How Might China’s Crackdown On Corruption Affect Your Investments?

The phenomena of corruption in China is not exactly unknown within the global community.

Transparency International, an independent non-governmental organisation (NGO) that focuses on measuring corruption internationally, had given China a score of 36/100 in 2014 on how corrupt its public sector is perceived to be (with a score of 0 being “highly corrupt”). This score placed China at 100th position out of 175.

But China is not sitting idly by with an apparent festering of corruption in its public sector – in recent years, the Chinese government has been cracking-down on corruption.

Fighting against corruption might be a right step to take for the country, but there are some interesting (and likely unintended consequences) that came with it.

As the BBC reported last April, restaurants and luxury goods purveyors have suffered because of Chinese President Xi Jinping’s desire to weed out corruption. A Wall Street Journal article that was published just yesterday also pointed out how the fight against corruption had been a real bane to the casinos in gaming-haven Macau.

Given these, it’s perhaps apt to wonder: Are there any businesses in Singapore which may suffer collateral damage as a result of China’s crackdown on corruption?

Trouble in paradise

Currently, there are two casinos operating in Singapore – one’s in Resorts World Sentosa, owned by Genting Singapore PLC (SGX: G13), and the other’s in Marina Bay Sands, run by U.S.-based Las Vegas Sands Corp – and both rely pretty heavily on high-rollers from China.

According to the Singapore Tourism Board, tourist traffic coming from China had dropped by 25% in 2014 compared to a year ago. Channel News Asia had also reported that “the shrinking number of Chinese VIP punters is a new norm that the casinos have to adapt to at a time when the Chinese government is stemming large cash outflows from the country amid a crackdown on corruption and as domestic reforms have led to slowing economic growth.”

With that as a backdrop, it’s perhaps no real surprise to see cracks forming in Genting Singapore’s operations; its profit in the third quarter of 2014 had crashed by almost 50% from the third quarter of 2013.

So long as the crackdowns in China are being enforced, it’s likely that Genting Singapore would be facing significant headwinds in its business.

Drinking your sorrows away

Another company that might be affected by the crackdown is baijiu distiller Dukang Distillers Holdings Ltd (SGX: GJ8).

Alcohol is one of the most common gifts seen in the dealings of the Chinese in both the public and private sectors. With alcohol being banned from Chinese government events now, companies like Dukang would have lots of troubling trying to grow its sales and profits.

As a prime example of Dukang’s struggles, the firm had issued a profit guidance late last month, warning that it “expects its overall revenue and earnings to be significantly lower for the three months ended 31 December 2014… compared to the three months ended 31 December 2013.”

Back in November 2014, the firm also released its results for the quarter ended 30 September 2014 and saw its revenue collapse by 47%.

In response to Dukang’s business-slump, its share price had also fallen from a 2013-peak of around S$0.60 to S$0.14 today.

Foolish Summary

Although the crackdown on corruption in China should be beneficial for the country (and perhaps the world, given the size of the Chinese economy) in the long run, some companies listed in Singapore – like Genting and Dukang – are suffering some damage now in the name of progress.

Investors should keep this dynamic in mind when studying the past performance of these companies as their future is a lot more cloudy now.

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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 Stanley Lim owns shares in Genting Singapore.