Wednesday, 3 March 2010

Coming to grips with S-chips’ cash positions

It is no surprise that China firms listed here have a yawning credibility problem, given the antics over the past 12 months. But what does amaze is their lack of effort in trying to improve their tattered image.


Guanyu 道 said...

Coming to grips with S-chips’ cash positions

Simple remedial measures can help these companies fix their image among wary investors

By Goh Eng Yeow
01 March 2010

It is no surprise that China firms listed here have a yawning credibility problem, given the antics over the past 12 months. But what does amaze is their lack of effort in trying to improve their tattered image.

Investors have considerable doubts over the cash balances in some of these firms, yet the companies have been doing little to ease those doubts during the current reporting season.

Being upfront about cash levels would have boosted confidence and gone a long way towards assuring investors that parking their money in S-chips is a sound investment strategy.

No one needs reminding that a year ago, the market was rocked by one accounting scandal after another as auditors uncovered irregularities in market favourites like Fibrechem Technologies and China Sun Biochem, with huge sums of cash purportedly gone missing from both companies’ coffers.

Around the same time, India was rocked when the founder of Satyam Computer confessed to inflating earnings and inventing a US$1 billion (S$1.4 billion) cash pile to give the impression of fast growth.

The similarities between the accounting irregularities unearthed at S-chips and those at Satyam called into question those glowing company reports showing consistently high growth and astoundingly high levels of cash.

It has all led to a meltdown in investor interest in S-chips, leaving many to trade at a huge discount to their net cash value. This refers to the amount of cash a shareholder would get if a company is broken up.

One year after the scandals, the question mark over the high cash levels in S-chips continues to fester among investors.

S-chips have largely themselves to blame. They appear to display a serious lack of effort to boost confidence as they unveil full-year results.

They give the impression of going through the motions, presenting their results only because regulations require it.

As a result, the big discount at which some of them are trading to their net cash value has not narrowed appreciably.

It is not too late to turn this around. In the weeks ahead before they present annual reports to shareholders and hold annual general meetings (AGMs), S-chips will have a golden opportunity to make up for the neglect in assuring investors over their cash hoards.

One dealer recalls that at the height of the jitters over the high cash levels of S-chips last year, the investor relations officer of one firm even waved a bank statement during analysts’ briefings purportedly showing the amount of cash held in the bank.

Naturally, such amateurish gestures failed to restore confidence.

It is true that the media spotlight on the few S-chips that had gone astray soured sentiment for the rest of the sector, with investors taking a ‘better be safe than sorry’ attitude.

But this does not mean that S-chips can pretend that the problem does not exist.

The bosses of a few S-chips have taken extreme actions like delisting their firms. The rationale is that they can buy back the business for a song, as they can repay bank loans taken out to pay off minority shareholders with the company’s cash hoard.

This is an unhealthy trend that could hollow out the local bourse and deprive it of promising high-growth firms much sought after by investors.

After all, investors showed during the boom years from 2004 to 2007 that they had a voracious appetite for S-chips, which offered them an opportunity to ride on China’s booming economy.

Fortunately, only a few simple remedial measures need to be taken to restore confidence, yet S-chips have yet to undertake them.

For a start, they can transfer part of their cash hoards to branches of recognised banks like HSBC and Standard Chartered in Shanghai, Beijing and other major mainland cities.

Guanyu 道 said...

Better still, they can keep the money at Singapore lenders like DBS Bank, OCBC Bank and United Overseas Bank - all of which are expanding their branch networks aggressively in China.

Investors know these banks and have faith in them.

S-chips can also do more to boost confidence in the numbers. Besides getting existing auditors to certify the accounts, S-chips can engage international accounting firms to verify cash balances.

Independent confirmations will speak far more loudly than futile gestures like waving a bank statement in front of analysts.

And any boost a company’s share price gets from a lift in confidence will far outweigh any expenses incurred. Above all, cash-rich S-chips can show more generosity by rewarding shareholders with a big dividend.

Investors find it hard to understand why S-chips want to sit on a cash hoard that attracts only 1 per cent interest in Chinese banks, while share prices languish at a big discount to break-up value.

Bosses will need to explain to shareholders at upcoming AGMs if they do not put these simple remedial measures in place.

A year has already been wasted in trying to resolve the debate over whether the cash noted on an S-chip’s balance sheet is really there in the first place.

If the problem continues to fester, S-chips will have only themselves to blame for the sorry state of affairs.