China-based firms now going cheap, any takers?

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This article first appeared in The Edge Financial Daily, on September 5, 2016.


KUALA LUMPUR: As the economic weather turns harsh, investors tend to seek shelter in cash-rich companies. But China-based firms, many of which are in a net cash position, are unlikely to be the top choice for investors on Bursa Malaysia, although they are trading below cash per share.

Sad to say, investments made in this breed of stocks are proven fruitless. Investors, who subscribed to the initial public offerings (IPOs) and have kept their shares until today, are in deep losses.

A quick check has showed that share prices of nine out of 10 China-based companies that are listed on local exchange have tumbled below their IPO prices. The quantum of the fall could be as much as 96%. Most of them are literally penny stocks which are trading below 10 sen.

In addition, some of them had made cash calls asking shareholders to pump in more money for business expansion or working capital, although a majority of these companies have a cash pile of over one billion yuan in the banks — sizable cash coffers that not many listed companies have, including blue-chip companies.

Shareholders would have suffered from shareholding and earnings dilution if they did not subscribe to the rights issue.

Based on last Friday's closing price, except Kanger International Bhd, other Chinese-based companies are either trading at their all-time low or near to historical low. And some have been suspended from trading due to failure to submit financial accounts.

On the back-of-the-envelope calculation, these companies’ cash pile translated into cash per share of 1.5 sen to 115 sen, many of which are notably higher than their share prices.

Analysts noted that in the most recent case, shoemaker XingQuan International Sports Holdings Ltd announced the worst-ever quarterly net loss in the fourth quarter ended June 30, 2016 (4QFY16) which has again shaken the confidence, which is already not high at all, on Chinese firms.

XingQuan revealed that its customer had rejected 3.6 million pairs of custom-made shoes and as a result it sank into the red with a net loss of 605.9 million yuan (RM386.52 million) in 4QFY16.

The rejected shoes had cost XingQuan a whopping loss of 415.7 million yuan (RM252.06 million). On top of that, it suffered from collection problem. The slowdown in Chinese economy hit hard on its sales, its revenue halved to 129.7 million yuan (RM82.7 million).

Just a few months back, XingQuan, which then had RM945 million cash in bank, completed its rights issue at 30 sen per share. The cash call was undersubscribed, although it was sweetened by free warrants. Its share price closed at 12 sen last Friday.

XingQuan is the first China-based firm listed on Bursa, but it is not the first one that has sunk into the red.

In May, Bursa warned that it would suspend shares of two Chinese firms — Maxwell International Holdings Bhd and Multi Sports Holdings Ltd — from trading if both companies failed to submit their latest annual reports before deadline.

For Maxwell, it has fallen into the Practice Note 17 status after external auditor Baker Tilly Monteiro Heng expressed a disclaimer of opinion in its audited financial statements for the financial year ended Dec 31, 2015 (FY15).

The disclaimer of opinion is premised on that Maxwell was unable to provide complete supporting documents for the RM57.25 million advertising and promotion expenses incurred by subsidiary Maxwell (Xiamen) Co Ltd, whose office had ceased operations then.

Multi Sports, another footwear producer has delayed the submission of its annual report and audited statements for FY15, citing the delay was caused by “additional works” by external auditors.

The company had announced on Apr 25 that there would be a delay of at least two months in the release of the documents, as auditors had to carry out more work to verify its expenditure and bank balances. This does not paint a good picture.

Consequently, the counter has been from trading since May.

In 2013, China Stationery Ltd caught fire. The fire destroyed the stationary maker’s accounting books. Since the incident, the company’s earnings have not recovered to the previous levels.

When Bursa started looking beyond the shores for potential IPO candidates, its move met with scepticism about attracting the rotten apples, instead, having seen the slew of corporate scandals in Singapore.

Simply put, the scepticism seems to have proven that it is not that harsh after all.