Report from Asian leading english daily The Straits Times:China fund managers drawn to S-chips

China fund managers drawn to S-chips;
The key reason: Their valuations are lower than those of firms in China


Jonathan Kwok


LOCAL retail investors have been shunning S-chips for a while but fund managers in China are increasingly turning their attention to these Singapore-listed mainland counters.


They cite the much lower valuations compared with those of firms listed in their own country as one of the main draws.


Mr Rocky Lu, chairman of Shanghai-based family investment firm China Best with about 500 million yuan (S$99million) under management, said: 'The further the Chinese company is listed from China, the more likely it is that valuations will be lower.


'Investors further away may not understand the company very well.'


Mr Lu, one of a number of fund managers here on a rare trip to understand firms on the Singapore Exchange (SGX), has already invested in S-chips like Yangzijiang Shipbuilding, Sunpower Group and Sound Global.


The Shenzhen and Shanghai bourses are among the most active stock exchanges in the world and this has helped drive up valuations of China companies there.


The price-earnings (P/E) ratios of firms on these markets can run into the hundreds and there are very few firms with ratios below 10.


By contrast, most of the 150 or so China companies on the SGX have P/E ratios under 10, meaning that there are many bargains to be had, at least in the eyes of China fund managers.


Price earnings is a commonly-used indicator of stock value - the higher the ratio, the higher the shares are valued.


Other than S-chips, the funds are also looking at other sectors such as marine and offshore plays, telcos and food and beverage firms, said Ms Kathy Zhang, managing director of public and investor relations firm Financial PR, which organised the trip. These may include Singapore or regional companies.


'There's definitely an increased interest from China funds to invest in Singapore, compared to two to three years ago,' said Ms Zhang.


The delegation from six funds, including government-linked investors Harvest Fund and CDB Capital, is visiting a mix of Singapore and China companies to speak to their bosses.


The itinerary yesterday included Chinese machine maker World Precision Machinery, Singapore-based heavy equipment and engine company Kian Ann Engineering and Singapore's Q&M Dental Group. They will visit telco StarHub and minerals company Sapphire Corp among others today.


Mr Lu said that when deciding whether to invest, he looks at the boss, the business, including cash flow and historical profits, and the sector it operates in. He wants to speak to the boss before investing and prefers an ethnic Chinese so that communication is easier.


Mr Lu said he may set up an open-end fund here, where other investors can join in his investments, although there is no timeline. A reverse takeover of an existing firm to become a listed investment company is also an option.


Dr Zhang Xiying, chief investment officer of Beijing-based United Innovation Capital, said he was going to take a closer look at Q&M Dental and China-based winemaker Dukang Distillers, which was also on the visit schedule yesterday.


The spectre of corporate and accounting scandals is also a consideration for the fund managers, another reason Mr Lu cited for his need to study the firms well and speak to the bosses.


Locally-listed companies welcomed the meeting with fund managers who could potentially pump millions into their stock.


'The inflow of China investment funds into the Singapore market will provide additional liquidity and increase the interest in good S-chip companies as they can better understand the Chinese companies,' said World Precision chief financial officer Samuel Ng.


Mr Ngo Yit Sung, investor relations manager of Dukang Distillers, said the fund managers studied the company even before the meeting.

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