S-chips make a comeback in Singapore

[Musicwhiz]

Hi MW, I meant the listing status.

Would it be too far-fetch to assume that trading suspension would be lifted? Their actions thus far after the suspension seemed to indicate a willingness to resolve the issue, with the exception of a director who resigned.

Oh that's what you meant. Hmm, well I think I am in no position to comment on that as the auditors are probably still doing their (additional) due diligence and investigative procedures.

I think we should all wait for more announcements on SGXNet to see how things pan out.

(Not vested)

[Musicwhiz]

S-chips racing against time to meet May 31 deadline
by Lois Calderon

04:47 AM Apr 18, 2011

SINGAPORE - Listed companies with operations in China are racing against time to put in place strict new measures that could give them more control over their mainland-based legal representative or top executives.

These so-called S-chips, or Chinese companies listed on the Singapore Exchange (SGX), might be able to comply with the May 31 deadline, according to industry observers. But other issues might haunt them and force the SGX to put more teeth to existing regulations.

Recent accounting and management scandals that hound Chinese companies listed here have led the SGX to require the firms to clearly lay down rules on hiring and firing their top management, including CEOs and company founders, who might have unlimited legal authority to enter into contracts and manage the company's finances.

There are 155 China companies listed on the SGX and high-profile cases involving accounting controversies include names like Sino-Environment Technology Group, Oriental Century, Falmac and CDW Holding.

"We often find that the legal representative from China is not doing the right thing. When we need to replace them, we find difficulties because the articles of association did not provide for that," said Mr Lim Lee Meng, tax expert at accounting firm RSM Chio Lim.

Experts said most S-chip firms will be able to meet the May 31 deadline set by the SGX to revise their articles of association. They are also given leeway to explain if they fail to do so.

But while the new measures look good on paper, their implementation might hit a snag.

"If you don't have the cooperation of the legal rep, then you might not be able to go through the whole procedure and then to effect the removal of the legal rep because you can foresee that the legal rep will not give full cooperation in helping you to remove himself," said Mr Lin Song, co-head of international China practice group at law firm KhattarWong.

The lawyer was referring to the paperwork involved in effecting the removal of the Chinese-backed legal representative. Company transactions become binding only when they bear the firm's corporate seal and the power to affix this seal is vested only in the legal representative.

"The issue is more on the execution level even though you might have in the articles of association all these provisions when you really need to remove the legal rep … you may face difficulty," Mr Lin said.

"For example, the listed company might be required to present the local authority a stamp registration form and other documents which might require the legal rep to sign," he added.

Mr Robson Lee, partner at Shook Lin & Bok LLP, echoed the same sentiment that the SGX ruling might not be enough to clip the wings of Chinese-backed executives.

Mr Lee, who also sits as a director for S-chip firm Youcan Food International, said there are practical enforcement difficulties to ensure compliance by the executive management that are based in China.

"It would be better to put in place the necessary legal provisions in the articles of association to give the board of the listed company the legal right to intervene when things go wrong," he said.

[Jacmar]

For those brave souls out there who is still invested in S-chips, pls read this. I copied it from NRA website of a SCMP article. You need to really ask whether you can trust the numbers if you are investing base on fundamentals.


Welcome to the IPO kitchen - where the deals are cooked up

MONEY MATTERS
Shirley Yam
May 07, 2011

The company's investors include two international private equity funds and dozens of "long funds". A leading investment bank was one of its sponsors. Its auditor is a Big Four accounting firm and its bonds are rated by Moody's.
Yet this week China Forestry told the market that almost everything of significance at the company had been falsified by its former management - its logging permits, its management accounts and its bank statements.


"The Board has reason to believe that the financial statements in previous years might not reflect the true and fair view of the Company's financial performance and position," said China Forestry, which was listed in late 2009.

China Forestry said it had managed to verify most of its forest ownership and cash deposits. But its auditor KPMG said with most accounting staff and papers missing, they could not form an opinion about management's assessment of its ability to continue as a going concern.

How could the big names get it so wrong?

