Faltering S-chips need watchful eyes

Listed firms with China-centric businesses, commonly known as S-chips, have come under the spotlight following a column last week by Singapore Exchange chief regulatory officer Tan Boon Gin, warning investors to monitor risks after several firms with large operations in China announced major reversals in their financial positions "under perplexing circumstances". While the exchange did not single out any company, Wong Wei Han looks at some recent results that bear closer scrutiny.


United Food

A lack of operating foresight and prudence can be a dangerous combination in a choppy business landscape, as United Food Holdings may have found out to its cost.

United Food is a producer and supplier of soya bean products and animal feed under the Jiangquan brand, with businesses in pig rearing as well.

According to its third-quarter results, United Food was hit by a 177.8 million yuan (S$39.4 million) total loss in the three months to Sept 30, a steep reversal from the 21.5 million yuan profit reported a year ago.


The loss resulted partly from its compensation to a supplier after it cancelled 11 shipments of soya beans in the second quarter, "due to the uncertainty of supply of utilities as well as raw material costs which was not commensurate with the soya bean product prices", United Food said.

"Based on the market future prices of soya bean at the end of September 2015, the total loss expected to be suffered by the group's soya bean supplier was approximately 304.53 million yuan.

"In this regard, the group recorded an additional loss of 114.82 million yuan in the third quarter which represented the excess of the total expected loss over the impairment of 189.71 million yuan made by the group in respect of the prepayments and deposits to the supplier in the second quarter," it added.

In July, United Food announced it would suspend its soya bean production temporarily, "pending a review of the business operating environment and its financial position".

While business and financial struggles continue, further uncertainties have emerged within the management. There have been departures at the board and senior management levels. Mr Sitoh Yih Pin retired as an independent director last month while in September, chief financial officer George Hung left "to pursue other career opportunities".

China Taisan Tech

Loans to customers are a common business arrangement but they require effective credit risk management to prevent a sudden pile-up of bad debts that can plunge the lender into a financial mess. This seems to be the case with fabric producer China Taisan Technology Holdings.

China Taisan is a supplier to notable sportswear and casual wear brands such as Nike, adidas and Li-Ning. It claims to produce up to 27,650 tonnes of fabrics at its central facility in Fujian, making it one of China's largest players in the industry.

But with China's economy slowing down and manufacturing demand cooling, China Taisan started to have problems recovering the loans offered to customers. In the three months to June 30, it wrote off 72.7 million yuan (S$16 million) of bad debt extended to one client, later revealed to be Shi Shi Tai San Fabric.

"The said customer was declared insolvent" by China's courts, China Taisan said when announcing its second-quarter results. The write-off was booked as additional operating expenses, which almost single-handedly led to the 74 million yuan loss for the quarter, reversing from a 55.8 million yuan profit a year ago.

It triggered queries by SGX that revealed further twists. In September, China Taisan told SGX that Shi Shi Fabric was not declared insolvent by the Chinese courts after all, but the write-off still stood as Shi Shi Fabric's person in charge was not contactable and its debt was as good as lost. China Taisan has decided to take legal action, the management added.

The firm reported another 24.6 million yuan loss in the three months to Sept 30, as "the cost of production per tonne for two new products increased in order to meet customer requirements".

Dukang Distillers

Impairment provisions for non-current assets such as properties and land to account for softer market and business conditions are not unusual but in the case of Dukang Distillers Holdings, they were crippling.

The spirit maker, known for its high-end baijiu products, reported impairment losses totalling around 547.4 million yuan (S$121.3 million) for the 12 months to June 30.

"The impairment losses were mainly due to significant changes in the economic and political environment in China which adversely affected the demand for the group's baijiu products," Dukang said, referring to Beijing's corruption clampdown, which has dampened demand for luxury and lifestyle goods.

The impairment losses included 471.7 million yuan for property and equipment. Another 38.7 million yuan was impaired for intangible assets including intellectual property rights in a company brand, while a 37 million yuan impairment was made for its interest in associate firm Yichuan Dukang Jiuzu Asset Management.

As a result of these losses, Dukang reported a loss of 561.4 million yuan for the financial year.

Following the results announcement, SGX queried Dukang on the identity of the valuer hired for the impairment assessment, as well as its methods and assumptions.

Dukang said the valuer was LCH (Asia-Pacific) Surveyors, which is experienced in asset valuation for listed firms in Singapore and Hong Kong. Dukang shareholders will have to determine whether the impairment decisions were valid. But against the backdrop of persistent business headwinds, investors may not have seen the last of these impairments. "It is expected that the situation will continue in the near future in the baijiu market and the economic performance of the dedicated assets will be worse," Dukang said in its full-year results announcement in August.

Ziwo Holdings

Aggressive compensation claims by clients over allegedly defective products have hit Ziwo Holdings, a producer and supplier of raw materials for sportswear and other lifestyle consumer products in China that had been otherwise profitable.

For the quarter ended Sept 30, Ziwo reported a whopping 96.1 million yuan (S$21.3 million) in expenses as compensation settlement. The sum was around five times its 17.6 million yuan revenue for the same period, and nearly half of Ziwo's 212.9 million yuan net loss in the quarter.

The settlement was paid to three customers over the sale of defective filament yarn materials, Ziwo said, adding that the defects had been verified by independent tests and the firm agreed to compensate out of court under the counsel of a law firm in Fujian.

The settlement followed a 38.1 million yuan product defect claim paid to a client in the second quarter. That announcement, made in August, drew the attention of SGX, which pressed Ziwo on how the 38.1 million yuan amount was arrived at. Ziwo's response painted a messy settlement process.

"The customer has provided the basis of the claims which included their costs incurred in production of approximately 21.3 million yuan, the contractual penalty of 30 per cent on contract amount of approximately 1.4 million yuan, foreseeable loss of profit of approximately 6.4 million yuan and damages paid to its downstream customer of approximately 11.2 million yuan," Ziwo said.

With total product defect claims soaring to around 133.7 million yuan this year, Ziwo has told SGX that it has asked its auditor to assess whether the firm is able to continue as a going concern, casting further uncertainties on the future of the company.

A version of this article appeared in the print edition of The Straits Times on November 23, 2015, with the headline 'Faltering S-chips need watchful eyes'. Print Edition | Subscribe