had revealed significant cash transfers to external parties in the year leading up to the liquidator's appointment last December.

This was especially pronounced in the six months prior to the appointment.

This was when the firm had appeared to be insolvent, based on the amount it owed that was immediately payable.

Mr Yit said that about $16.7 million was paid to a company incorporated in the BVI. This BVI firm has not responded to the liquidator's attempts to contact it, but Celestial's executive chairman Ming Dequan has told the liquidator that it is a supplier to one of its China subsidiaries.

The liquidator also discovered that all of the shares of Celestial's three operating China units had been transferred to external parties, in August and December last year. These transfers were not disclosed to the SGX by the firm's directors, as required by listing rules.

Mr Ming has told the liquidator the transfers of most of these shares were because the units' banker, China Construction Bank, exercised its rights to the shares after becoming aware of its impending SGX delisting.

But the liquidator noted that the existence of the share pledges had not been disclosed to the SGX. Any default of the loans by the bank, or any action taken by it, had also not been disclosed.

The liquidator is investigating the transfers of both the shares and cash. It said it is 'extremely unlikely' that Celestial's shareholders will get any dividend.

Mr Yit's statement also outlined many difficulties encountered in trying to gain control of the China units. Celestial, which is incorporated in Bermuda, held its subsidiaries via units in the BVI. But initially, the registered agent of the BVI units refused to recognise the Singapore High Court's order to appoint the provisional liquidator.

The liquidator had to seek recognition of the Singapore Court's order from the Supreme Court of Bermuda.

When it finally got the go-ahead, the Chinese authorities were uncooperative. This was when it discovered the China units had been transferred from the BVI units.
Cheers!

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
candy_chia
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Post by candy_chia »

I am also a victim. I lost $7k in Celestial in 2004!

The worst investment is ACCS (now called MDR) with lost of $18k in 2005.

ACCS committed corporate fraud against Nokia and falsified financial statement.

FY04 Profit was inflated to S$54 Million but actually there is S$35 MILLION LOSS!

Shares crash from high of 89 cents in Jan 2005 to 10 cents by Aug 2005, Now only trading at 0.5 cent!!!
Dennis Ng wrote:I myself also got "conned" by this Celestial Nutrifoods...I bought in the Financial Crisis at 30 cents...thinking the stock will recover when the Crisis recovers...but the stock got suspended instead...the lesson learned is I better do NOT believe the Balance Sheet of China Companies listed in Singapore, commonly known as S-Chips...you'll be better off buying Potato Chips (at least can eat, even though not healthy. haha, not bad, I can laugh at my own mistakes.

Nowadays, I rather invest into Shanghai Stock Exchange index through UOB SSE 50 instead of buying S-Chips.

Cheers!

Dennis Ng

Celestial Nutrifoods (Suspended)
Jul 14, 2011
Liquidator finds governance lapses at Celestial Nutrifoods
By Jonathan Kwok


Former market darling Celestial, whose shares reached $1.95 at their height in 2006, has been suspended from trading since 2009. It has since been told to delist and faces a winding-up petition.
candy_chia
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Joined: Sun Jul 17, 2011 11:36 am

Post by candy_chia »

http://stocktaleslot.blogspot.com/2006/ ... -accs.html


Bulls and Bears: Tales of the Zoo: Crash Stock: ACCS
stocktaleslot.blogspot.com

STORIES OF THE STOCK MARKET, OCCASIONALLY HILARIOUS TO OBSERVERS (LIKE US) BUT NOT FUNNY TO THOSE WHO ARE INVOLVED (WITH THEIR LIFE SAVINGS).

Friday, May 26, 2006
Crash Stock: ACCS

With the admission of guilt of ACCS founder and former CEO Victor Tan to charges of fraud as announced in the papers today, the corporate scandal of ACCS that first erupted in February 2005 and brought the high-flying stock to the pits comes to a close. The company was once a stock market darling worth S$800M in market capitalisation but today trades at less than one-eighth that value.

In early February 2005 ACCS was trading at 85 cents, a trailing PE of 25 times. Since its IPO in 2002, it had displayed stellar performance, showing near doubling of revenues and net profits every year till then. It had the backing of the investors with the Midas touch -- 2G Capital. Its business captured the imagination of investors and traders alike --- its rapidly expanding after-market maintenance services for mobile phones captured two popular themes: the regional outsourcing story and the mobile phone theme. Its subsidiary, DMS (in the business of phone distribution), was on the verge of listing, which would bring its parent exit gains. It is amazing, on retrospect, that within one week the whole world would come crashing down.

On 18 February, the company made a late-night announcement that it was ceasing its AMS (after-market services) for Nokia in several countries, spooking the market despite company assurances ("just pricing issues") and concurring analyst reports ("impact on financials minimal, maintain target prices"). One learns to respect the movement of the market; it behaved in a volatile manner on heavy volume despite these assurances and four days later the bomb dropped --- the Commercial Affairs Department announced that it was launching an investigation into ACCS, which subsequently admitted to overstating revenue in the previous quarter "in relation to one particular contract in Singapore with a customer of the company", and cancelled its listing of DMS. In the wake of CAO and Citiraya the market was sufficiently alarmed to bring it to below 40 cents, or half of its early-February valuation. Even a stellar set of FY04 results announced around the same time, showing another year of revenue and profit doubling, wasn't much help --- investors no longer knew what to trust.