Welcome to the IPO kitchen where the deals are cooked up. Everyone gets paid for delivering a dish, even if they don't taste it. And nobody is punished for sending out rotten food.

China Forestry had two of the best ingredients to make any scam - China plus forests. Both are opaque to outsiders and yet are very inviting.

The mainland did not open its forestry business to private investment until 2003. There are few rules and regulations. Approvals are made by local officials, who are more interested in making money than keeping records.

Even though China Forestry's management had limited logging experience, Carlyle Group chipped in HK$312 million in late 2007 and 2008. Five months before the listing, Carlyle put in another HK$116 million, bringing its stake to more than 11 per cent. Switzerland's Partner Group invested HK$233 million to get more than 5 per cent.

According to the company's announcement this week, China Forestry's former chief executive - who is now under arrest - as well as its heads of forestry, finance, sales and human resources were all "behind the irregularities".

With the money from private equity funds, China Forestry bought more forest. By aggressively revaluing its forest land, it was able to generate sufficient fair-value gains to cover its operating losses, giving the company a three-year profit record. The company headed for listing.

KPMG was brought in to do the audit.

"A significant part of its profit is valuation gain and an auditor will largely rely on a valuer's report unless he or she sees reason to doubt the latter," said a retired auditor.

Greater China Appraisal was the valuer. It said in the prospectus: "We have been provided with copies of title documents of the properties owned by the group. However, due to the current registration system of the PRC, no investigation has been made for the legal title or any liabilities attached to the properties. We have relied upon the legal opinion given by the Commerce and Finance Law Office [a mainland law firm]."

New Zealand-based Chandler Fraser Keating did the report on the quality of the company's forests. In the prospectus, it said: "We have relied on the accuracy, completeness of the forest inventory, operation costs and other data supplied by the group ... We have not been able to independently verify the forest description."

There were limited visual inspections of the forests but no aerial inspections because Yunnan, where the company's forests are concentrated, is the site of a major army base.

The sponsor is supposed to be the ultimate gatekeeper of these experts' work. In this case, it was Standard Chartered, Cazenove and UBS. Yet sponsors get paid only when a deal goes forward. In fact, they profit from future fund-raising by the company and its management.

The initial public offering application reached the regulators. Under Hong Kong's disclosure-based regulatory regime, their job is not to say whether a company is legitimate or a scam but to vet the prospectus, look for suspicious numbers, raise questions and ensure answers are provided in detail. In fact, the limitations of China Forestry's valuations and business model were disclosed in the prospectus.

But who reads these massive documents? Listings are now covered by capital markets journalists who spend most of their time chasing information about the deal's pricing and investors' response instead of reading the prospectus.

China Forestry's initial trading was far from impressive. But that changed within weeks. Its name began to appear on the stock commentary pages of almost every major Chinese newspaper.

"Trading at an 11.5 price-to-earning ratio, China Forestry has much upside" said one. "Favourable government policy is putting gold on the face of this industry." Soon its share price traded up from below HK$2 to HK$3.50.

The price took a hit in April 2010 when the company announced a 90 per cent fall in profit due to a drop in its forest valuation. UBS immediately issued a buy report, raising its target price from HK$3.76 to HK$4.85 after "factoring in the 120,000 hectare forest addition in Yunnan?.

The market always needs more stories to dream about. In June, China Forestry announced an agreement with a central state-owned enterprise to supply logs, prompting China Construction Bank (SEHK: 0939, announcements, news) International to raise its target price to HK$4.70.

More non-binding memorandums of understanding for forest purchases were signed with county authorities in the southwest. China Forestry's stock price rose with the positive news.

In between, dozens of institutional investors jumped on the bandwagon, holding about 10 per cent of China Forestry. Among them was the Capital Group fund manager.

The real push in stock price came in early November when it got its credit rating. Moody's assigned a Ba3 corporate family rating, while Standard & Poor's gave it B+. Noting a high execution risk, Moody's said: "We expect China Forestry's profitability to remain good over the next two years."

