Friday, October 17, 2014

My thoughts on S-chips

There is plenty of negative sentiments surrounding s-chips and I would say it is not without justifiable reasons. There are plenty of fraud cases, and I have my fair share of hits and misses. The thing is, for me, those that I was vested before, at least they're still around, and some did well. What I am sharing is just my personal opinion.

Different types of S-chips:

S-chips are defined by companies with all of its business or most of it business in China. There is a tighter definition, S -chip are companies with most of its business in China and owned by Chinese National. It is argued that if it is run/ owned by Singaporean, it is less probable fraud case, since the owner will be less able to get away with things. Straco, valuetronics are examples of non- chinese Nationals at the Helm. (HKers not counted) However, not all s-chips are equal, at least in terms valuation by Mr market. 

1) Those with SOE parentage or connection. While it is no guarantee for success, it is less likely an outright fraud too, as the Chinese like "face" CAO is not fraud but mismanaged its trading business. The parent company step in and roped in Strategic partners to restructure the company. 

Other examples include China Merchant Pacific Holdings, and to a certain extent SIIC, which counts china sovereign funds its biggest shareholder. But do note that parentage while providing some assurance is not formula for success, just like at Cosco.

2) Those that give regular dividends that is significant to earnings. Real cash flow to shareholders is important. The key word here is regular. YZJ, Yanlord and China Sunshine are good examples. It is even more assuring if the dividends pay out over the years exceed the fund raise from IPO or already is a high percentage of fund raise. Again YZJ and CMHP come to mind. Eratat will fulfill the criteria of constant dividend payout but they raise money from the market rather frequently. Gaoxian pay special dividends due to its success of it dual listing. But that should not provide too much comfort.

3) Those that attract strategic investors.
Funds do not count. We are talking about competitors or operators of the industry buying a significant stake in the Company. Examples include China Minzhong and Sino-Food Grandness 

4) The rest... ...
The rest are trading at ridiciously low valuation as compared to their assets or earnings. But you have to seriously ask yourself if they do not fulfilled one or more the criteria above, is it worth it?

I know it is a stretch to call the rest all frauds or potential losers. But if u Still insist on investing in "the rest" category of S-chips, please learn to identify red flags such as receivables, discrepancies etc. and be ready to lose everything on that investment. The risk reward profile might still be worth it, but the risk is total loss, and you must have that in your mind when you invest, if there is too much for you. Walk away. 

Another way to get some reassurance is the profile of customers. If it has big name customers which are also listed, it is easy to verify its numbers. Maybe not totally, but obvious fraud will be easier to detect. YZJ has big names customers, straco Acquarium in Shanghai is for all to visit. Oops, they are already not in the "the rest" category. Yes, see what I mean, Mr Market might be temperamental, but he is not stupid. 

The third way, baidu the subsidaries and the city/ province it operates in. Search top tax contributors in Jiangsu, for example. Chinese tax bureaus like to rank the top tax contributors, and they put then in various tax bands. Counter check those with the numbers of income tax paid of the company AR. I did that and found discrepancies is Eratat numbers and tried to warn forummers to no avail. I did that for YZJ and sleep better knowing that it is the top 50 tax contributors in Jiangsu for 2012 and 2011. In fact, the ranking improved. Once is enough, I didn't bother to check further years. You can read Valuebuddies or Nextinsight forum for my post. Search Eratat.

Lastly, try not to be iron teeth. Try not to find excuses or reasons for management.  If multiple red flags are flashing, run. No dividends, super low cash level at company level, in a industry where many peers has fumbled? E-g. Textile industry from Fujian. Remember, when you find crockcoach in a closet, it is usually infested with it, with more than just 1 skeleton. ( sound disgusting? Halloween effect ) LOL.

Cheers,
Silly Investor

6 comments:

  1. Very good insight....didn't know we are able to check the s- chips tax contribution in their home country. Thanks for the sharing.

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  2. You are welcome David, glad you like it.

    You are looking at s-chips?

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  3. Worse, they lay eggs!

    On a more serious note, dividends give a sense that the cash is real, provided they are actually not collecting more from you in the first place (rights issue)!

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  4. Lizardo,

    That's why when I look at s-chip, I want to make sure the yield is significant for me make reasonable gain assume no capital appreciation.

    For me to invest in one, I need the company to be in more than 1 category. Dividends is a must, plus one more condition fulfilled

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  5. My personal experience is try to avoid S chips. Its not worth it to take the risk just for a slightly better return or yield which may see your invested capital vanishes overnight. Stay safe. Unless SGX can have a better set of rules to hold these companies accountable, S chips are not worth the trouble at all.

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    Replies
    1. I believe in the S-chips universal, there are some that are different.

      I know of many who will give it a total miss, even some very "Lao jiao" and successful investors.

      I will not disagree with your statement. S-chips is definitely not for the masses.

      Can anyone do well in Singapore without S-chips. I think so.

      But I was vested in YzJ and it has been rewarding, and j am thinking of increasing exposure to CMPH ...

      But to each his own.

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