Published September 11, 2009

S-chips should focus on fundamentals

By LYNETTE KHOO

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THE recent slew of delisting and dual-listing news among S-chips isn't a comforting sign, considering that interest in China companies listed in Singapore is just starting to show signs of a revival.

Perhaps the unease of being lumped together with tainted S-chips and the towering valuations of peers in the Chinese markets have prompted some S-chips to look elsewhere.

While it is early days yet to conclude if an exodus is underway, an S-chip contemplating a change of listing domicile should ask the hard question: Will a listing elsewhere guarantee a storming comeback?

A look at a handful of companies that had shifted their listing domiciles suggests that valuation success is not always assured. Even if valuation turns out better, it is not necessary because of the shift.

Let's take Taiwanese snack food maker Want Want Holdings, whose better performance on the Hong Kong bourse has often been widely cited. It made its exit from Singapore Exchange (SGX) in September 2007 and entered the Hong Kong stock exchange in March last year. Continued strong interest there leaves it with a price-earnings ratio of 28 today and the reputation of a market darling.

But, arguably, Want Want's poor valuation on SGX was due to shrinking earnings and profit margins. Its Hong Kong success was aided by its subsequent business reorganisation. The company underwent a major restructuring and disposed its non-core businesses to become a more focused and efficient company.

One S-chip, Tianjin Zhong Xin Pharmaceutical, has benefited from a dual listing on Shanghai's A-shares market in 2002, following an IPO on SGX in 1997. Though it was plagued by persistent weak earnings and even a law suit over share transfer agreements in China in 2003, the Singapore market seems to have priced in the bad news much more than in China. Defying reason, Tianjin's A-shares are still fetching a superb PE of 41.6 times today, dwarfing its PE on SGX of 9.4 times.

People's Food Holdings was less fortunate. Though it dual-listed in Hong Kong in late 2002, it didn't make a splash as investors were hardly interested in a stock that was still reporting sinking earnings. After its dual listing, more than 90 per cent of its gross trading volume still resided within Singapore. No funds were ever raised in Hong Kong. It eventually made its exit from Hong Kong in August 2006.

Given the mixed outcomes, one may argue that at the end of the day, it is still the business fundamentals and outlook that count when it comes to market valuation.

While S-chips have been the unfortunate recipients of poor market perception due to a few black sheep in their midst, there are also fundamental reasons for their lagging share prices. A closer look at some failures tells a similar story: an S-chip sits pretty on sterling profits at the point of listing, but over-expansion and a lack of financial discipline rear their ugly heads in later years. Plagued by sluggish earnings growth or going-concern risks, the stock eventually falls out of favour.

It is worth noting that troubled S-chips such as Fibrechem and China Sun had an institutional following and strong retail interest until accounting issues crept in. Of course, some simply failed the test of the financial crisis.

For some, it is a matter of fixing their internal problems to regain the trust of the market. For others, it is about drumming up their communication with investors and analysts.

The valuation gap for the broader S-chips sector will probably stay with us for a while. It has to be noted that S-chips such as Yangzijiang and Yanlord are trading on a par with some comparables in China, Korea and the US. Interestingly, the FTSE ST China Index comprising S-chips has edged up to 19.8 times PE, narrowing the gap with Hang Seng China Enterprises Index, which is trading at 20.4 times PE.

Hopefully, S-chips will return to the high PEs that they once enjoyed. In the meantime, S-chips would do well to review, restructure and streamline their operations.