Ying Li

S-chips ‘may not do so well for rest of year’     EXCEPT . . . China-based firms that are listed on the Singapore Exchange, or S-chips, may see a lacklustre performance for the rest of the year as China’s economic cooling measures continue to weigh down sentiment on these stocks.Thomson Reuters.

China measures still affect sentiment

Millet Enriquez

emelita@mediacorp.com.sg

SINGAPORE —

Still, prospects are not all bleak for the S-chips — which have generally taken a beating so far — as some analysts believe there are some bright spots.

Sectors such as consumer goods and food could prove resilient amid the overall market weakness.

“Just when you think that things wouldn’t come back, they often do.

“And I believe that this will be the case for the S-chips — though I would advocate very selective stock picking,”

said Mr Terence Wong, co-head of research at DMG and Partners.

As at Aug 12, some of the component stocks of the FTSE ST China Index have shed as much as 60 per cent in their share prices since the start of the year, according to data provided by

Asia Environment and Jiutian Chemicals were among those whose share prices have dropped considerably.

So far, valuations for S-chips are low. At a price to earnings (PE) ratio of about 5.7 or 5.8, they are quite below their counterparts in Hong Kong and Shanghai where valuations are seeing double digits, said Sias Research vicepresident Roger Tan.

Said Mr Tan: “In general, we are going to see a weaker S-chip market.

There will be one or two gems.”

Among those which could offer some upside potential are Ying Li, C&O Pharmaceutical Technology, and China Minzhong.

Another company singled out with good prospects is Singapore firm Midas Holdings which has significant business interests in China.

C&O Pharmaceutical, for one, is on track to meet its expansion plans, said Mr Tan.

While Midas will likely benefit from the China government’s commitment to improve its railroad system, said DMG’s Mr Wong.

“With the burgeoning of the middle class in China as well as the upping of the minimum wages over there, that would actually benefit a lot of the consumer players.

“Some of the companies that we do cover on that front would be the likes of China Hongxing Sports,” said Mr Wong.

While these stocks offer good valuations, Mr Tan said investors should also be prepared to hold on to the stocks for the long-term as it will take a while before they see some upside.

While investor confidence is gradually returning, further evidence of good business prospects, earnings track record, good management and transparency will be needed to gain investors back, analysts said.

Mr Tan said the fate of S-chips is also likely to rest on how China manages its cooling measures: “(If) they are not careful in managing the way they try to reduce the size of the bubble, and it does burst, then that may cause a panic in S-chips.”

In the meantime, these counters will have to compete with local companies to gain investor interest. “If they have a good growth story I don’t think it’s difficult to do that,” he added.

It flags postponing the launch of the residential component of its Da Ping project to 2H11 from 2H10 as a risk to bottom-line improvement.

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Bloomberg 4 Aug 2010

China’s banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets, a person with knowledge of the matter said.

Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, the person said, declining to be identified because the regulator’s requirement hasn’t been publicly announced. Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent.

The tougher assumption may underscore concern that last year’s record $1.4 trillion of new loans fueled a property bubble that could lead to a surge in delinquent debts. Regulators have tightened real-estate lending and cracked down on speculation since mid-April, after residential real estate prices soared 68 percent in the first quarter from a year earlier, according to estimates from Knight Frank LLP, the London-based property adviser.

The China Banking Regulatory Commission said in a July 20 statement that banks should “continue to deepen” stress tests on lending to property and related industries, citing a speech by Chairman Liu Mingkang during a meeting attended by regulatory officials and bank heads. The release didn’t give details. Officials at CBRC didn’t return calls seeking comment.

Results from previous stress tests show that the ratio of non-performing real estate loans among Chinese banks would rise by 2.2 percentage points if home prices drop 30 percent and interest rates rise by 108 basis points, the person said. Pretax profits would fall 20 percent under that scenario. A basis point is 0.01 percentage point.

Property Slowdown

Measures to cool property-price gains included raising minimum mortgage rates and down-payment ratios for second-home purchases, and a suspension of lending for third homes.

Property prices in 70 Chinese cities dropped 0.1 percent in June from the previous month, the statistics bureau said July 12. Prices rose 11.4 percent from a year earlier, the second monthly slowdown after April’s record expansion.

Bank of China Ltd.’s bad-loan ratio would climb 1.2 percentage points under the worst-case scenario drawn up in the latest stress tests, Li Lihui, president of the nation’s third- biggest lender by market value, said May 27.

Record lending last year in China and the ensuing surge in home prices have stoked concerns that a bubble is forming that may threaten the banking industry. Property stocks are the worst performers on the Shanghai Composite Index this year with an average 21 percent drop, data compiled by Bloomberg show.

Rogoff’s Warning

China’s property market is beginning a “collapse” that will hit the nation’s banking system, Kenneth Rogoff, a Harvard University professor and former chief economist of the International Monetary Fund, said July 6.

Average prices may fall as much as 20 percent over the next 12 to 18 months, with declines of up to 40 percent in “big bubble” cities, Nomura Holdings Inc. said in a July 2 report. The impact on banks’ asset quality will still be “limited” as long as borrowers have adequate income to keep paying their mortgages, Nomura said.

The banking regulator has reminded lenders that some developers with high debt burdens and large land reserves already face the risk of a funding collapse, the person said. Banks were told to gauge developers’ real borrowing needs by monitoring the progress of projects under construction and to “strictly” control the pace of lending, the person said.

“Special mention” real-estate development loans have climbed in Shanghai since April and rose by 1.4 billion yuan ($207 million) in June, Xinhua News Agency reported Aug. 1, without saying where it got the information.