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Investors Beware: Chinese State-Owned Enterprises in Singapore May No Longer Have a Strong Safety Net

Chinese state-owned enterprises, as their name suggests, are companies in which China’s government has stakes in.

In the past, these companies have likely been conferred preferential treatment in the business world, as alluded to by a November 2013 Bloomberg article which stated that China’s state-owned enterprises have been “coddled by cheap credit and sheltered monopolies for years.”

A first in China

This situation’s changing – fast. Bloomberg reported yesterday that Baoding Tianwei Group Co had become China’s “first state-owned company to default on an onshore bond [emphasis mine].” The company, a maker of power-transformers, is part of China South Industries Group Corp., a Chinese state-owned enterprise.

Baoding Tianwei had failed to pay 85.5 million yuan (around S$19 million) in interest on its debt on Tuesday largely as a result of huge losses suffered in 2014. Bloomberg quoted the company as stating that it has “lost financing ability and suffered from a capital shortage.” The firm also complained about its inability to raise capital to meet its interest expenses.

As early as late-2013, China’s government had already made known its intentions that it would be allowing market forces more room to shape the fortunes of state-owned enterprises.

Baoding Tianwei’s experience is a stark reminder for investors that Chinese state-owned companies may no longer have a strong government-sponsored safety net to fall back upon and would have to increasingly depend on their own wits to survive in the business world.

Singapore-listed SOEs

According to a market update from the Singapore Exchange, there are nine shares listed here, as of 18 November 2014, which can be considered as Chinese state-owned enterprises.

These group of nine are namely: Tianjin Zhongxin Pharmaceutical Group (SGX: T14), SIIC Environment Hldg Ltd (SGX: 5GB), Cosco Corporation (Singapore) Limited (SGX: F83), China Merchants Holdings (Pacific) Ltd (SGX: C22), Ying Li International Real Estate Ltd (SGX: 5DM), China Aviation Oil Singapore (SGX: G92), GMG Global Ltd (SGX: 5IM), Pteris Global Ltd (SGX: UD3), and AVIC International Maritime Holdings Ltd (SGX: O2I).

Chinese SOE balance sheet figures

Source: S&P Capital IQ

As you can see in the table above, Cosco and AVIC currently have very high total debt to equity ratios of over 150%. Meanwhile, China Aviation Oil and GMG Global are at the other end of the spectrum with some healthy looking balance sheets given their low total debt to equity ratios.

A Fool’s take

Having high debt levels need not necessarily mean that Cosco and AVIC are in trouble. By the same logic, the rest of the Chinese state-owned enterprises listed in Singapore are not necessarily free of future problems too despite having decent balance sheets at the moment.

But whatever the case, given the recent episode with Baoding Tianwei, the most prudent way forward when it comes to considering Chinese state-owned companies as potential investment opportunities would be to think about their investing merits (or lack thereof) purely on the grounds of the economic characteristics of their businesses.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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 shares in any company mentioned.