China Forestry's share price reached a record high of HK$4.18. It did not matter that the rating agencies gave favourable ratings to subprime loans; or that investment banks paid them to assign ratings; or that they simply conducted management interviews and ticked off items on their checklists instead of independently verifying the company's claims.

What is important is that the rating made possible the company's sale of US$300 million in senior notes, providing more money for forest acquisitions. The notes were brokered by UBS and Standard Chartered.

Each party was having a good time until January 13 when the company's CEO, Li Hunchun, sold HK$400 million worth of shares, in a deal brokered by Standard Chartered, triggering an insider-trading investigation by the Securities and Futures Commission.

shirley.yam@scmp.com

[karlmarx]

what an excellent story. it reminds me of the CDO saga 3 years ago. financial institutions never change and investors never learn.

this should be published in the local (business) broadsheet to give these deal makers a run for their money.

[Nick]

We have our very own 'Confession of a S Chip CEO' story to remind people of the dangers involved in S Chips investment.

(Vested in China Minzhong)

[Musicwhiz]

what an excellent story. it reminds me of the CDO saga 3 years ago. financial institutions never change and investors never learn.

this should be published in the local (business) broadsheet to give these deal makers a run for their money.

Everybody loves a "sexy" story.

The problem is that the route to making decent money in the stock market is boring and unsexy, which is why it is neither mentioned by brokers/bankers nor promoted by pundits and analysts.

Of course, if you were the CEO or CFO of a soon to be listed IPO, and had the chance of a lifetime to make obscene amounts of money, the temptation to falsify records also increases exponentially!

[iisterry]

This is really where regulations come to play. I think we are one of the most lax capital markets in the world.

Scrutiny should really be on the persistent market makers who brings in questionable offerings. If we cannot exercise prevention logically, the least we can do is to make they exercise abstinence for fear of reprisals.

I only seem to recall an incident in recent years of [/code]someone from the BoD of a certain company being charged for signing off on some statements while possessing knowledge of the fact that it is untrue.

[Jared Seah]

To put things in perspective. Please read:

http://www.cnbc.com/id/43043254/

When we have eager investors ready to buy-in to the China growth story, there will be supply.

If not here in SGX, then other exchanges. But like high prices for crude, demand destruction will come sooner or later. Then the Chinese authorities will "clean-house" if the demand destruction will affect their own state-owned enterprise listings.

Until then, it's let the good times roll! Just don't be the one left holding the baby

[Musicwhiz]

Business Times - 18 May 2011

Q1 separates S-chip men from the boys

Some shone brightly in tough quarter while others saw their bottom lines hit by rising costs

By LYNETTE KHOO

(SINGAPORE) The financial report cards of S-chips or Chinese companies listed on Singapore Exchange point to mixed fortunes.

While rising costs weighed on the bottom lines of some Chinese firms, others thrived on stronger domestic demand and were quick to raise margins by shifting towards higher-end products.

Of the 89 S-chips that announced their financial results for the first quarter ended March 31, almost half - 41 of them - showed higher profits while 29 posted lower profits. Five companies narrowed their losses and another five firms posted wider losses.

Six S-chips swung from profit a year ago to a quarterly loss while three returned to profitability from a quarterly loss a year ago.

Analysts are circumspect on whether the improved earnings outlook will translate to stock re-rating, as recent accounting scandals at a few S-chips again rocked investor confidence in the S-chip cluster, while the broader market is still dampened by macroeconomic uncertainties.

'The expansion or contraction in valuation multiples would depend on sentiments,' said DMG & Partners Securities analyst Tan Han Meng. 'Based on our estimates from a sample of about 100 S-chips, the cluster currently trades at historical average of 11 times price-to-earnings. In terms of price-to-book, the cluster is at 1.2 times.'

Top S-chip earner Yangzijiang Shipbuilding chalked up a record gain in net profit for the first quarter - a 63 per cent increase to 954.9 million yuan (S$183.4 million) on the back of fat margins from pre-crisis ship orders, large gains from its micro-financing subsidiary and foreign exchange gains.

