Published April 3, 2009

Low rankings for troubled S-chips

By LYNETTE KHOO

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TROUBLED Chinese companies have found themselves among the lowest ranked in the Governance & Transparency Index (GTI) released yesterday.

But while doubts continue over the quality of governance among S-chips (Chinese companies listed in Singapore) following the emergence of some S-chip scandals, the GTI suggests that the sector is a mixed bag in terms of the quality of corporate governance.

The best-ranked S-chip is Pan Hong Property Group in 46th place with a score of 47 points. Epure International is in 53rd position with a score of 46 points, out of a total of 677 listed companies.

This is followed by Midas Holdings in 61st position with a score of 45 points against a full score of 100 points. Hi-P International is next in line with a score of 44 points in 70th position.

On the other hand, Guangzhao Industrial Forest Biotechnology Group, Oriental Century, Ocean International, FerroChina, and China Printing & Dyeing are among the 13 S-chips in the bottom 30 companies, after they saw points deducted over questionable issues.

Guangzhao IFB - which is ranked 671, the last among S-chips - had 32 points deducted from 39 points. The group had defaulted on its convertible bonds, after a change in controlling shareholding triggered early redemptions of its convertible bonds.

Ocean International is also haunted by the same problem with convertible bonds, while FerroChina has become insolvent and China Printing has gone into judicial management with two missing ex-honchos after its parent firm went broke. Oriental Century is a case of the chief executive confessing to cooking the books for years.

Some market watchers took issue with the near absence of S-chips among the top 50, except for Pan Hong Property.

Roger Tan, vice-president of SIAS Research, felt that the fact that there are a handful of Chinese companies in the bottom 50 of the list should give reason for investors to be vigilant when investing in Chinese companies.

Bigger S-chips like Cos- co Corp and China Aviation Oil scored better than the smaller S-chips on the GTI, with Cosco in 266th position and China Aviation Oil in 330th, but both have 12-15 penalty points deducted. China Hongxing Sports, a major sports brand in China, is ranked 166th with a 39-point net score after 8 points were deducted.

'Clearly, some companies need to be more transparent,' said an S-chip analyst. 'More needs to be done in terms of disclosure but, obviously, the problem is there doesn't seem to be anyone who can force company management to be more open if the company refuses to talk.'

SIAS Research's Mr Tan said that, to be fair, many S-chips fall into the middle ranks of the GTI. 'This, to me, suggests that the average level of corporate governance of Chinese companies compared to non-Chinese ones is about the same,' he said.

'Interestingly, there are quite a few China companies with positive adjustments,' he added. 'This suggests that they are trying to improve their governance and transparency.'

Published April 3, 2009

Call for vigilance against 'creative accounting'

Accounting experts warn of more fraud cases creeping in during bad times

By LYNETTE KHOO

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ACCOUNTING experts have warned once again of the need for more vigilance against financial fraud, saying that if 2008 was bad, this year could be much worse.

Auditors and audit committees were told, at a forum yesterday, that the key challenge facing them now comes from the higher tendency of creative accounting - the manipulation of numbers - rearing its ugly head.

Amid the continuing economic and market turmoil, more companies may resort to manipulating their financial statements to meet certain targets or to avoid any breach of loan covenants.

'When the economy is coming down, it is difficult for companies to generate enough profitability and cashflow will be negatively affected. Then it is very difficult for them to convince banks to finance them continuously,' said Ernest Kan, vice-president of the Institute of Certified Public Accountants (ICPAS).

This would result in a 'motivation to manipulate the numbers'.

The forum was jointly organised by ICPAS and the Accounting and Corporate Regulatory Authority (Acra).

KPMG LLP audit partner Philip Lee noted that it is certainly not business as usual for auditors this year.

Key areas of audit considerations now include highly judgemental issues of going concern, fair value accounting in a volatile market, heightened risk of fraud and mis-statements, and qualifying of audit opinion.

He reminded the audience - comprising auditors, accountants and audit committee members - of the need to do further due diligence when in doubt.

This may involve visiting the client's major customer to ascertain the collectibility of receivables and cross-checking information with various sources. 'We work a lot harder in times of crisis,' he quipped.

