I had recently shared a chart that showed the number of shares in Singapore’s share market that were selling for below their net current values (NCAV) currently. Such shares have market capitalisations smaller than what’s left-over after subtracting all their liabilities from their total current assets. Using an analogy, this is how I once described how cheap such shares can potentially be: “You have Peter, who owns a property (long-term asset) worth S$1 million that’s fully-paid up for. He has S$500,000 in the bank (current asset) and has total liabilities, made up of various types of personal loans,…
I had recently shared a chart that showed the number of shares in Singapore’s share market that were selling for below their net current values (NCAV) currently. Such shares have market capitalisations smaller than what’s left-over after subtracting all their liabilities from their total current assets.
Using an analogy, this is how I once described how cheap such shares can potentially be:
“You have Peter, who owns a property (long-term asset) worth S$1 million that’s fully-paid up for. He has S$500,000 in the bank (current asset) and has total liabilities, made up of various types of personal loans, of around S$100,000. In this way, his current assets sans all liabilities, would be S$400,000. One day, he just walks up to you and says, “Would you pay me $200,000 for all the cash, property, and loans I have?” That’s a [NCAV]share for you – and we’re not even looking at whether Peter’s drawing a salary, which could add to his bank account periodically.”
Based on share market prices as of 22 June 2014, there are currently 92 shares – somewhat predictably, none of those shares were any of the 30 blue chips that make up the Straits Times Index (SGX: ^STI) – that are selling below their NCAV in Singapore. But as I was taking a closer look at the data, something jumped out at me.
Of those 92, 27 were headquartered in China. In Singapore’s market, China-based companies listed in Singapore are often termed as S-chips. As of 31 March 2014, according to data from stock exchange operator Singapore Exchange, there were 133 companies listed here that originate from China. With 27 such shares selling below their NCAVs, a significant percentage – some 20% – are selling for what seems to be bargain-basement prices.
Here’s a table showing three of those 27 shares which have the largest market capitalisations:
Li Heng Chemical Fibre Technologies (SGX: E9A)
|S$145 million||S$275 million|
|China Yuanbang Property Holdings (SGX: B2X)||S$123 million||
|Weiye Holdings (SGX: ON7)||S$122 million||
Source: S&P Capital IQ
By way of comparison, there are 476 companies in Singapore’s share market that originate from Singapore and only 11.7% (56) of those companies were actually selling below their NCAVs.
From the way I see it, there are two possible reasons for this phenomenon: 1) A slowdown in China’s economy – the Asian giant’s economy is predicted to grow at its slowest pace yet since 1990 – have sparked fears that the businesses of those China-based companies might worsen, leading to depressed valuations; 2) there’s a taint associated with these China-based companies amongst local investors.
It’s hard to tell which effect is stronger, or whether one of them is in fact absent. But let’s take a closer look at the latter.
According to a February 2012 The Business Times article titled “Why S-chip fraud cases keep cropping up”, the first S-chip scandal appeared in 2007. Between then and March 2011, there have been a total of at least 10 cases that involved companies like Ferrochina, Celestial Nutrifood, and Fibrechen Technologies. Those scandals often erupted due to accounting irregularities and sometimes, outright frauds.
One of the most recent S-chip scandals, which would have added to the tally, involves Eratat Lifestyle (SGX: FO8). The China-based company has been suspended from trading since this January after it defaulted on its interest payments on its high-yield bonds. The company was then subsequently found to have fabricated some of its bank statements.
Such developments make it hard for investors to develop trust in S-chips in general and leave the onus on bargain hunters to ascertain for themselves that S-chips that look really cheap do in fact have proper operating businesses and accounting practices.
Sometimes, companies are cheap for other reasons apart from having loss-making poor (but legitimate) businesses; at times, the market may harbour a fear of such shares being frauds, a fear which may turn out to be true.
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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.