Another major Chinese shipbuilder, Cosco Corp, reported a 17 per cent rise in net profit to $37.1 million as growth in the shipbuilding and marine engineering offset the lower revenue from ship conversion projects, ship repairs and dry bulk shipping activities.

Some S-chips in the property sector also rang in a strong first quarter despite Beijing's efforts to cool the real estate market.

China Merchants Property Development Co Ltd, the residential flagship of China Merchants and primarily listed in Shenzhen, posted a 45.9 per cent jump in net profit to 561.6 million yuan for the first quarter ended March 31.

High-end residential developer Yanlord Group's net profit surged 197 per cent to 267.9 million yuan from 90.3 million yuan a year ago as it delivered higher gross floor area to customers.

Alan Lok, director of independent buy-side research firm Sabio Global, noted that while S-chips with larger market caps are marking strong returns, 'some small counters are slowly withering away'.

Those in the manufacturing sector producing basic goods are particularly vulnerable to rising inflationary costs and renminbi as they are unable to pass the incremental costs directly to customers, Mr Lok said.

People's Food Holdings, for one, dealt a 38.2 per cent slump in net profit to 82.8 million yuan for the first quarter ended March 31, as higher operating costs outpaced the growth in sales.

'Inflation in the PRC remains a concern for the group,' the meat producer said in its financial report. 'Therefore, the group's cost structure will continue to be affected. However, for meat products, being basic food items, the group's ability to increase selling prices is limited.'

Rising raw materials and labour costs also pared down margins at downstream food processor Synear Holdings, whose net profit fell 37 per cent to 31.5 million yuan, despite a 2.8 per cent rise in revenue to 545.8 million yuan.

But Sino Grandness, which produces and distributes bottled juices, canned fruits and vegetables, managed to fend off the challenge by shifting its product mix and securing more orders. This lifted its net profit by nearly five-fold from 6.6 million yuan a year ago to 31.3 million yuan in the first quarter.

In the textile industry, downstream fabric processors such as Foreland Fabrictech and China Fibretech reported stronger sales and managed to garner higher gross margins through higher-grade fabric products.

But upstream textile players were hit by higher raw material costs and depressed margins. Li Heng, a nylon yarn producer, was also hit by China's anti-dumping levies on imported polyamide chips, a key raw material that it does not fully produce in-house. This translated to a 45.6 decline in net profit to 32.4 million yuan.

Analysts foresee further margin pressures for the rest of the year, as more hikes in reserve requirement ratios and interest rate, and a faster appreciation of the yuan are widely expected.

Issues facing some S-chips were also reflected at the recent Canton Fair, China's largest trade fair held in Guangzhou last month, Mr Tan said. While there was a 5 to 20 per cent increase in average selling prices, the orders may not translate to higher profits as raw material prices had risen by 20 to 50 per cent.

Given concerns over rising raw material costs and yuan, the trade fair participants preferred to commit to short-term contracts rather than single large orders. Some sellers were also asking for payments to be settled in a pre-arranged forex range or looking to hedge their exposure with forwards contracts.

'Margin pressure from higher costs and stronger renminbi will remain one of the key concerns for investors, and second-quarter results could provide better clarity,' Mr Tan said.

[Musicwhiz]

May 22, 2011
small change
Accounting scams past and present
S-chip scandals just the latest to plague markets
By Goh Eng Yeow, Senior Correspondent

Recently, a short wire story out of Tokyo caught my eye.

It reported that brash young Internet tycoon Takafumi Horie would be going to jail after losing his final appeal against a conviction for an accounting fraud committed more than five years ago.

For me, the news brought back a flood of memories of similar frauds that had rocked the local stock market at around the same time Horie was arrested.

Even the broad outlines of the accounting scandal involving him and the then big corporate scandals that had erupted here - waste recycler Citiraya Industries and phone repairer Accord Customer Care Solutions (ACCS) - were similar.

