S-chips underperformed the broader market in 2011 and 2012. Singapore-listed Chinese companies, or S-chips, are a segment of the market that many investors have shied away from in the past two years. Many S-chips are relatively immature companies and some are alleged to have lax corporate governance standards. Triggered by accounting fraud cases involving a number of Chinese companies listed in North America, Hong Kong and Singapore, the entire S-chips segment was sold down heavily in 2011 and early 2012. Investors with longer memories may also recall some other trading suspension and delisting of S-chips in the past five years. Even today, many are still languishing well below their historical highs. As of today, more than half of S-chips are still trading at single-digit PER vs 15x for the Straits Times Index.

But don’t ignore them. For all their notoriety, S-chips still offer the most direct play on a China rebound and investors ignore them at their own risk. We believe the accounting irregularities and corporate governance scandals so far have largely eliminated the worst-managed S-chips in the market and good quality companies will eventually survive and regain the confidence of the market. Meanwhile in China, the economy appears to have bottomed out in 2012 and official data suggests that it will gather steam in 2013. S-chips provide a cheaper and more direct exposure to China’s economic rebound.

Signs of re-rating emerging. Since late 2012, the re-rating of the Schips sector has become increasingly apparent on improving market sentiment and the prevailing risk-on environment. The agriculture sector, for example, once beset by questionable corporate governance practices, rebounded strongly, led by China Minzhong (up 63% in 6 months). Food and beverage stocks such as Sino Grandness (up 113% in 6 months) and People’s Food (up 130% in 6 months) also outperformed the market, riding the rapid increase in Chinese domestic consumption growth. Yanlord Land and Ying Li International, representing the property sector, also gained 28% and 66%, respectively, since August 2012 on speculation that the Chinese government may ease property tightening policies.

Source: Maybank Kim Eng Research - 26 Feb 2013