Caveat emptor (Let the buyer beware)!

“They conceive trouble and give birth to evil; their womb fashions deceit.” (Job 15:35)

It was reported recently in The Straits Times that since 2006 till now, there are 17 companies under suspension under the Stock Exchange of Singapore. I browsed through the names and noticed that 12 are China-linked companies. This does not reflect well the quality of companies that are attracted to raise funds here.

The China story was a very hot investment theme in 2005/2006 when many relatively unknown, small to mid- sized Chinese companies started to flock here through initial public offers. Prospectuses depicted fantastic profit growth rates and big plans. Many of them were brought here by the big brokerage firms which also underwritten these companies’ fund raising exercises. Such close relationships inadvertently led to very favourable reports from these broking houses. It was very common in those heydays that share prices of these companies opened at very high price (40-50% above issue price) on the first day of listing.

These Chinese companies started to raise even more funds through convertible bonds (normally of 3-5 year tenure) shortly after listed. I remember many of them were done in 2006, and the broking and investment houses made lucrative fees from such exercises. Share prices peaked around September 2007 and a year later came the financial crisis. When these bonds started to mature in 2009 and thereafter, these companies defaulted on the bonds, and the ‘true’ earnings started to surface.

I should say that many of my ex-clients lost more money in China shares than in other shares. In fact, one of my ex-client is so mesmerized with China growth story that he holds almost exclusively Chinese stocks in his portfolio despite advice. His refusal to act when things don’t turn out well caused him huge paper losses to-date.

If you ask me what is the most important thing to consider when investing in a company, I will say-corporate governance. In fact, there is a premium attached to a company that has good track record of corporate governance in that it commands higher valuation in the stock market. What is the point of a company making good profits when the top management is more concerned with their own pockets and even engaged in ‘milking’ activities? When the ‘ profits’ sound too good to be true, better take them with a pinch of salt. This is especially so for a foreign company where it is difficult to verify the information furnished. For novice investors, start with Singapore-based blue chips that are in the ST Index is a better choice.