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In recent years, S-Chips have gotten a bad reputation from some negative cases. When you google S-Chips, the first few links that pop up would inevitably be linked to either scandals or frauds, just try it!


Some cases that come to mind would be Eratat Lifestyle Limited (SGX:FO8) – Suspended since Jan-2014 and FerroChina Limited (SGX:F33) – Delisted in Mar-2011. Check out some of the interesting things that S-Chips have done in the past in our article “The Funny Thing S-Chips Say“. We guarantee a LOL moment for all of you 🙂

There are always some black sheep in the family. When a few of these high profile scandals were exposed, the whole spectrum of S-Chips (Whether they were good or bad) was hit by a halo effect in a negative way.

So what are S-Chips?

Essentially S-Chips or S-Shares refer to Chinese companies listed on the Singapore Exchange Limited (SGX:S68). In most cases, this meant that while listed on SGX, these companies had no business operations whatsoever within Singapore with most, if not all of their operations, if any (I am exaggerating here!), in China.

The difficulties with such structures would be multifold for the local (Singaporean) investor:

1)    Not easy to do on-the-ground research:

If you were interested in a REIT like Mapletree Commercial Trust (SGX:N2IU), you could just take a train down to VivoCity to check out the crowd and occupancy rates. Whereas say that you were interested in an apparel company with their factories all in Fujian, I would think that you might not go all the way there and might have to take management’s word for what’s happening there.

2)    No legal jurisdiction:

Say if the company collapses and has to be sold out, in theory, investors should get what’s left after the creditors are paid. However, in practice, things aren’t so straightforward. Investors would be at the mercy of how the authorities, as well as the management, handle the situation.

3)    No extradition treaty between China and Singapore:

Meaning to say that prosecution by Singapore authorities of Chinese perpetrator is close to impossible. This might breed an environment whereby there would be a lack of incentive to treat shareholders equitably.

This article “Why S-Chip fraud cases keep cropping up” published in the Business Times on 17 Feb 2012 showed the vicious cycle involved – “Low valuation leads to low quality and the low quality confirms the low valuation. It is a vicious cycle“.

Value In Action

Though not all S-Chips are bad, we were of the opinion that for the regular investor, it may be wiser to consider investments with a higher degree of clarity; rather than searching for buried gold amongst a minefield.

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A path that might be fraught with lesser dangers could be another type of chips – Blue Chips, explored in one of our earlier articles “Blue Chips Or Potato Chips“!

 

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All views and opinions articulated in the article were expressed in the team of Value Invest Asia’s personal capacities and do not in any way represent those of his employer and other related entities. Value Invest Asia does not own any shares in the companies mentioned above.

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