S-chips make a comeback in Singapore

[Musicwhiz]

Investors still never learn. When in doubt or feeling uncomfortable, AVOID!

May 30, 2011
CAI JIN
Are S-chips being unfairly penalised?
China's foot-dragging over corporate scams is costly for sector
By Goh Eng Yeow, Senior Correspondent

PANDEMONIUM broke out early last week among the remaining S-chips still favoured by local investors after China's authorities uncovered irregularities in the financial statements of 17 major Chinese state-owned firms.

No one could blame investors for feeling jittery even though the accounting violations had nothing to do with any of the companies listed here.

After all, news that even state-owned companies under the close supervision of China's National Audit Office (NAO) could not get their sums right only serves to deepen suspicion here over the reliability of financial data furnished by the troubled S-chip sector.

Even the assurances made by some management teams failed to soothe investors.

Take shipbuilder Cosco Corp. Last Friday, it was still trading 4.4 per cent below its close a week ago, despite stating that 'neither it nor its subsidiaries have been cited as having committed any irregularities and disciplinary violations in the NAO report'.

Under such vexing circumstances, it is difficult to fault well-managed S-chips for feeling short-changed.

They get unfairly penalised for the purported wrongdoings of other mainland companies even as they work hard to maximise earnings for shareholders.

As measured by the FTSE ST China Index, S-chips are still down by 37per cent in value from three years ago, despite staging a recovery along with the rest of the market after the global financial crisis.

This was despite the impressive comeback staged by the benchmark Straits Times Index, which had recouped all its losses over the same period.

So a pertinent question is whether the sector is being unfairly punished for the misdemeanours of a handful of China plays.

But S-chips and their long-suffering investors are hardly alone in their quandary. There was a similar stampede out of China plays in Hong Kong last week when the NAO news broke.

Some would even say that Singapore's accounting problem with S-chips is relatively mild, compared with the eruptions that have occurred elsewhere.

Since January, accounting irregularities had been uncovered among four S-chips but in the United States, the scams appeared to have reached epidemic proportions, with questionable accounting issues being reported in 30 firms since March alone.

But the dodges encountered here and in the US show distressing similarities.

One common trend is the cash that suddenly goes missing from the company's purportedly huge bank balances. Other warning signals include the company's significant borrowings, huge trade receivables - the outstanding payments on goods already delivered to customers - and the ridiculously high expenditure incurred in building fresh plants and acquiring new machinery.

Very often, it is only when the auditors do further checks, such as trying to get confirmation on the company's cash balances from the bank's headquarters rather than the local branch, that the scams are uncovered.

It led to The New York Times raising the question as to whether there is collusion between errant mainland company bosses and bank officers at the branch level, given the growing number of false bank confirmations on mainland firms' cash balances uncovered by US auditors.

Even sophisticated investors have been ensnared by the scams.

The South China Morning Post noted recently that it is difficult to vouch for a mainland firm's soundness, even when it has blue-blood investors on its shareholder list. It observed that Hong Kong-listed China Forestry counted top-notch fund managers US-based Carlyle Group and Switzerland's Partner Group among its investors, appointed KPMG as its auditor, and had its bonds rated by Moody's.

The sponsors for its 2009 initial public offering were Swiss investment bank UBS and foreign brokerage Cazenove.

'Yet, China Forestry told the market that almost everything of significance at the company has been falsified by its former management - its logging permits, its management accounts and its bank statements,' said the Hong Kong newspaper.

Sure, it is a no-brainer that China will overtake the US as the world's largest economy in the next few decades if it continues to grow at the same frantic rate it has enjoyed in recent years.

But along the way, there will be a lot of catch-up it will have to do in areas such as good corporate governance and reliable financial statements.

The growing spate of corporate scandals involving its small and medium-sized firms listed on overseas stock exchanges is also becoming a massive public relation disaster for Beijing.

As The New York Times noted, 'just what, if anything, Chinese officials choose to do could provide an indication about whether defrauding foreign investors is deemed to be a serious crime in China'.

But such apparent foot-dragging is turning out to be very costly for S-chips in Singapore.

