Chinese firms fight for credibility on the Singapore Exchange

When debts at China Printing & Dyeing spiraled out of control in October 2008 while exports continued to tumble, chief executive Tao Shoulong sold what personal possessions he could and fled with his wife – and deputy chief executive – Yan Qi.

Having built the business up from just a handful of employees to become one of China’s biggest textile-dyeing companies in just five years, Tao’s empire came crashing down almost overnight.

While debt-ridden companies across the world have succumbed to the credit crunch over the last year, it is the speed and manner of China Printing & Dyeing’s collapse that has alarmed investors in Singapore, where the firm is listed. When it unveiled second-quarter numbers in August 2008, the company revealed a sharp drop in revenue but said that, ‘barring unforeseen circumstances, the company will continue to be profitable.’

The next update to the market, issued by the board of directors in October, said simply that Tao and Yan have ‘not been contactable since Tuesday, October 7, 2008, despite repeated attempts on the part of the independent directors to contact them.’

Scarred reputation
In an investment climate blackened by poor financial results, profit warnings and increasing concern about the high levels of debt racked up by companies such as FerroChina, scandals are denting confidence in ‘S-chips’, as the Chinese stocks listed in Singapore are known. The FTSE Straits Times China Index slumped by 76 percent between January and mid-November, significantly underperforming other stocks in Singapore: the benchmark FTSE Straits Index was down just 49 percent in the same period (see Market performance, right).

Investors believe the combination of corporate governance concerns and growing evidence of the global slowdown hitting China means these stocks will continue to trade at a considerable discount to their Singaporean peers for some time to come.

While the braver (or more foolhardy) fund managers point out that some S-chip valuations are starting to look attractive, the problem remains that in a bear market, most investors stop making rational investment decisions and indiscriminately sell any stock with even the faintest whiff of trouble surrounding it.

Second-rate stocks?
Since it first started touting for business in China around the turn of the new millennium, Singapore Exchange has attracted 150 Chinese companies, which together comprise around 20 percent of the total number of listed companies. Despite finding it relatively easy to generate a large number of Chinese listings, critics say Singapore has found it much harder to draw in high quality, with the biggest and best companies often opting to float in Hong Kong or on the mainland.

‘There certainly is a perception – and I don’t think it’s a biased one – that Singapore tends to attract the companies that didn’t feel they were able to list in Hong Kong or mainland China,’ notes David Webb, a Hong Kong-based former investment banker who now runs Webb-site.com, an independent corporate governance watchdog.

Heng Tong Jin, an analyst at Singapore stock broking firm DMG & Partners Securities, agrees. ‘Hong Kong-listed shares definitely get higher ratings than S-chips for genuine reasons such as the lower levels of liquidity, smaller market capitalizations and the lesser quality of companies trading here in Singapore,’ he explains.

These views are backed up by a recent research report from JPMorgan, which analyzed 21 S-chips with market caps above $200 mn and found that 13 of them triggered various financial or corporate governance alarm bells.

‘But some of them are reasonable companies,’ Heng continues. ‘Perhaps they wouldn’t be number one in their sector if they listed in Hong Kong or China, but they will be number one in Singapore.’

Nancy Wei, head of research at UOB Kay Hian, another Singapore broking house, also thinks the S-chips have been given an unfair rap. She believes there is no specific problem with Chinese companies and that all non-domestic firms listed in Singapore face similar difficulties.

One problem is that, while they may have a CFO and a small administrative office in the city, most of the 310 non-domestic companies are heavily focused on their home country, and the chief executive may not make it to Singapore regularly.

‘With many of the overseas companies listed in Singapore, there is no way analysts and investors can easily see management,’ Wei explains. ‘The risk is that they list here and then drop off the radar because they might visit no more than twice a year.’

For Chinese companies listed across the globe – whether in London, Singapore, Shanghai or Hong Kong – which until last year had only ever seen their share price going one way, this downturn will be a stern test. But it will also provide an opportunity for the better companies to show their mettle and learn some valuable lessons about the importance of transparent communication with the market along the way.

As one S-chip CFO puts it: ‘There’s nothing the market likes less than uncertainty, and those firms whose shares have been punished the most have generally been the least transparent ones’.

Invest to impress
Webb says it is important that these companies ‘spend some money on IR and have someone who can deal with investor queries.’ Companies can also distinguish themselves by rising above the minimum corporate governance requirements, he adds, whether by improving the quality of their financial reporting or reducing the ability of controlling shareholders to dilute other investors by issuing new shares.

With budgets under pressure at many S-chips, Wei emphasizes that better investor relations is not just about organizing costly investor meetings and roadshows.

‘S-chips normally appoint an external investor relations company, but it’s more important to give answers to critical issues,’ she says. ‘It’s all about giving consistent information and good disclosure to the stock exchange. For example, Hong Kong-listed Cathay Pacific doesn’t hold meetings that frequently but it does give very good information to the market every month.’

Heng also believes companies can relieve some of the pressure on their share price by opening up to investors. ‘I’ve seen companies set up their own IR department and some have made an effort to give guidance on certain fundamentals such as how much cash they have,’ he notes. ‘But other than that it’s going to be really hard in the current market to persuade investors that, Hey, I’m clean, believe in me.’

Ultimately though, Heng believes responsibility for corporate governance verification should lie with the auditors. ‘The investment community should realize fundamentally that once the auditor signs off on the accounts, they are deemed to have been professionally assured as legitimate,’ he says.

When the dust eventually settles, one Singapore market veteran is reasonably optimistic about the longer-term future for S-chips. ‘What goes around comes around,’ he comments. ‘No matter how carefully you try to screen S-chips, the law of averages says there will be some problems with these companies. But over time they’ll get better.’