Accounting irregularities in S-chip stocks

Posted by Amy CHAN Wen Yi, final year undergrad at the School of Accountancy, Singapore Management University

Amy: The BT article “A re-look at China stocks?” provided a good overview on China stock classifications and also discussed about some accounting irregularities that happened to some of the S-chip stocks. Excerpts below:

Discussion question: Do (systematic) accounting irregularities for a group of companies have negative spillover effects for others in the stock exchange, including resulting in a lower credibility and market valuation?

For example, SGX is panned as a place to raise funds in 2015BT article on Jan 9, 2015

What type of companies tend to be impacted adversely and how to avoid the “infection”? What is the transmission mechanism (e.g. common ownership identity hidden in nominee accounts)? Will the overall market degenerate into a “lemon’s market” over time and how to solve the lemon’s problem?

A re-look at China stocks?

04 Nov 2013 17:39 by CAI HAOXIANG

A lack of confidence

Chinese companies have also chosen to list elsewhere, such as on the Singapore Exchange (SGX) and the New York Stock Exchange. However, many of these stocks have been plagued by a lack of investor confidence, making them easy targets for short-sellers.

Investors in Singapore will remember the case of Fujian-based vegetable producer China Minzhong. In late August, US-based shortseller Glaucus Research Group accused the company of fraud and financial irregularities. Within a couple of hours of the report coming out, China Minzhong shares fell more than 50 per cent, losing some S$300 million of market value in the process.

Among other things, Glaucus dug up filings of the company’s two major customers before it went public in 2010, and alleged that the company faked sales to them.

But China Minzhong later produced tax filings to defend itself, arguing that the documents that Glaucus produced were meant for business registration and not meant to be as definitive as tax claims.

In any case, China Minzhong’s major shareholder, Indofood Sukses Makmur, rode in with a general offer at the same price at which it previously acquired its stake earlier in the year. Investors were only too happy to sell, the company’s share price rebounded, and the Indofood offer succeeded within days.

Investors in Singapore are justifiably jittery over Chinese counters listed on SGX, otherwise known as S-chips. In recent years, stocks such as Sino Techfibre, China Gaoxian, Hongwei Technologies and China Hongxing have all been hit by accounting irregularities.

Certain unfortunate accidents also seem to befall Chinese counters. Late last year, China Paper Holdings said a fire had destroyed its financial records for all of 2011 and severely damaged records for the last few months of 2012.

In 2011, Sino Techfibre also said its financial records were destroyed in a fire. In 2009, auditors investigating missing funds at China Sun Bio-chem Technology Group were hit by a mysterious power failure, a missing disk drive, and were told that a truck transporting accounting records was stolen while the driver was having dinner.

The crux of the issue is that Singapore authorities have no legal jurisdiction over the board and management of Chinese companies, who are often based in China. These companies are also not registered in Singapore, but in places such as Bermuda, the Cayman Islands and the British Virgin Islands, where regulators find it hard to enforce court rulings.

After so many instances of S-chip scares or failures over the past few years, some brokers here appear to have given up covering them altogether. Right after the China Minzhong fallout, a local broking house ceased its coverage on the S-chip sector, with an analyst noting that the time and resources needed to do detailed forensic research on China Minzhong to ascertain the truth behind the Glaucus allegations was beyond his reach.

Summing up investor sentiment, he wrote: “We believe the lack of accountability by S-chip management makes it a weak investment case for S-chip investors in Singapore, notwithstanding their attractive growth prospects and valuations.”


Discussion question: Do (systematic) accounting irregularities for a group of companies have negative spillover effects for others?

SGX panned as a place to raise funds in 2015

Kenneth Lim, 9 January 2015, Business Times Singapore

Association which says it represents nearly 30 listed firms urges Singapore businesses to consider markets abroad

AN advocacy group has suggested that businesses consider overseas markets and non-equity funding to raise capital, as it expects a lacklustre 2015 for the Singapore stock market.

The Small and Middle Capitalisation Companies Association (SMCCA), which says it has a membership of almost 30 listed companies, issued a report on Thursday stating its outlook for a weak 2015 market.

Citing non-oil export and industrial production data, it said it expects the Singapore economy to “weaken further” this year and drag on the stock market.

It observed that the declining trading activity as a percentage of market capitalisation in Singapore was worse than in rival exchanges such as Hong Kong, and that the “decreasing trend of total offer size and average offer size of equity IPOs” was a concern.

Asked about this, SMCCA president Tan Choon Wee clarified: “Our concern is not the lower average offer size, but that while there are claims that IPO numbers are up, the total amount raised by all these IPOs is not.”

Singapore Exchange (SGX) executive vice-president Chew Sutat replied that the numbers actually reflected a robust Catalist board:

“Business trusts and Reits have been well-received by investors. The average size of equity IPOs has come down and this follows the success we’ve had with Catalist listings, which have come both from SMEs that are homegrown as well as regional.”

SMCCA said it expects increased competition in the year ahead for “conventional fund raising” – defined as equity capital raising – as SGX “tries to increase number of listed companies without improving trading activities”. SMCCA also called for a “catalyst” to revitalise the stock market. In short, SGX needed to focus on creating excitement instead of coming up with more regulations, said Mr Tan:

“Excitement is not in more regulation or more education. It is in allowing market participants to explore innovations and opportunities. New regulations just introduce uncertainties. Policing and prosecuting should be the regulator’s job; telling investors how to invest and listed companies how to run their business is not.”

