BT: Is investing in China stocks riskier? (03 Nov 2006)

Business Times - 03 Nov 2006

Is investing in China stocks riskier?

By R SIVANITHY

IT WOULD be tempting to conclude from the murky events surrounding the controversial ouster of Bio-Treat Technology's chairman last week that investing in China companies comes fraught with all sorts of unknowable risks and that investors have to be extra vigilant when dealing with such companies.

Coming just a week after China Food Industries (CFI) was found to have faked its accounts via various dubious schemes, and with the bitter taste of China Aviation Oil's spectacular collapse still lingering in the mouths of investors, the Bio-Treat incident not only cast the China segment in a poor light, it also provides ammunition for critics who think the local market should be less accommodating towards the listing of foreign companies, especially those from China.

'China was, and always will be, an opaque black box, and Bio-Treat and CFI should remind us of that,' remarked one observer, who also pointed to various profit shocks reported by China companies over the past six months by way of additional illustration.

The outcome of these unfortunate events has been significant underperformance of China stocks over the past few weeks as investors shun the segment in favour of local stocks. This is a shame. To be honest, investing in China companies should be seen as being no more or less risky than investing in any other stocks, regardless of country of origin.

For example, if boardroom trauma is viewed as enhancing investment risk because of increased managerial uncertainty, then recent upheavals at integra2000 and Vantage Corp (and to a lesser extent, the surprising boardroom developments at Robinson's) which have occurred over the past couple of months suggest that top-level displacements are just as likely to occur in non-China companies as in Chinese ones. If fraudulent financial reporting is the issue, then the pro-China camp can quite justifiably point to the calamitous practices of Citiraya Industries and Accord Customer Care Solutions, two of the more high-profile corporate collapses in recent times. Both were Singapore-based and Singapore-owned.

Questionable practices at the initial public offer stage? Again, the risks are just as high for local companies as China ones - recall the infamous circumstances surrounding Mid-Continent and Links Islands, two companies whose shares were cornered and manipulated soon after listing.

Some might suggest that China companies are more likely to cause profit shocks than their local counterparts. Again, this can be disputed. One might argue, for example, that the blow from Creative Technology's larger-than-expected loss announced this week could have been cushioned by a profit warning or guidance of sorts.

The important point to note is that in a relatively mature caveat emptor market and in a world where investment borders are no longer as clearly delineated as before, the onus is on the entire gamut of intermediaries like auditors, financial sponsors, lawyers, investment banks, underwriters and brokers to minimise the risk of shocks to the investing public. Companies, too, are responsible for being transparent and forthcoming with their disclosures.

Quite correctly, this is the model towards which the regulatory authorities are moving. The Singapore Exchange, for example, is studying the possibility of introducing a third board, to complement the main board and Sesdaq, on which companies can raise capital as long as they have an approved financial adviser. If and when such a board were to be launched, and if China stocks were to proliferate, investors should recognise the risks are first and foremost company-specific and not country-specific.

Copyright © 2005 Singapore Press Holdings Ltd. All rights reserved.

Crash stock: Global Tech

Since today's papers put the financial woes of this SGX-listed Hong Kong company back in focus since it was suspended from trading more than a year ago, I thought I would write about the story of this stock. It is a very interesting tale indeed, and the whole sequence of events has transpired just over these couple of years.

Global Tech was a leading distributor of Motorola, Nokia and in particular Samsung mobile phones in China, already the largest mobile phone market in the world by 2002. Its revenues had increased steadily from HK$2B in 1997 to HK$4B by 2001, with rising margins propelling bottomline from HK$500M in the same period. Valuation-wise, by 2002 it was selling at 4 times trailing PE, seemingly a great bargain given the earnings performance over the past few years.

It turned out to be the classic example of why investors should not catch a falling knife. The share price had dropped from S$0.20 (split-adjusted) in 2000 to $0.10 by mid-2002 despite the strong performance and high dividend yield of 8%. In early 2002 the company's chairman was reported to have been arrested in Guangzhou for tax evasion, which he later admitted to and had to step down from his Global Tech positions to be taken over by his brother Timothy. He was also charged with misstated sales in two of his privately- controlled companies.

