Published August 21, 2009

Worst seems to be over for S-chips, analysts say

Biggest concern now is when Beijing will tighten its monetary policy

By LYNETTE KHOO
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IT WAS an uphill battle against declining demand for many Singapore Exchange-listed Chinese companies, or S-chips, in the second quarter, but the good news is that the only way to go from the valley now is up.

'The bright spot is that we have probably hit the bottom,' said Kim Eng analyst James Koh, citing lower inventory build-up and fewer problems on receivables cropping up.

Roger Tan, vice-president of SIAS Research, noted that the earnings performance of S-chips in the last quarter was mixed. While the reporting season saw positive surprises from property groups Yanlord and CentraLand, it also presented poor report cards on shipbuilders Cosco Corp and JES International.

Yangzijiang posted the highest profits of $128.76 million, a 79.6 per cent surge from a year ago, thanks to stronger revenue from building larger vessels in the second quarter.

Higher selling prices for Yanlord Land Group's residential projects enabled the group to post a 36.2 per cent year-on-year rise in net profit to $91.6 million for the three months ended June 30. CentraLand posted an 18-fold jump in net profit to $417,000 on the back of a 178 per cent surge in revenue to $4.35 million from a year ago when it did not register any property sales.

Some domestic players put up a mixed showing. China Dairy's Q2 net profit jumped ninefold from a year ago to $2.27 million but China Farm's net profit fell 60.3 per cent to $3.12 million on waning sales.

The 14 S-chips that swung from profits a year ago into losses last quarter included food manufacturers Celestial Nutrifoods, United Food and Pine Agritech, as well as chemical fibre firms Sino Techfibre and China Sky Chemical Fibre.

Sports apparel players were dealt a blow from the post-Olympic slump. China Hongxing's Q2 net profit slipped 60 per cent to $10 million on weaker sales while China Sport's 38 per cent fall in Q2 net profit to $7.68 million was dragged by higher marketing expenses.

Fibrechem and Sino-Environment have yet to announce their first and second-quarter results as their auditors could not finalise the review of their cash.

For the third quarter, Mr Tan of SIAS expects the Chinese property firms to fare well and enjoy a 5-10 per cent earnings growth. Local consumer plays could also see another 5 per cent gain in earnings while export-driven firms may see flat growth, he said.

'The worst is over, but the biggest concern now is when the Chinese government is going to tighten its monetary policy,' he added. A bursting of the asset bubble may put the brakes on growth in the property sector but analysts noted that Beijing would be careful not to do so.

Mr Koh of Kim Eng said that any tightening would likely be selectively applied to areas of undue speculation such as the stock market or property market.

'China is still very much committed to its GDP (gross domestic product) growth target and tightening credit in productive areas would be a counter-intuitive measure,' he said. 'From what we understand, banks there are still very happy to lend to industries or companies engaged in areas such as infrastructure and water.'

Since this year, the combined market cap of S-chips has risen by over 40 per cent to $34.5 billion as at Aug 18. There is room for more upside, analysts said.

'For the next six to 12 months, we are seeing a potential for 15-20 per cent upside in S-chips,' Mr Tan said. But he noted that corporate governance concerns among S-chips have not fully blown over yet.

This is 'a shake-up period where the good S-chips are differentiated from the rest', he said. 'But we need to give good Chinese companies a fair valuation to keep them in Singapore.'