In response, Mr Chew argued that the market operator’s numerous outreach initiatives had raised turnover year-on-year in November and December, and that the coming rule changes will help, too.

“The board-lot size reduction on Jan 19 will help new and existing investors who have not been active to return to the market with sustainable trading and investing, and not only short-term speculative trading,” he said.

Recommending that companies seeking to raise capital this year consider overseas exchanges, Mr Tan said: “Given the current trading liquidity situation in Singapore, the more attractive overseas ones will be those which can offer better trading liquidity and vibrancy – markets such as Hong Kong, Malaysia and the UK are potentially attractive markets.

Listed companies can either do a secondary listing or spin off part of their business for a separate listing overseas, suggests the SMCCA, which said its network of expert partners can advise and help its members with these corporate exercises.

SGX’s Mr Chew pointed out that the primary market capitalisation growth of 27 per cent in the Singapore market from the end of 2009 to 2014 outpaced Hong Kong’s 26 per cent and Japan’s 24 per cent in Singapore dollar terms.

Overseas companies are also finding Singapore an attractive place to raise money.

“Market capitalisation statistics show growth in the market. We continue to benefit from our position as the earliest exchange to start driving international listings; a good proportion of the 41 listings last year were from overseas.”

Advocacy group’s actions do not serve interests of small, mid-caps

Kenneth Lim

806 words

9 January 2015

Business Times Singapore

AMBIGUITY and red herrings plague an advocacy group’s report that paints a bleak outlook for the Singapore stock market in 2015 and suggests that companies may do better raising capital overseas.

The thesis of the report by the Small and Middle Capitalisation Companies Association (SMCCA) can be summarised thus: 2015 will be a terrible year for the Singapore stock market, so if you have to raise capital or grow your company, think about doing it overseas or through non-equity means.

How did SMCCA come to that conclusion? First, SMCCA reckoned that “GDP in 2015 is thus expected to weaken” as non-oil exports and industrial production show signs of a slowdown.

But a down market in Singapore is not on its own a good reason to go looking for another bourse. The quality of a market, rule of law, currency and other factors matter too. And keep in mind that if Singapore’s trade-heavy economy is not doing well, many other economies will not be too rosy either.

SMCCA also argued that the weak economy aside, the Singapore stock market is facing deep structural problems. It noted that new-listing volumes in Singapore have declined over the past four years, and the average deal size has decreased as well.

“This decreasing trend of total offer size and average offer size of equity IPOs is a concern,” SMCCA said.

That seemed like an odd thing to say for a group that advocates for the interests of smaller companies. After all, smaller average offer sizes suggest that smaller companies are becoming a larger slice of the IPO market.

Asked on that statement, SMCCA president Tan Choon Wee backtracked, saying that it was actually only the total IPO volumes that concerned the association. “Our concern is not the lower average offer size but that while there are claims that IPO numbers are up, the total amount raised in by all these IPOs is not,” Mr Tan said. SMCCA also argued that the weak market will make “conventional” fund-raising difficult for companies. “Alternative” fund-raising methods such as medium-term notes will become more popular, SMCCA said.

Since when did debt become unconventional capital raising? Equity capital costs more than debt – companies would rather take on debt than equity whenever possible. And of course debt has been popular in recent years.

Interest rates have been historically low, making debt financing the clear favourite among companies. But these are all natural market reactions, and extend beyond Singapore. Interest rates are historically low in most other major markets. A company isn’t going to find a different reality when it tries to raise capital somewhere else.

SMCCA also mentioned in the report, more than once, that a “catalyst” is needed to revitalise the Singapore market. Asked to elaborate, Mr Tan said: “The Singapore market now lacks excitement. Excitement is not in more regulation nor more education. It is in allowing market participants to explore innovations and opportunities. New regulations just introduce uncertainties. Police and prosecute should be the regulators’ job. Telling investors how to invest and listed companies how to run their business is not.”

That, in essence, appears to be what SMCCA is after. More excitement, no new rules and less education. But will that really serve the interests of Singapore’s listed small and mid-cap companies?

The rules that SMCCA has opposed were raised in the wake of the penny stock collapse in 2013. Bear in mind that it was the smaller counters that were hit in that episode. If anything, the new rules are meant to protect their shareholders.

Has SMCCA forgotten the penny rout? Does it want a repeat? Do away with circuit breakers? Loosen disclosure rules? How can more education for retail investors be bad? And if Singapore Exchange (SGX) does not play that role, who will? Surely not SMCCA, which has a rather rash attitude towards market selection, has a confusing stance on average IPO sizes and views debt as unconventional capital.

Not to say that SGX does not face any structural challenges or that liquidity is not a pressing problem. But SMCCA’s preferred course of action seems to be a step backward.

Will asking companies to raise capital outside of Singapore really serve the interests of Singapore’s listed small- and mid-cap companies? It is not clear if most small and mid-cap companies feel that same way as SMCCA, which has a membership count of about 30 companies. That is out of 590 Singapore-listed companies with a market cap of under S$500 million.

Let’s hope the other 560 companies are more discerning.


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