Are S-chips Burnt Chips?

S-chips are Chinese companies or companies with operations in China listed on the Singapore Exchange.

Even though there are more than 100 S-chips, a quick peek into the FTSE ST China Index reveals some more established companies such as Keppel Land (SGX: K17) and Biosensors (SGX: B20) are included.

Story behind S-chips

In the past, many small Chinese companies chose to list in Singapore either because they couldn’t meet the stricter listing standards imposed by their home country or that they were too small to be considered. Nevertheless, they were welcome in Singapore and so it led to a slew of initial public offerings (IPOs) in the boom year of 2007.

However, the good times didn’t last long. As a number of high-profile corporate scandals came to light, the stock price of almost all S-chips (whether they were good or bad) slid and many investors got burnt as a result. With bad news seemingly the norm for these Chinese companies, investors, understandably, gradually lost faith in them.

Detecting Red Flags

S-chips appear to have a poor reputation when it comes to accounting. A number have been caught being generous with the truth. Although not absolutely fool-proof, there are some indicators that can investors can watch out for. For instance, look out for companies with excessive debt or cash. Yes, Cash, you heard me right.

Beware of S-chips that states a large cash hoard but refuses to pay dividends yet still call for more money to be raised through issuing new shares. Two recent examples include China Hongxing Sports and ChinaMilk, which remain suspended at the time of writing.

Side-stepping the Pitfalls  

Despite the bad press surrounding some S-chips, it would be wrong to assume that all Chinese companies have accounting issues. In fact, fundamentally strong S-chips offer a margin of safety with their cheap valuations due to a lack of analyst coverage and dwindling investor interest.

For example, Temasek Holdings has an interest in China Minzhong (SGX: K2N) while SinoGrandness (SGX: JS5) has welcomed analysts to visit its factories. These qualities may go some way to explain the sharp rise in their market valuations.

All is not lost when it comes to S-chips. With MAS tightening the regulations and keeping a watchful eye on S-chips, there might be some hidden gems amongst S-Chips especially if nobody else is looking for them.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.   Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.