While the scams purportedly involved missing sums in the hundreds of millions of dollars, S-chips would have collectively lost tens of billions of dollars in market value, going by their lacklustre performance in the past three years.

It leaves investors with a dilemma: Hopping onto the S-chip bandwagon may turn out to be exhilarating and rewarding but there is also the danger that riding such a tiger ends in a mauling.

engyeow@sph.com.sg

----------------------------------------------------
Since January, accounting irregularities had been uncovered among four S-chips but in the United States, the scams appeared to have reached epidemic proportions, with questionable accounting issues being reported in 30 firms since March alone.

[Nick]

China Milk Final Report (by KPMG):

http://info.sgx.com/webcoranncatth.nsf/V...A00383459/$file/2011_06_07_ChinaMilk_FinalReport_Executive_Summary.pdf?openelement

A very interesting read !

[d.o.g.]

It was clear years ago at IPO that there was something fishy when the company used fair value accounting for its milk sales.

One of my friends who went to visit the company a few years back also concluded that it was a fraud.

Too bad so many "investors" refused to think for themselves and blindly bought the shares. Yes, that includes the "professional" investors who bought the convertible bonds.

"China! Milk! Listed in Singapore!"
"High margins! High ROE! Low PE!"

Who is to blame? Look in the mirror.

"Thinking is the hardest work there is, which is probably why so few engage in it."
- Henry Ford

[Musicwhiz]

Too bad so many "investors" refused to think for themselves and blindly bought the shares. Yes, that includes the "professional" investors who bought the convertible bonds.

"Thinking is the hardest work there is, which is probably why so few engage in it."
- Henry Ford

I remember when China Milk used to release their financial results. I could not understand the Income Statement at all, especially the fair value thingy. And I can be considered to be accounting-trained! That was when I decided that if I can't understand it, then I should simply avoid it.

Actually, I am not too sure what made the other investors purchase China Milk. I know they had cute cow figures on their press releases and their Annual Report looks cute, but the numbers don't look so appealing.

And yes, thanks for the quote! I thoroughly enjoyed it!

[Nick]

Shame on CHINA MILK management! (Nextinsight)

Article: http://nextinsight.net/index.php/story-a...management

A good summary of KPMG report.

[Musicwhiz]

Business Times - 13 Jun 2011

Hock Lock Siew
Lack of recourse ails S-chips sector

By LYNETTE KHOO

UNCOOPERATIVE bank officers, confusing testimonies from dodgy third-party suppliers and numerous obstructions from management to obtaining information - all this clearly make up an exciting read.

This has been the common thread in special audit reports that have been released one after another on beleaguered China-based companies listed here, or S-chips, as they are known.

But just as a script isn't complete without a good ending, the question shareholders are concerned about is whether there is any recourse after these findings are out in the open.

Last week, investors got another nasty surprise - this time from China Milk, where special auditors uncovered undisclosed and unauthorised transactions and payments.

All the undisclosed transactions added up would far exceed China Milk's latest audited full-year net profit of 382.5 million yuan (S$72.9 million) for the fiscal year ended March 31, 2009.

And even after payments have been made, there is still no evidence of the purported land use rights being obtained, an alleged stake acquisition in a joint venture being completed, or improvement works commissioned on farm facilities being undertaken.

Even more ironic was a 53.5 per cent drop in China Milk's herd size between April 2009 and March 2010 despite a cattle replacement programme to replace older cows.

The damning 18-page summary report of KPMG's special audit findings probably stoked a sense of deja vu among those familiar with past S-chip scandals.

After all, problems of sloppy corporate governance and weak board oversight have also beset companies in past scandal blowouts.

However, it appears that once the special audit report is out, either because investigations are completed or could no longer continue due to obstructions from management, the story ends there.

Special auditors do not have a duty to lodge a police report on their findings, as the onus lies with the audit committee or the Singapore Exchange (SGX) to decide whether to take the case further.

But even after police reports are lodged in some cases, there is the difficulty of enforcement as the companies' assets and management are located in China and their incorporation may be elsewhere - say, in Bermuda or the Cayman Islands.

The perceived lack of enforcement is already seen at Oriental Century and Sino-Environment, where alleged embezzlement took place and police reports against the Chinese management have been lodged in Singapore and China.