The stock was a journalist's dream in the next few months, for all the wrong reasons. In March it attracted a suitor in Singpost who proposed to take an eventual 30% stake, but this was called off after much publicity about how Singpost's chairman's and director's (Tommie Goh) ACCS holdings presented a conflict of interest. The forced selling of Victor Tan's ACCS stake (ostensibly to meet margin calls) and similar disposals by co-founder Ronnie Poh provided further corroborating signs of the company's troubles. Finally, the second bombshell dropped in May 06 with the results of Price Waterhouse's investigations into the "overstatement of revenue" issue.

The special auditor had uncovered a whole can of worms. The 3Q04 revenue overstatement was not siginificant, but refurbishment revenue and profit had been massively overstated for the whole of FY03 and FY04. The overstatement of the revenue and profit before tax amounted to approximately S$22 million and S$19 million respectively for FY03 and approximately S$60 million and S$54 million respectively for FY04 in relation to the refurbishment business of the group. One look at the figures and one knows that this refurbishment business was dodgy: what kind of business model could for example, let one earn $54M profit on $60M revenue ie. profit margin of 90%?

The net effect of this revelation was that FY03 was just a marginal profit year while FY04 was in fact a loss-incurring year. Which means there was no meaning to the earnings multiple anymore. The company had to make massive provisions to investments and receivables, reducing net asset base to 4 cents per share --- the new base for further share price consolidation.

The entry of Philip Eng, the former CEO of Jardine Cycle and Carriage, as the new ACCS chairman later in the year helped to bring some cheer to the company. There was probably a special reason for bringing him in in addition to prestige: he had been through loss of a key distributorship before at C&C, when they lost the Mercedes-Benz account. The early optimism soon evaporated, as the company continued to make further downward revisions to FY03 and FY04 losses (eventually amounting to >S$35M losses in each year!) while issuing another set of red ink in FY05. In June 05, I had written a Hotstocks not article against ACCS, which was justified by later events.

The company's former CFO has recently admitted to corporate fraud against Nokia and falsifying financial statements, while Victor Tan has pleaded guilty to collaborating with him in falsifying claims for the repair of Nokia handphones, for faking a "thriving" refurbishment business (using company funds), and for issuing false financial statements. Over 10 others in ACCS have been implicated in this massive fraud.

What signs were there to prevent the investor/trader from entering this stock in the first place? The PE was too high at >20, to begin with. It was the pressure to maintain the phenomenal growth rate expected by the market that might have driven the ACCS management to tamper with their accounts .... the same market pressure that drove CAO's Chen Jiulin to direct speculation in oil derivatives. If one had been in the stock when the loss of the Nokia contract was announced, a cut-loss or selling into strength on the subsequent day might have been adopted hence avoiding the follow-up carnage --- a cockroach on the kitchen floor might hint at many more in the closet. Lastly, never hope ---- just react. As the spate of unfavourable news poured in, one should have known better than hold and hope for the tide to turn. Fundamentals trends are terribly difficult to turn.
XLTan
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Post by XLTan »

Hi, I learnt a bit on S-chips from my audit lecturer who used to be an auditor with Deloitte. Let me share and attempt to explain it here.

How it works for most S-chips is there is a legal rep from china who brings the company into Singapore for listing, to raise funds from SG (SG company being the parent company). Once the funds are raised, they will transfer the funds back to the China subsidiary. In short, all the assets are under subsidiary. The auditors then have to find ways to verify the value of the assets under the china subsidiary.

When auditing the parent company, the auditor of a parent company can by right verify subsidiary's accounts (if they are not appointed as auditor of the subsidiary). However, they need to get the legal rep's permission to have access to the subsidiary's accounts (which the legal rep can disallow). Hence we can see that it can be rather difficult for auditors to verify the value of assets in balance sheet.

For more info on legal rep: http://www.lehmanlaw.com/fileadmin/lehm ... lities.pdf
candy_chia
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Re: To make money, avoid investing into S-chips (in general)

Post by candy_chia »

Accounting frauds can occur even in local companies (ACCA, now named MDR & Citiraya now named Metech Internatinal), therefore one needs to conduct due diligence before investing in stock.

http://www.np.edu.sg/library/resources/ ... 5.11sc.pdf

http://business.asiaone.com/Business/Ne ... 82708.html
Fugitive ex-Citiraya boss fled with US$51m
The Straits Times, Sun, Aug 17, 2008

THREE years after Ng Teck Lee fled the country with money he pocketed while running waste recycling company Citiraya, it has now surfaced just how much he amassed and how he did it.

In all, investigators believe he skipped town with US$51 million (S$72 million), made from selling used computer chips which the recycler should have destroyed.

It was renamed and now operates as Centillion Environment and Recycling.

Peter Lynch mentioned, "Stocks Aren't Lottery Tickets

There's a COMPANY Attached to Every Share."
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