Mention S-chips, or Chinese companies listed on the Singapore Exchange (SGX), and many investors may shrug. With good reason too, considering the chequered history many of them have had in Singapore.

Names like China Aviation Oil (CAO) come to mind. In late 2004, the Singapore-listed red chip with a lucrative monopoly on imports of jet fuel into China racked up US$550 million in losses from speculative trading. This wiped out investor share value overnight.

Just a couple of years later, the “Eight Beauties” emerged, referring to eight S-chips riding on China’s turbo-charged growth in the lead up to the 2008 Beijing Olympics. These were firms like Fibrechem Technologies, which witnessed a nearly 170 per cent surge in Q3 2006 profit with its innovative products like synthetic leather. Whether it was steelmaker Ferrochina or cosmetics maker Beauty China, the glossy results and glowing forecasts of these Chinese giants convinced investors that the tide had turned for S-chips after the CAO debacle.

But these beauties were soon unmasked, revealing accounting irregularities and debt issues that resulted in share suspensions, made worse by the Global Financial Crisis.

It must be emphasised, however, that not all was ugly. CAO undertook corporate reforms and continues to trade on SGX, recording full-year profits of about US$58 million in fiscal year 2023. Yangzijiang Shipbuilding, one of the largest shipbuilders in China, has maintained profitability, expanded into LNG carriers, and today is among the top counters by market cap on SGX.

Six years ago, Forefront discussed how S-chips could make a comeback. Since then, the response has been tepid. But the landscape could change soon. Reuters reported that several Chinese firms are looking to either list, dual-list or raise funds in Singapore over the next 12 months. This is good news for SGX, which has been looking for new ways to boost interest, excitement and liquidity. Currently, about 100 Chinese firms are on the local bourse, making up close to 20 per cent of the total number of listed companies.

We should not throw the baby out with the bathwater, nor discard a good harvest just because of a few bad apples. Indeed, with a few tweaks the harvest could well be a bountiful one.

One key issue identified in previous cases was that S-chips were allowed to list without adequate consideration of their unique governance risks. But the incidents have resulted in a tightening of listing regulations.

First, the Association of Banks in Singapore (ABS) updated the ABS Listings Due Diligence Guidelines, which sets detailed standards for due diligence by IPO issue managers and full sponsors. The amendments (first in 2016 and again in 2020) had the net effect of better aligning practices to ensure that any governance risks are adequately identified, mitigated and/or disclosed.

In October 2023, the Monetary Authority of Singapore (MAS) also issued the MAS Notice SFA 04-N21 on Business Conduct Requirements for Corporate Finance Advice, which created legally enforceable, baseline standards of conduct for corporate finance advisors. This includes the obligation on corporate finance advisors to determine the nature and extent of due diligence work to be performed for each initial public offering (IPO) and to assess the accuracy and completeness of all material statements and representations made by listing aspirants.

Add to that a stronger public awareness of the need for better corporate governance, thanks to the work of watchdogs like the Securities Investors Association (Singapore), and there is much greater pressure on companies to shape up.

There are also signs that a resurgence in S-chips could be a longer-term trend, based on geopolitics and geography.

Geopolitics and Geography

With the Nasdaq ratcheting up scrutiny of Chinese listings, such IPO hopefuls have ruled out listing in the West, especially amid US-China trade tensions. This is a view echoed in China, where a New York Stock Exchange listing is labelled as a “politically unacceptable risk”, with some citing fast-fashion giant Shein’s withdrawal from a London Stock Exchange listing for similar reasons.

With the decoupling of Chinese and Western markets, Singapore is a clear alternative, a rare neutral platform that is credible worldwide. The Republic is not just a safe harbour and hedge against geopolitical risk, but also a gateway to the wider Southeast Asian region with growing capital pools sourced from sovereign wealth funds, family offices and institutional investors. This is in contrast to sluggish domestic demand in China, another push factor for Chinese companies to seek overseas funding.

These factors point to a more sustained Chinese presence on the SGX, aided by the burnishing of Chinese brands in recent years.

Rising Tide

A glance at recent S-chip listings on the SGX indicates that more reputable Chinese firms have Singapore in their sights. Take, for instance, electric car maker NIO, which listed on SGX in 2022, giving investors a third venue to trade its shares after New York and Hong Kong. A primary reason was to build a hedge against the risk of being delisted in the US due to regulatory issues.

Then there is another rising star in its field, pharmaceutical company China Medical System, which dual-listed on the SGX in July this year. A crucial reason was to deepen its Southeast Asian presence, as it explained that the 700-million-strong population “is experiencing surging pharmaceutical demand due to rapid economic growth, the rise of the middle class, ageing population, and the increasing burden of non-infectious diseases”.

CNBC also reported that a Chinese energy company, a Chinese healthcare group, and a Shanghai-based biotech group are looking to follow suit.

It remains early days but the signs are encouraging. The second coming of S-chips, then, is less about reliving the past than about reimagining the future. It is an opportunity to rebuild trust, deepen liquidity and reposition Singapore as the natural capital hub for Southeast Asia.

It is perhaps time to shake that S-chip off your shoulder.