While investors might still eventually recoup some losses at Sino-Environment should the restructuring plan proposed by judicial managers go through, Oriental Century is already delisted.

Also struck off the bourse is Zhonghui Holdings, where a reverse takeover proposed by judicial managers did not take off. Zhonghui ran into debt woes in late 2008 and subsequent findings by special auditors PricewaterhouseCoopers (PwC) found certain payments made without board approval.

China Sun, whose special audit was disrupted by a missing truckload of accounting records, is in the process of being liquidated; while Fibrechem, whose investigator nTan Corporate Advisory has yet to complete or submit its findings to SGX, is being rehabilitated through an investment agreement with an Indonesian firm.

In the United States, investors are also reeling from losses in US-listed Chinese companies that have been hit by accounting scandals, and they are starting to sue these companies for fraud. Some are going further to sue the auditors who blessed the financial statements of these firms.

It remains to be seen if investors in the US will make more headway than those in Singapore when it comes to seeking redress and bringing the management of fraud-hit Chinese companies to account.

On its part, SGX has taken some measures to strengthen safeguards in the S-chips cluster.

It has asked S-chips to engage professionals to determine whether their internal controls are sufficient and to ensure they have the power to remove rogue legal representatives at their Chinese subsidiaries.

Surely, being proactive in preventing fraud is better than trying to contain a blowout when it occurs. But, sadly, the perceived accounting risks in Chinese companies and the lack of recourse for shareholders when these firms run afoul of the law may continue to plague interest in the S-chips sector.

[Musicwhiz]

Business Times - 17 Jun 2011

Hock Lock Siew
Will S-chips go the way of Clob?

By R SIVANITHY

THERE are disturbing parallels between China stocks listed here (or S-chips, as they are known) and Malaysian stocks that used to be quoted on Clob International.

First, both were admitted into the local market because it was thought that Singapore stocks by themselves do not offer investors a sufficiently large critical mass. Clob was started in the early 1990s when the KL Stock Exchange decided to split with its Singapore counterpart and go its own way, while S-chips were brought in to fill the void created after Clob disintegrated 10 years later. Both were therefore born out of necessity to achieve size as quickly as possible.

Second, both had speculative but seductive stories to stoke investor interest: Clob's was a Malaysian infrastructure boom (that benefited the likes of Ekran, Idris Hydraulic and Renong, all companies that enjoyed huge local interest but no longer exist in their original form) and S-chips' was an emergent and roaring China (that benefited anything with 'China' or 'Sino' in its name).

Third and most worryingly, both became victims of a major crisis of confidence. In Clob's case, the trigger for a crash was the regional crisis of 1998 that exposed many companies as having weak (and, in some cases, non-existent) fundamentals, and this unfortunately coincided with a controversial Malaysian declaration that Clob was an illegal market. Massive losses were incurred and this created such deep distrust and disillusionment among local investors with Malaysian stocks that no moves have been made since then to revive the sector.

This, of course, then begs the question: with S-chips already suffering from massive investor distrust and disillusionment because of mind- boggling accounting irregularities, fraud and governance lapses, can the Singapore Exchange (SGX) really restore confidence in the sector? Or if the steps it takes are seen as being too little too late, will S-chips go the way of Clob?

First, though, it has to be said that to lay all the blame on SGX for the S-chip shambles would be unfair since it ignores the role played by the rest of the investment community, all of whom should be held equally culpable.

Underwriters, auditors, lawyers, sponsors, fund managers, dealers, remisiers and research analysts were all guilty of foisting Chinese junk onto the investing public. And if we were to be brutally honest, the public itself also played some part by swallowing the China story, ignoring warnings that mainly second-grade companies would choose to list here, and by chasing China stocks to record highs between 2005 and 2008.

However, SGX must bear a fair amount of responsibility because, although there are many similarities between the Clob and S-chip fiascos, there is a significant difference: unlike S-chips, Malaysian stocks on Clob were only quoted and traded but were not listed here, so they did not have to satisfy local listing rules.

Investors therefore bought and sold Clob stocks at their own risk, fully aware of the fact that there was no official implicit or explicit endorsement of quality. Investors also knew that Clob could have been closed down at any time, so trading was really based on 'caveat emptor'.

