There have been numerous frauds revolving the Chinese companies that were listed on SGX. Below is a non-exhaustive list of S-Chips that went bad (courtesy of Maria Teo):
- FerroChina – Unable to settle debts and loans despite significant profits
- Fibrechem Technologies – Discrepancies between trade receivables and bank balances
- Beauty China – Force-sell of shares of controlling shareholder, which were pledged for Company’s loans
- Sino-Environment – Questionable cash transactions
- Oriental Century – Inflated sales and cash balances
- China Printing & Dyeing – Unable to settle debts
- China Hongxing Sports – Irregularities in the cash and bank balances, receivables, payables and expenses of two China subsidiaries
- Hongwei Technologies – Questionable cash and bank balances in its subsidiary
- China Gaoxian – Questionable cash and bank balances of two subsidiaries
- Sino Techfibre – Fake invoices
- Falmac – Directors and auditors denied access to critical accounting records
- Celestial NutriFoods – Defaulted on liabilities, unexplained cash outflows and ownership of subsidiaries were transferred without disclosures
- China Milk – A large number of accounting irregularities, delay in paying bond holders
Given these statistics, it is no surprise that investors have lost confidence in S-Chips and would avoid the stocks totally.
The key challenge is that there is no way to verify whether the numbers in these annual reports are true. Even auditors may be fooled if the companies have forged the documents flawlessly.
Personally I find it very difficult to trust the numbers but if you were to point a gun on my head to invest in S-Chips, I would look at one thing – dividends.
If the S-Chip is able to give out a consistent or rising dividend over time, I am more willing to give more trust because at least I would be able to recoup some part of my invested capital each year.
With that in mind, I have studied the S-Chips which have given out dividends for consecutive 5 years.
I have added some information about these S-Chips:
- Lowest yield = the lowest dividend yield in the past five years (based on the dividend paid out than year, divided by the average share price for the whole year)
- Highest yield = the highest dividend yield in the past five years (based on the dividend paid out than year, divided by the average share price for the whole year)
- Dividend Trend = Rising means the subsequent year’s dividend is at least equal or higher than previous years. Consistent means the dividends have stayed the same for each year. Fluctuating means the dividends were not consistent, could go lower or higher in subsequent years. Declining means the dividends have turned lower as the years went by. Of course, rising and consistent are preferred trends.
- Average dividend payout ratio = stated as the percentage of earnings paid out as dividends. A company is considered good if the dividend yield is high and yet the payout ratio is low, so that the company can retain enough earnings to grow her business. I have averaged out the past 5 years of payout ratio.
| Stocks | Lowest Yield | Highest Yield | Dividend Trend | Average Dividend Payout Ratio |
|---|---|---|---|---|
| CM Pacific | 5.9% | 9% | Rising | 0.55 |
| China Sunsine | 3.8% | 4.7% | Consistent | 0.32 |
| Memtech | 3.7% | 10% | Fluctuating | 0.47 |
| Yangzijiang | 3% | 5% | Fluctuating | 0.28 |
| World Precision | 2.2% | 12.1% | Fluctuating | 0.39 |
| Eratat | 2.2% | 5.5% | Fluctuating | 0.1 |
| Fujian Zhenyun | 1.9% | 4.2% | Declining | 0.07 |
| China Aviation | 1.7% | 2.8% | Consistent | 0.24 |
| Southern Packaging | 1.4% | 6.2% | Fluctuating | 0.19 |
| Sunpower | 0.6% | 1.2% | Declining | 0.04 |
| 8Telecom | 0.3% | 3.5% | Fluctuating | 0.15 |
| United Envirotech | 0.3% | 2.1% | Fluctuating | 0.09 |
From the table, an investor can nitpick further, which would likely to CM Pacific and China Sunsine, as they have reasonable dividend yields, healthy dividend trends, and decent payout ratios.
Important Warning
This article serves to give a statistical view of the S-Chips and do not provide a qualitative study into the numbers. And it is important to note that one of the fraudulent company, China Milk, also gave dividends, albeit on an inconsistent basis. Hence, investors should always do the due diligence and be able to accept the risks should you invest in the stocks. Please note that this article is not meant for any buy or sell recommendation.
I do not own any of the stocks mentioned in this article.
I would look at dividend, debt level and having a positive free cash flow. Paying consistent dividend by taking on excessive debt with negative Fcf doesnt make any sense to me. Not just for s chip but all other company alike. Noble pays dividend every yr…
I would take closer look if there was no dividend..coe ownership, how he rewarded himself, debt, recent m&a or other capex, cash flow that gets reinvested for high growth, roi/roe…
Hi SL, of course an investor can look deeper into the companies. I devised the above rules to filter out the chaff first. It would reduce the number of stocks to look at in detail.
Hi Alvin,
Like you, I have avoided S Chips from the beginning of my investment journey.
If you can’t ascertain for sure the integrity of the numbers, it’s better to pass it. But a quick look at the dividends would be a quick and Pareto-efficient method to become more confident of an S-chip.
Dividends given out in cash doesn’t lie. No wonder quite a few of the local financial bloggers are vested in CM Pacific.
“I have added some information about these S-Cips”
Some typo
Thanks for the post Alvin!
Would just like to ask you seasoned investors here: how would you determine if a company is in S-chip? which part of the annual report do you look at?
Thank you!
LS
I would define S-Chip as a management comprise Chinese Nationals.