By early 2003, before the release of their FY02 results, Global Tech was trading at 2 times PE and a remarkable 18% dividend yield, at a price of 5 cents. Then the bombshell dropped. In the released FY02 results, topline had grown to HK$5B but bottomline had shockingly reversed to a loss of HK$200M; there was also a restatement of FY01's profits reducing it by HK$100M. The company explained that massive provisions had to be made for doubtful debts and slow-moving inventory, amounting to an amazing >HK$200M each.

Things have deteriorated rapidly since then. Global Tech had several changes of auditors, reported another dismal set of results for FY03 with continuing losses and with revenues dropping as well. The company voluntarily suspended trading in 2004 when a number of their board members resigned and it claimed that time was needed to find replacements. Since then it has not resumed trading. The last traded price was about 1-2 cents.

The Global Tech episode clearly illustrates the importance of management integrity and transparency. Global Tech continually denied the truth of reports about its chairman being in litigation trouble, and the massive provisions in FY02 suggested that its probable overstatement of profits in previous years had finally caught up with it. The fact that auditors had to be changed several times and that non-executive directors resigned subsequently in 2003-04 also signalled deep problems within top management.

Why do I sound so familiar with the stock? That is because I was vested in it and luckily bailed out (with big losses) before it got suspended. To me it was another costly lesson not to be tempted by extraordinarily low valuations, and to have respect for how the market values stocks; it was another manifestation of the fact that generally, the Efficient Market Hypothesis does assert itself. If a stock is low-priced and continues falling, it could be pricing in some adverse news that might not yet have been made public and the investor should not plunge in just because it "looks cheap".

http://stocktaleslot.blogspot.com/2005/08/crash-stock-global-tech.html

Citiraya

Let's help each other to learn from Citiraya

The initial collapse of Citiraya spooked me because I could not uncover any warning signs in the financial statements. In fact, the statements looked so impressive that it was easy to be tempted to buy despite the soaring price.

Perhaps some smarter financial Sherlock Holmes could enlighten me as to where I could have missed out in the financial statements. I am not able to detect any glaring figures.

Nevertheless, there were still warning signs;
1. Senior management resignations
Below shows the series of resignations among its key personnel.
# 25 Sep 2002
Resignation Of Director
# 17 Nov 2003
Resignation Of General Manager
# 31 Dec 2003
Resignation Of Director
# 23 Feb 2004
Resignation Of Managers
# 31 May 2004
Resignation Of Financial Controller
# 02 Aug 2004
Resignation Of Director

There was some disagreement between the co-founders, the Ng brothers. Raymond Ng quit and sold off the bulk of his shares. Some other key figures quitted along with Raymond Ng who set up a rival business.

Given the booming picture painted by Citiraya's financials, it is a better bet to stay on in Citiraya than to join a new start-up. The high turnover among the key staff is cause for suspicion and worry. What else could they have known?

2. Insider selling
The co-founder Raymond Ng sold off the bulk of his shares. If a knowledgeable insider expresses his lack of confidence in the company, it is a cause for concern.

3. Stock is becoming too expensive
Taking 3Q Sep04 book value and last traded price,
Price to book value = 5.94
PE ratio = 40.51

Even if the accounting figures were accurate, the financial ratios are enough to indicate that the price has risen to risky levels.

Given the resignations, insider selling and the expensive price, it should easily fail the margin of safety test of a conservative investor.

Investors who were burnt by Citiraya will probably be thinking "Is this smart aleck trying to prove he is smarter than the rest of us? It's just wisdom on hindsight" I would like to end by saying it is easy to analyse based on hindsight. The difficult part is staying objective amidst the excitement of seeing the price soaring to ecstatic levels. Frankly speaking, I myself might have bought it out of greed then. Luckily, I was never a follower of Citiraya.

For investors who were burnt by Citiraya, this post was never meant to show somebody else was smarter than you. The purpose is to learn from this lesson so that we all can be smarter next time to protect ourselves against evil fraudsters in future.

teachme posted on 23-5-2005 at 06:20
http://www.wallstraits.com/community/viewthread.php?tid=1631&page=1#pid13711