S-chips, on the other hand, were actively courted by an exchange which (on its website) states that it adopts an 'intelligent regulatory approach' which is 'an attractive consideration for companies striving to be recognised on good corporate governance and transparency'. It adds: 'In fact, a listing on SGX today bears a quality mark that is recognised internationally.'

So as far as investors are concerned, even though 'caveat emptor' applies when it comes to S-chips as well, there was a subtle but significant endorsement of some quality when a listing here was granted to a China company - an endorsement that was reinforced when several (at least 20, by our reckoning) were granted approved status under the Central Provident Fund Investment Scheme (CPFIS).

So far, the exchange's response to the S-chip scandals has been to ask audit committees to step up their internal controls and for companies to amend their Articles of Association to allow appointment and removal of legal representatives in China. Directors have been encouraged to keep a close eye on cash balances and receivables, and to practise good governance.

Papering over the cracks because it's too little too late? Possibly, though you'd have to say that instead of 'cracks', 'yawning fissures' is more apt given the alarming frequency with which fresh S-chip irregularities are surfacing. It's a bit like bolting the barn door after the horses have long fled (back to obscure provinces in China, no doubt).

SGX's main problem when trying to salvage confidence in its S-chips boils down to this: if Clob, which was not endorsed by the local authorities in any way could leave such deep and ingrained scars when it collapsed, what of S-chips - which are listed under a regime that subtly advertises quality and has granted many constituents CPF approved status?

[Musicwhiz]

Jun 20, 2011
CAI JIN
S-chips can benefit from more checks and balances
Some of the upcoming rule changes will help protect shareholders
By Goh Eng Yeow, Senior Correspondent

THERE was once a time when buying any stock linked to China was a sure ticket to healthy gain, given the wealth of opportunities thrown up by the booming economy.

But now investors in the United States, like their jaded Singapore counterparts, are learning to their chagrin that putting their money in China-based counters may not turn out to be a bed of roses after all.

A string of China-based companies listed in the US have been accused of fraud, accounting irregularities and other corporate governance failings in recent months.

There are similarities - at least superficially - between S-chip scandals here and those that have erupted in the US.

The common trend seems to involve high-profile companies that initially produce an impeccable series of quarterly growth numbers and claim a huge cash hoard.

That usually keeps any nosy questions about its business model at bay, but the deception often falls apart when the company's external auditors take a more in-depth look at the books.

Their path to important venues such as banks to confirm the cash hoards is often blocked as well.

There has been a rash of lawsuits by angry investors in the US alleging that China-based firms had invented sham businesses and inflated revenues.

While they may get their day in court, it is unlikely they will ever see any of their money again. That is because the firms often use empty shell companies in tax havens such as Bermuda or the Cayman Islands to hold their assets.

In the past, some fund managers here have contemplated taking legal action in these jurisdictions to try to seize such firms' assets.

But the convoluted corporate structures devised by the companies to circumvent China's strict capital controls turn out to be just as effective in fobbing off a hostile seizure of assets.

Still, the spate of scandals has made some market regulators wise up, and preventive measures are being explored.

The Singapore Exchange (SGX), for example, is believed to be going for the jugular by looking at how to use the Chinese legal system to complement its own regulatory framework, in a bid to make sure such firms toe the line.

In many troubled S-chips, the financial calamities are triggered by bosses taking excessive business risks, rather than outright fraud.

But some fund managers were shocked to learn that many of the corporate checks and balances, which apply to Singaporean and US companies, do not exist in Chinese firms.

Under Chinese law, the company boss is often the 'legal representative', which gives him vast authority to execute agreements, transfer assets such as cash and land, and provide guarantees on the firm's behalf - all without any board oversight.

When problems arise, there is some confusion over whether he can be removed without his consent.

But two China-based lawyers pointed out in a letter to The Business Times recently: 'Chinese law and regulations provide clear avenues for recourse and enforcement of legal and contractual rights relating to the appointment and removal of legal representatives.'

The SGX wants S-chips to have the framework in place to remove existing legal representatives and appoint new ones if needed. Initial feedback suggests it has been largely successful in its efforts to get S-chips to comply.

