Analysts see high double-digit year- on-year decline in earnings for S-chips
By LYNETTE KHOO
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IT'S not just accounting issues and forced sales of pledged shares that are affecting sentiment towards China-based companies listed in Singapore - fundamentals too appear to play a part in the gloom facing many of these so-called S-chips.
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| Falling gains: Half of the profitable S-chips, including soya bean-based products maker Pine Agritech, saw lower earnings for the year ended Dec31, 2008 |
Analysts say they are expecting high double-digit year-on-year decline in earnings for the S-chips universe amid waning demand and pricing power, and the muted impact from China's stimulus package in the near term.
The combined net profits of the 109 S-chip companies that announced their results for the year ended Dec 31, 2008 have fallen 40.2 per cent from a year ago to $2.1 billion.
Half of the profitable S-chips saw lower earnings. They included chemical fibre companies China Sky Chemical Fibre and Sino Techfibre, as well as consumer plays such as Synear and Pine Agritech.
Of the loss-making firms, about 77 per cent were profitable a year ago.
For the fourth quarter ended Dec 31, 2008, 90 S-chips reported combined net losses of $323.6 million, compared with net profits of $1.03 billion a year ago.
If this report card looks dismal, the 2009 report card could be more unsightly. Westcomb Securities analyst Wong Say Tian noted that many S-chips will be pitting their earnings this year against a high base last year backed by Olympics-driven demand.
For many S-chips, asset impairments on receivables and inventories have risen, and they have painted a challenging outlook for this year, he said.
DMG & Partners Securities analyst Heng Tong Jin said he is expecting the overall earnings per share of the S-chips cluster to drop more than 50 per cent year on year.
'The outlook remains bleak,' he said, especially for S-chips that are export-oriented.
Notwithstanding China's stimulus package of four trillion yuan (S$893 billion), few S-chips will be direct beneficiaries, analysts reckon. Rail carriage maker Midas Holdings has been widely cited as an exception but the benefits will take some time to trickle down, analysts say.
Recently, accounting integrity issues have taken on greater gravity after auditors at FibreChem could not finalise trade receivables and cash balances.
The flurry of queries from the Singapore Exchange (SGX) on rising impairment losses, trade receivables, debt obligations, among other balance sheet issues in companies' financials statements, was notable.
Almost half of the queries to 44 listed companies on their full-year results went to S-chips though they accounted for less than a quarter of the total number of companies that have reported full-year results ended Dec 31, 2008.
Kim Eng analyst James Koh noted that bearish market conditions have shifted investors' focus back to issues of corporate governance and balance-sheet strength.
'The overall poor sentiment on S-chips now makes them a tough valuation call,' Mr Koh said. 'Traditional matrixes like price-to-earnings (PE) and price-to-book may not make much sense, given that most S-chips are trading in low single-digit PE and below book value.'
Mr Heng of DMG said that the fact that many S-chips are trading below net cash suggests two possibilities: investors expect the net cash to fall because of earnings decline or losses, a mismanagement of cash in poor decisions; or they question the authenticity of the cash. However, to doubt the reported cash balances at all S-chips would be over-scepticism, he said.
Despite the weak outlook, Mr Heng encourages investors who are seeking for gains several times their investments in the long haul to look at opportunities to buy in on the cheap as S-chips could 'return with a vengeance' when the recovery eventually comes.
Given China's economic prowess, it is unlikely that any investor looking for growth can exclude S-chips completely from their portfolio, added Mr Koh.
To investors who want to stay invested in S-chips, Mr Koh said: 'Companies which can stay resilient and weather this downturn may turn out to be major players after this. Consider carefully who these companies are likely to be.'
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