All three scams involved young businessmen who had been feted like rock stars. But they were also hounded by sky-high expectations in terms of business and profit, which turned out to be out of touch with reality. Inevitably, the house of cards collapsed, leaving investors to lick their wounds in the fallout.

Just a few words to jolt the memory: ACCS was run by Victor Tan, who was made out to be Singapore's corporate poster boy after taking his company public at the age of 31. Citiraya's young boss Ng Teck Lee was celebrated by the Wall Street Journal Asia as a rags-to-riches story for building a recycling business from scratch after dropping out of secondary school.

On the day ACCS was going to make its year-end results announcement five years ago, the Commercial Affairs Department raided its office.

At Citiraya, Ng was overseas on a business trip when the scam was uncovered. He never came back, and his bungalow in Paya Lebar showed signs of a hasty departure. Half-burnt joss sticks and Chinese New Year decorations adorning the house were not taken down for months after that.

The script for the two scandals roughly had the same ending as well. Justice was meted out to Tan, and while Ng was never caught, his accomplices were given long jail sentences. It provided some closure for the aggrieved investors who lost money to the scams.

However, there was no similar closure for the other spate of accounting scandals that rocked the local stock market in recent years. They involved China-based companies - or S-chips as they are known here - which had made their way in large numbers to Singapore in recent years.

Again, the scripts were broadly similar in outline. In most cases, the auditors experienced difficulties locating part of the huge cash hoard, which the companies claimed to have, when they went to inspect the books in China.

Analysts even coined a term for it - the Satyam Syndrome - after the accounting scandal that involved Indian software company Satyam Computer Services whose founder had confessed that he inflated its earnings and invented a huge cash pile in order to give the impression of fast growth.

But keeping track of the latest accounting scams involving S-chips has not been as easy.

Getting information on Citiraya and ACCS had been relatively simple because they were located here and most of their business was conducted out of Singapore. Reporters could get information from many sources like suppliers, customers and business rivals.

For S-chips, however, we have to rely on the companies' disclosures for the bulk of our information, as well as the occasional reports issued by research analysts who had visited them in China.

Often, the flow of information dries up completely when irregularities are uncovered and trading of the company's shares is suspended subsequently. It is also very difficult to verify the authenticity of the information furnished by the affected S-chips.

Even after huge sums have been spent hiring special auditors to get to the bottom of the matter, investors are often left no wiser as to what really happened.

Take China Sun Bio-chem. Back in 2009, the company called in accounting company KPMG to do a review of its accounts, after its then auditors PricewaterhouseCoopers raised concerns over its cash balance.

However, before the KPMG team could get down to work, it was told that the truck transporting the company's accounting records had been stolen while the driver was having dinner.

More recently, investors at Sino Techfibre were caught in a similar bind. Just as they were supposed to be getting their annual report last month, they were suddenly told that the company could not finalise its accounts because discrepancies had been uncovered in its sales invoices.

To rub salt into fresh wounds, Sino Techfibre then issued a statement a few days later to say that a fire had broken out at its factory's premises in Shandong province, destroying the company's books and financial records.

So far, there is very little an investor can do to get redress. As the scams occurred in China, we have to rely on the law enforcement agencies there to take action against the wrongdoers.

Stock market regulators outside China are powerless to do anything, even though the scam may involve a Chinese company that is listed on the stock exchange they oversee.

Even the powerful Securities and Exchange Commission (SEC) in the US reportedly said that it was facing problems.

One of its commissioners, Mr Luis Aguilar, was recently quoted by wire agency Bloomberg as saying that the SEC is limited in its ability to enforce securities laws on fraud committed at China-based companies listed in the United States.

He made the statement following a probe conducted by the SEC last year that arose from concerns that some China-based companies listed on US stock exchanges were doctoring their financial accounts.

But I am hopeful that this sorry state of affairs will not continue.

As China advances to economic superpower status, it will not want any corporate misbehaviour by its overseas-listed Chinese companies to besmirch its good name internationally.

It will also be in China's interests to make sure that the corporate governance concerns dogging these companies are being tackled vigorously.

engyeow@sph.com.sg