As for the problem of getting bank confirmations of cash balances, market watchers believe it will be resolved when electronic confirmations catch on in China.

This will make it easier for auditors to confirm balances at head office rather than at branch level, where most irregularities surface.

Of course, it is difficult to eliminate fraud completely, if top management is implicated too. But sometimes, the mere implementation of simple checks and balances can go a long way in protecting a shareholder's interests, and this is what market regulators should aim for.

engyeow@sph.com.sg

[Musicwhiz]

Business Times - 01 Jul 2011

What if S-chips are forced into mandatory delistings?

By R SIVANITHY

IN the stock market it is retail investors who usually end up with the short end of the stick and nowhere is this more apparent than in the current cases of compulsory delistings involving Japan Land and General Magnetics.

In both instances, shareholders will receive nothing as both companies are being forcibly delisted by the Singapore Exchange (SGX) for failing to meet its continuing listing requirements. Not surprisingly, shareholders are unhappy with the way things have panned out - after lengthy delays that led to raised hopes, the end result is hugely disappointing.

Defenders of the status quo however, might argue that the problem is relatively well-contained - after all, two of 800 listed entities doesn't suggest a widespread problem that needs urgent fixing.

But what of the two dozen or so counters that are currently suspended, a number which includes around a dozen S-chips or China stocks?

What if all are eventually shown to be failed going concerns and cannot be restructured or saved in any way? If these companies are then delisted - and surely some will encounter this fate since they have been suspended for years - would their minorities, like those in Japan Land and Gen Mag, find themselves having to write off the entire value of their shareholdings because the authorities are unable to enforce the rules?

These questions are not new. Almost three years ago, we raised the likelihood that one day, the Singapore Exchange (SGX) would encounter problems when it tried to enforce a mandatory delisting rule it introduced in its transition measures for Catalist companies moving to the new sponsor-supervised model ('Compulsory Catalist delisting: who will protect minority rights?' BT, Hock Lock Siew, Sept 23, 2008).

Back then we wrote 'What is there to stop underperforming companies, whose shares have languished for years in the lower reaches of penny territory and suffer from poor liquidity, from sitting on their hands until the deadline...then when faced with SGX's threat of delisting, throwing up their hands in the air and replying 'Okay, go ahead - do your worst?' '

According to Rule 13 of the Listing Manual, if the exchange exercises its power to remove a firm from its Official List, 'a reasonable exit alternative, which should normally be in cash, should be offered'.

In other words, a forced, mandatory delisting is supposed to be conducted in the same manner as a voluntary delisting/privatisation.

In a voluntary delisting shareholders have two options. They either accept the offer and walk away with cash in the pocket in exchange for their shares, or reject the offer and the shares continue to trade. However, in a compulsory delisting, there is no such fallback; worse, as shareholders of Japan Land and Gen Mag have now found out, there might not even be any cash offer. Thus the option they have is really a no-option: lose all their investment and write this off as one of those 'buyer beware' lessons in stock market life.

Our conclusion back in 2008 was that before problems arose the authorities had to figure out how to enforce the rules, otherwise the day would come when minorities end up suffering unfairly. At the time, the S-chip segment was still relatively untainted by governance and accounting scandals, so the issue was raised with underperforming Catalist companies in mind.

Today, with 24 counters suspended, about half of which are S-chips - and many of which like Gen Mag and Japan Land, are from the mainboard and are approved stocks in the CPF Investment Scheme - the issue takes on vastly greater urgency.

If SGX is unable to enforce the 'reasonable offer' rule for Singapore incorporated companies with local management, then the prognosis for shareholders of China stocks can't be encouraging. This is therefore an area that requires full-on regulatory attention: how to enforce the listing rules when there is a compulsory delisting such that minorities are fairly treated?

[wsreader]

".....and many of which like Gen Mag and Japan Land, are from the mainboard and are approved stocks in the CPF Investment Scheme....."

Any investors had delisted shares bought under CPFIS? That means CPF money used to invest in a private company. Interesting to find out what CPFB says to that. Is it possible for corporate actions that leads to CPF member withdrawing his money out before his retirement?