Accounting woes threaten Chinese listings in Singapore

The string of blow-ups at overseas-listed Chinese companies could derail Singapore Exchange’s (SGXL.SI) efforts to revive investor confidence and dent its status as a major trading hub for mainland issues. 

The bourse’s long-running charm offensive in China means Chinese stocks, known in the city-state as S-chips, now make up around 20% of its 779 listed companies, up sharply from April 2004 when there were just 41 mainland firms listed on the exchange.

But a rash of accounting problems that broke this year, reminiscent of a previous wave in 2008 in Singapore, threatens to undermine SGX’s strategy as investor interest fades.

 

“S-chips have been in the news for all the wrong reasons,” said Andrew Chow, head of research at brokerage UOB Kay Hian. “I think it’s going to be a long hard slog for the S-chips to gain investor interest.”

 

On Thursday, SGX reprimanded Chinese multimedia firm KXD Digital Entertainment (KXDD.SI) and its former chairman and CEO Liu Fusheng for breaching a string of rules, including failing to disclose it had ceased business operations.

 

The same day, China Gaoxian (CGXF.SI) said its special auditor had obtained evidence showing its cash and bank balance at the end of last year was around 93 million yuan ($17.2 million), not 1.1 billion yuan which the fabric maker had originally claimed.

 

Chinese companies from Toronto to New York have taken a beating on concerns over their accounting practices amid a spike in scandals that has roped in U.S. and Chinese regulators.

 

SGX has unveiled a series of measures to improve corporate governance and shore up confidence in the S-chips. These include asking firms to improve their control of cash and other assets.

 

Last month, it proposed new rules requiring companies to hold meetings with shareholders in Singapore so investors had the chance to grill company management -- something they had been prevented from doing with some Chinese firms.

 

But these measures may not be enough to attract investors.

 

“People are increasingly worried about Chinese companies and Chinese management as some of them have been too lax in their reporting standards,” said Michael Preiss, chief equity strategist at Standard Chartered in Singapore.

 

The FTSE Straits Times China Index <.FTFSTC>, which tracks Chinese stocks listed in Singapore, has fallen around 12% so far this year, underperforming a 4% decline in the broader Straits Times Index <.FTSTI>.

 

Trading volume in S-chips for May declined 43% to 3.5 billion shares from a year ago while volume in non-Chinese companies only fell 23% to 18.2 billion shares.

 

IMPROVE IMAGE OR MOVE ELSEWHERE

The relatively low valuations of S-chips compared with Chinese companies listed in other markets such as Hong Kong and Taiwan have already prompted some of them to seek dual listings or delist from the SGX.

 

“The trend towards delisting here and relisting in other markets is on the rise,” said Ng Joo Khin, a partner at Singapore’s Stamford Law Corporation, who specialises in capital markets and corporate finance.

 

“The smaller companies, especially those not well followed here, are looking at taking themselves private partly because the valuation is lower now than before,” Ng said.

 

Sihuan Pharmaceutical delisted from SGX in 2009 and saw its market value jump 10 times after relisting on the Hong Kong Stock Exchange within less than a year, according to Singapore brokerage DMG & Partners Research.

 

More than 20 companies, including shipbuilder Yangzijiang (YAZG.SI) and livestock drug maker China Animal Healthcare (CAHC.SI), are looking at forming an association to represent the sector in Singapore.

 

“One way to reinject the confidence among the investors is to identify the good S-chips who can share their experience and best practices with the rest of the S-chips,” said Kathy Zhang, managing director of investor relations firm Financial PR, who is one of the initiators of the body.  

However, S-chips face an uphill task.

 

“We pay a lot of attention to the track record of the management, the sustainability of the business, the cash flows, as well as the annual reports and the accounting policies,” said Kristy Fong, an investment manager at Aberdeen Asset Management Asia.

 

“These are the sort of criteria that we apply across the board, and most of the S-chips don’t really meet our investment criteria in the first place.”