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The S-Chips Value Trap : Fake Cash Holdings – Hongwei and China Hongxing Sports

One of the key things that a value investor look into is a company’s financial strength. Small time investor like us have not many ways to do that but to analyze the balance sheet, income statement and cash flow statement.

At Investment Moats some aspect of the balance sheet that I look at to ascertain financial health are:

  1. Short Term and Long Term Debts – Efficient use. Less the better
  2. Cash and Equivalent Holdings – Adequate. More the better
  3. Short to Negative Cash Conversion Cycle

One unique characteristics about these S-Chips is that they keep a lot of cash. Some deploy their cash immediately but many just keep it to the tune of 30-50% of their market cap.

When I see this, I thought to myself: “This is a value buy!”

Sadly the case of China Milk and Oriental Century have taught us that those cash is only useful if they exist.

Sometimes I wonder what SGX is doing to clamp down on this. You have all these inferior companies using Singapore as the backdoor to list because Hong Kong is a harder place to list. After listing here they use it as a further backdoor to list in Hong Kong again!

Take a look at Oriental Century’s stats. It’s a textbook value stock. My friend bought it and got royally screwed.

Hongwei Tech and China Hongxing have cash holding discrepancy

This week we probably add 2 names to this group. One common trait: they are very cash rich as part of market cap.

Given these releases and the kind of disclosures, have your confidence in S-Chips been affected. 1 Oriental Century might be a one-off but now we have so many examples.

Hong Wei


China Hongxing



I don’t know about you guys but I will be wary to practice investing using only the financial reports for S-Chips


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Monday 28th of February 2011

Hi Drizzt, This is one of my "most shameful" mistake. The % lost is quite substancial because I did not use "stop loss" or did not stick to some trading principles. I lost faith because 2 to 3 years annual reports successively were not very "good" Somehow I begin to question whether the reported cash is really there on not? I lost faith so I sold many months ago. That's why I said I may not want to speculate in trading again. This one of the silliest mistakes I have made in investment. And this is to be remember for life.


Monday 28th of February 2011

I was lucky to have profited 2k from Hongxing. Had 50 lots. That was the the time I bought without thinking, without knowing :(

Perhaps we could see this blog post on Dapai:

There are a few more suspects, but we shall see how this saga continues to unfold.


Sunday 27th of February 2011

I think we should take this lesson positively and always rub salts into what analysts or stock broking companies in calling these companies VALUED COMPANIES supported by x cents of cash, etc....

This approach may not apply well for s-chips particularly those smallish and popular. See where they are domiciled esp those in bermuda island, etc.. Just avoid it. Think it is better to sleep well and lose sleep. Ethnical media reporting is very important and x fold increase in profit are very harmful for those less abled investors


Monday 28th of February 2011

hi Hotstock, wise words but i feel no analyst market these companies as cash rich. they focus on sales outlook. nothing wrong with that really. the problem is really in governance and integrity of company


Sunday 27th of February 2011

Hi Drizzt, I agree most of us analyse the balance sheet of a company to determine whether it is a "good company" to invest. But if there is fraud in the balance sheet even the "specialist" takes sometime to discover. Or it takes many years for it to be in the open; though many people who are connected may know something. Good examples were "Enron" and "World Com", etc... And I think we should be prepared mentally "fraud reporting" can happen to any one of the companies. So investing is never a 100% thingy.

I have been a victim of China Hongx too. I bite the bullet and came out at 19.5c and 15.5c.(many months ago) And I lost about 30k+ which I have blogged before. I told myself then, I have lost my faith in this company. I don't want to have anything to do with this company anymore. In a way I am fortunate because I dare to bite the bullet and feel the pain rather then hoping for miracles to happen. But overall I still make some money after this "big loss" so maybe that's why I can take the pain. I suppose the over-all realised gain is the "pain-killer" pill for me. I tell myself never to speculate again. Never have been good at it anyway.


Monday 28th of February 2011

hi Temperament, thanks for sharing your experience with us. 30k loss in my dictionary is alot. wat i would hope to find out is the % loss for that stock for you and why do you think it turned for the worse.


Sunday 27th of February 2011

Hi Drizzt,

Haha, actually the Universe of companies to invest in is still pretty large, even if you exclude (Ass)-chips. Of course, one problem is that many companies are not even investment-grade to begin with, whether local or China-based. Another problem is that most of them have nary a track record as they had just listed a few years or a couple of years ago (probably when times were good or the market cycle was favourable). Hence, as investors we really need patience and spend more time tracking the businesses of these potential companies through thick and thin.

Consistency is actually much more important than stellar profits, but the average man on the street gets excited by press releases which proclaim "600% increase in net profit". Slow and steady really does win the race, but most people (I feel) don't wait long enough to find out!


Sunday 27th of February 2011

Hi Musicwhiz, not many people realise is that no matter how big our blue chips are they are essentially very small as well! Take SIA Engineering, people see its 4 bucks plus its expensive but on a world front alot of institution will not get vested because they think its a risky emerging market stock.

things are relative. as investors we hope to uncover the next Zhejiang Expressway or BYD, but sadly, it seems only inferior S-Chips get listed locally because they couldn't get in to HKSE.

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