Time to Take Another Bite of S-chips

By Chee Chin Wi

Numerous corporate governance scandals over the past 15 years involving S-chips have tarred these mainland-operating, Singapore-listed companies with the same brush. But do all S-chips deserve their bad reputation?

It was meant to be one of the Singapore Exchange’s (SGX) success stories. One of our biggest skincare companies, Best World International saw its profits grow almost 40 fold between 2013 and 2017. It was valued at S$1.8 billion at its peak in February 2019.

The stock lost its lustre when shocking allegations of wrongdoing by short-seller Bonitas Research and further pressure by the authorities forced the mainboard-listed company into clarifying its previous denials, confessing that the owner of its largest client, import agent Changsha Best, was in fact Best World’s CEO’s brother-in-law. Its share price plunged nine per cent as it halted its trading on 24 April 2019.

Said the SGX: “The revelation of the relationship between Changsha Best and the company’s CEO and managing director raises serious concerns about the veracity of China sales conducted under the export model from 2015 to 2018 and whether these were conducted on normal commercial terms.”

Once bitten, twice shy

For S-chip naysayers, Best World International’s fall from grace is hardly a blip on the radar. It is but the latest in a string of scandals that began as far back as 2004, when China Aviation Oil (CAO) engaged in speculative trading that led to massive losses of US$547 million (S$740 million). Its traders had ignored the company’s own regulations to limit losses, leading to its bankruptcy. The case went down in history as Singapore’s biggest corporate scandal since rogue trader Nick Leeson caused 233-year-old British merchant bank Barings to collapse in 1995.

Or take China Gaoxian Fibre Fabric Holdings Ltd’s trading suspension in 2011. The yarn maker’s stock was one of 2009’s biggest IPOs, listed half a year after measures were implemented to clean up after previous S-chip irregularities. One of its independent directors was SGX ex-listings head Philip Chan. Yet, special auditors found that the company had not only RMB1 billion (S$197 million) missing from its bank accounts, but also was in more debt than previously disclosed.  

Finally, the trading halt of China Fibretech Ltd. in 2015 after three customers lodged claims against the fabric processing services provider for substantial damages and financial losses. This had resulted in RMB450 million being paid out without the necessary corporate authorisations.

To rub salt into the wound, seven out of 25 new entrants to the SGX watch list for not meeting the minimum trading price requirements and/or the financial entry criteria on 4 June 2019 were S-chips. Together with years of high-profile S-chip failures, this has created the impression that such companies are no longer fit for listing on the SGX-ST. But is that really the case?

Reasons for optimism

Given the abysmal public perception of S-chip stocks, the SGX may be seen as being too optimistic with its continued wooing of such companies. Yet, recently, larger S-chips such as Dasin Retail Trust, China Jinjiang Environment and EC World Asset Management have been listed on the SGX-ST.

The hard numbers suggest that some degree of confirmation bias may be at work. In our analysis of the recent editions of the SGX’s “Report on Long-Suspended Companies”, the proportion of S-chips listed has in fact declined over the past three years.

One such turnaround story is China Fibretech, which resumed trading in September 2018 on the SGX-ST as Raffles Infrastructure after almost three years’ suspension. Reversing out of the red, it reported 2Q2019 earnings of RMB24.5 million, a stark difference when compared to a net loss of RMB974,000 a year ago.

Nor do S-chips form the majority of suspended companies listed on the last two versions of the SGX report: only five out of the 15 new entrants are such companies. In other words, S-chips are not the only corporate failures. One non-S-chip example is water resources giant Hyflux, which had pursued growth aggressively at the expense, some commentators have noted, of appropriate risk management, resulting in what could possibly become the largest insolvency in local history. Noble Group is another spectacular debacle. Accused of accounting fraud, it had its credit rating downgraded to junk. The former high-flying commodities trader recorded net losses of US$1.7 billion in 2015 and was delisted from the SGX last year.

On the contrary, in recent years, S-chips have been cleaning up their act in corporate governance. Comeback kid CAO, which is arguably the pioneer of the scandalous image of S-chips, turned its fortune around – steadily climbing from 330th position in 2009 in terms of its Governance & Transparency Index to a peak position of 25th in 2017.

In any event, the SGX is not sitting on its laurels, and has been taking steps to improve its position as the premier platform on which S-chips may list.

Proposed in 2011 and effected in 2014 was the requirement for companies listed on the SGX-ST (including S-chips) to hold annual general meetings in Singapore. This change substantially improved shareholder access to the directors and managements of listed companies, by having them physically present to address investor concerns.

More recently in 2018, the bourse and the Chinese Embassy in Singapore had entered into talks in connection with the proposed requirement for state-owned enterprises or mainland cornerstone investors (including sovereign wealth funds and state-linked investment vehicles) as shareholders in an S-chip before listing may be permitted on the SGX-ST. Although not much is known about the discussions, getting China on board with the SGX to strengthen the supervision and accountability of the country’s companies listed here will surely help boost investor confidence.

Furthermore, the SGX had entered into agreements with the likes of the China Chamber of International Commerce and the Zhejiang (S) Entrepreneurs Association with the intention to promote Singapore as a choice location for Chinese companies looking to expand their businesses internationally.

Nevertheless, despite the momentum picking up for S-chips coupled with the effort put in by the different stakeholders, it is unrealistic to expect all S-chips to be “Saint”-chips, and unfair to paint them all as “Scam”-chips.

The road ahead

In any case, China is a market that Singapore can ill afford to ignore. While growth in the People’s Republic may have tapered off to a 28-year low of 6.6 per cent, it still remains the world’s second largest economy – first, if ranked by purchasing power parity.

China’s economic development strategies – Made in China 2025 and Belt Road Initiative – will continue to provide its people with opportunities to invest, cultivate export markets and boost incomes and domestic consumption. In order for PRC companies to take advantage of such opportunities, they will need to offer securities to the public in exchange for capital.

Since the early days of the Chinese economy’s phenomenal expansion, its companies have been primarily listing in Hong Kong, Singapore and the United States. The two Asian exchanges had an edge over the United States’ due to, among other reasons, lower language barriers. The likelihood of listing in America has decreased even further due to the straining relationship between the two economic powerhouses due to the ongoing trade war. Consequently, China may be looking for a less hostile environment to conduct its business or list its companies.

Public unhappiness over the now-suspended extradition bill has led to massive demonstrations in Hong Kong, with the biggest flashpoint to-date being the storming of the LegCo building on the 22nd anniversary of the handover. In the build-up of the unrest, it has already been reported that funds from the special administrative region are looking for safer, more fragrant harbours.

Speaking to Reuters, the London-based chief executive of a mid-sized European private wealth advisory firm has revealed that it is launching its Asia arm in the Lion City instead of its earlier decision to set up in Hong Kong, because “what we are seeing [in Hong Kong] doesn’t give us much confidence.”

In an earlier story from the same news agency, a financial adviser claimed to be involved in a tycoon’s US$100 million transfer from a Hong Kong-based Citibank account to a Singapore-based one. The adviser said: “It’s started. We’re hearing others are doing it, too, but no-one is going to go on parade that they are leaving.”

Singapore has long kept up a friendly rivalry with Hong Kong. While we cannot compete with its ready access to mainland capital, we can provide a safer harbour for Chinese investments in the current political and economic climate. The SGX’s efforts to enhance its listing rules and corporate governance standards get us half way there. It’s time for the market to stop talking down China’s businesses and start welcoming high-quality listing applicants.



TSMP law corporation