Hardy survivors of S-chip fallout worth a second look: analysts

Singapore

THE painful experiences ranging from accounting fraud to the lack of accountability with past Chinese companies listed on Singapore Exchange (SGX) continue to cast a pall over the entire S-chip community.

While more analysts have taken notice of the bigger ones - many of which are leaders in their respective fields in China - experts warn against complacency, especially when many businesses are fighting to stay competitive.

China expert Qiu Yang, counsel at ZICO Insights Law LLC, doubts that the S-chip scandal is well and truly over.

"We doubt so. The problem of S-chip will re-surface again. It is a matter of 'when' instead of a question of 'if'. The Singapore Exchange (SGX) listing rules are designed to manage and to reduce rather than eliminate all risks associated with accounting fraud and/or other corporate governance failure - the typical S-chip problem," Dr Qiu told The Business Times.

"Despite the best effort to design and implement these rules, it is simply impossible to provide an absolute assurance against the occurrence of human errors, fraud or other material irregularities," she said.

"Against the backdrop of a disruption economy, such as the tectonic shift in technology and the US-China trade war, most of the Chinese businesses are under tremendous constant pressure to maintain their competitiveness, to maximise their profitability while trying to reduce their costs," Dr Qiu warned.

"When the majority of the S-chips are trying to achieve this challenging goal in a law-abiding manner without compromising fundamental business ethics, it is almost certain that some black sheep will appear to test the limit."

As such, S-chips listed on the SGX today have an ongoing battle against a negative perception perpetuated by the actions of a few - Midas Holdings being the most recent unfortunate example, she said.

"Indeed, as long as the intrinsic conflict/temptation between to maximise its profits and to do so at any cost to consumers, the community and the environment is there, the S-chip scandal will never be truly behind us. Caveat emptor - let the buyer beware," Dr Qiu said.

Despite the cautionary mood, some research houses believe that there are some among the surviving S-chips worth a second look.

The valuations of these stocks have taken a beating, following the scandal in the early 2010s and the subsequent delistings of many S-chips. On average, S-chips trade at a multiple of 7.6 times their past year earnings and 0.96-time of their book value. This makes them cheaper than the Straits Times Index (STI) component stocks and peer groups listed in Hong Kong and China.

"Contrary to investor perceptions, several of these S-chips are well established with long operating histories and their market share is ranked among the highest in China," said Horng Han Low, an analyst at CLSA, whose parent is CITIC Securities.

These industry leaders include shipbuilder Yangzijiang Shipping (YZJ), jet fuel supplier China Aviation Oil (Singapore), waste-to-energy operator China Jinjiang Environment (CJE) and rubber-accelerator producer China Sunsine Chemical.

In August, DBS Research added China Aviation Oil to its 'growth' category. The research team said it liked the company given its "monopolistic position as the sole importer of bonded jet fuel into China, and for its 33 per cent stake in the exclusive jet fuel refueller in Shanghai Pudong International Airport".

The largest S-chip today is YZJ. It boasts a market value of about S$5 billion and enjoys an average daily turnover of S$24 million.

"Over the past few shipbuilding cycles, the company has grown from strength to strength as it scales the technological curve and gains market share from the larger Korean yards. It is now the largest private shipbuilder in China and is ranked No 3 in the world. Plans to penetrate the LNG segment could see the stock rerate," said Mr Low. The shipbuilder is the only S-chip covered by CLSA.

While investors continue to flag uncertainty such as the fall in the Baltic Dry Index (BDI), Mr Low believes record-low shipbuilding orderbooks combined with shipyard consolidation bode well for the shipbuilder.

Several analysts noted that Cosco Singapore has also morphed into a completely different animal after a revamp which saw the disposal of its loss-making yard business. Cosco is transitioning from shipbuilding to a pan-Asean logistics player, with plans to "ride China's Belt and Road Initiative and build up an Asean logistics presence through mergers and acquiitions (M&As) in Southeast Asia".

Environment-related plays like SIIC Environment, China Everbright Water, China Jinjiang and Sunpower - which operate in the highly fragmented water/waste-treatment industry - are seen well-positioned to benefit from China's infrastructure spending as Beijing focuses on cleaning up the environment. Unlike the smaller players, they enjoy scale, capital and technological know-how.

"Larger players like CITIC Envirotech (CEL) and China Everbright Water are state-owned enterprises (SOEs), with a competitive edge due to their access to lower cost of capital. Meanwhile, private wastewater player SIIC has embarked on aggressive mergers and acquisitions to deliver growth," Mr Low said in an earlier report.

On the property front, Yanlord Land Group, with its sizeable landbanks in prime areas, appears a resilient builder. OCBC Investment Research said Yanlord's Q3 results were 'solid', with net profit beating its expectations.

China Sunsine, a leading producer of specialty-rubber chemicals, has come a long way to become a top player for rubber accelerators with a 20 per cent global market share and 33 per cent in China.

Colin Tan, an analyst at KGI Securities, believes Sunsine is "deeply undervalued". Phillip Securities, which has a 'buy' on Sunsine and a target price of S$1.68 a share, noted its efforts in ramping-up capacity and production, which will be realised in the near term.

However, analysts say they are not calling for a rush to buy these S-chips.

"Like any investment, you must do your due diligence," said one analyst.