The S Chip financial scandals in Singapore continue to grow - we now have on the list China Print & Dyeing, Ferro China, FibreChem, Oriental Century, China Sun Bio Chem, Celestial Nutrifoods, China Enersave and Sino Environment - just to name a few. I spoke to a fund manager this morning who mentioned that they are now shying away from China stocks in Singapore because they are less comfortable with the robustness of their financials and their governance. However, they recognise that you must still be invested in China so they have been investing in China stocks listed in Hong Kong. This is not good for the Sgx as we have prided ourselves as being a good market for China stocks to list besides Hong Kong. Anyway that is an issue for the Singapore Government, MAS and SGX to resolve.
Back to China stocks - I agree with the fund manager that investors must have China stocks in their portfolio but given the number and rate of scandals and audit issues - we should perhaps focus on China companies owned and managed by Singaporeans - to provide the exposure and also the comfort. This is not a guaranteed safeguard but a reasonable alternative.
The second China play owned and managed by Singaporeans which I would like to add to my list is Midas Holdings (see chart below). The first stock was Straco Corp but I am waiting for them to consolidate the shares and hopefully increase their dividend payout as well.
The share price decline from its peak means, other things being equal - its a five bagger if it returns to its high and not a "BIG" one but still worth reviewing and considering anyway. I met the CEO for breakfast shortly after its FY2008 results release and went through the announcement for clarification and some guidance for 2009 and 2010. Its main business is aluminium extrusion for train carriages and it also manufactures and installs PE pipes.
The key points from the breakfast meeting are:
a) for its aluminimum it operates on a cost plus basis - so the sharp decline in aluminimum price means that both revenue and profit from this division will decline despite margins being stable.
Comex Aluminimum Price
b) however a larger contribution from its 32.5% associate will mitigate the fall in its core earnings.
c) it will spend a further S$30-35mn in capex in 2009 to increase aluminimum extrusion capacity which will be increased by 50% but this will lower its cash position in its balance sheet to a net debt position from a S$ net cash position of about S$12mn now.
d) 2010 earnings could increase strongly if the PRC Government's plan to invest RMB2 trillion on passenger and rail systems is implemented - this is part of China's pump priming plan for the global crisis.
e) of this RMB2 trillion aboit 20-30% will be for rolling stock and of this 1-2% will be for the carriages where Midas and its asociate Nanjing SR Puzhen Rail Transport is positioned.
f) forward PERs for 2009 are about 7-8 times but are set to fall in 2010 to 4-5 times if the PRC's plan and Midas capacity expansion go ahead and are executed in a timely fashion.
Most brokers have a BUY with intermediate term price targets of about S$0.70 to S$0.80.....I am looking for a two year price target of about $1.50 if the expected earnings growth in 2010 of S$40-50mn can come to fruition.
When I mentioned MIDAS to a fund manager as a China play owned by Singaporeans - they highlighted that its Chairman had some corruption issues in the past....he owns 20.7% - but CEO Patrick Chew owns 14.3%, Penta Investments 7.1%, Fidelity 4.9%, Chew Hua Seng (Raffles Education) - 4.9% and Gay Chee Cheong 4.2%.
I checked and the corruption allegations in a Chinese newspaper were denied by the Company in 2007.