Commenting on the recent cases of fraud, Acra's deputy chief executive of operations and policy Ow Fook Chuen told BT at the sidelines of the forum that Acra will not resort to knee-jerk reaction by finger-pointing of sorts.

'In most of the recent cases, we see that the auditors are the ones who are highlighting it,' Mr Ow said.

'Acra will not hesitate to take appropriate enforcement actions where necessary.

'However, we have to make sure that we do not react in a knee-jerk manner and start a 'witch' hunt.'

On the confidential submission by KPMG to the finance minister on NEL Group that flagged potential dishonesty and fraud in the group, Mr Ow said the regulators are monitoring the developments.

He noted that strong corporate governance requires the collective efforts of all parties charged with governance, not just auditors alone. At the panel discussion, Mr Ow urged auditors to communicate more with the board and audit committee.

While it is natural that some companies may go under in bad times, what the regulators are concerned is the 'systemic destruction of trust and the whole corporate governance regime' making it difficult for investors to differentiate a good company from a bad one as 'everyone is painted with the same concerns and scepticism'.

Mr Ow cited a company that resorted to brandishing its bank statement in recent analyst briefings given doubts over whether its cash is real. The company is not named but it is understood to be China Hongxing.

'Our practice going forward in the next few months is to extend our communication to the other stakeholders to facilitate the bridge between the auditors and the other parties that are charged with the responsibility in corporate governance,' Mr Ow said.

Published April 3, 2009

STI skyrockets 6% on recovery hopes

US data, G-20 optimism help fuel powerful Asian rally

By R SIVANITHY

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(SINGAPORE) An improvement in US economic numbers ignited hopes yesterday that a recovery could be taking shape and sent the Straits Times Index up 101.08 points, or 5.9 per cent, to a three-month high of 1,803.34.

The rise was in tandem with gains elsewhere, led in the region by a 7 per cent jump in Hong Kong's Hang Seng Index and a 100-point rise in June futures on the Dow Jones Industrial Average.

Turnover here, excluding foreign currency issues, which dropped to a low $755 million on Wednesday, rose to 1.8 billion units worth $1.7 billion yesterday.

The last time the index closed at this level was Jan 9, when it ended at 1,806.02. In the three weeks since touching 1,456.95 on March 9, the index has gained 346.39 points, or 24 per cent, on hopes of a US-led economic recovery.

'Bear market rallies can be very powerful and can sometimes last a few months,' said a dealer, suggesting further upside is still possible. But most also admit that unless economic figures show clear signs of improvement, the upcoming earnings reporting season could slam the brakes on the market's rise.

Yesterday's push was fuelled by hopes that the US economy was improving, following improved residential construction figures and a manufacturing report that was bad, but not as bad as expected. Also helping were comments by officials that there are signs that coordinated international action to spur the global economy is gaining some traction.

'There's speculation that something good will come out of the G-20 meeting, so the buying is also in anticipation of this,' said a dealer. Leaders from the 20 nations started their meeting in London yesterday.

Assessing local news of a 13.8 per cent drop in private property prices in the first quarter, DMG & Partners said that although there will be more prospective buyers, most will only window-shop until prices become considerably more attractive.

'HDB prices should fall further on the back of economic weakness, job insecurity and filtering of interest into the mass market condominiums, which should result in an increase in bargaining power of buyers,' DMG said.

'While we are cognisant of units disposed at distressed prices in the secondary market, these remain selective ones. For the remaining year, we should see an increased quantum of such transactions, especially from the 10,000 units that will receive TOP (temporary occupation permits) in 2009. As such, we are keeping our neutral call for the property sector.'

In his latest market commentary dated April 1, fund manager Marc Faber said that the current bounce is because stock markets were heavily oversold and are experiencing a powerful bear market rally. 'While I do not expect any full-market recovery within the next few years (after that, we shall need to see how much money will be printed) I would not be surprised to see some further headway until summer 2009,' Dr Faber said.

'Very near-term, the stock market has become overbought and should correct. But for the immediate positive stance to be maintained, it is important that the November 2008 low of 741 for the S&P 500 not be violated on the downside.'

The S&P 500 closed at 811.08 on Wednesday.

Dr Faber also pointed out that although US residential construction appears to have stabilised, non-residential construction has only just started to contract, so talk of a recovery is premature.