6 Chinese private equity funds eye undervalued stocks
They are on lookout for S-chips and firms with ethnic
Chinese management
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They are on lookout for S-chips and firms with ethnic Chinese management
Lynette Khoo
13 April 2012
Six Chinese private equity (PE) funds that are in town this week to uncover undervalued stocks have their eyes on S-chips and Singapore companies with an ethnic Chinese management.
Among them is Shanghai-based China Best Group, which has drawn up preliminary plans to set up a fund to invest in Singapore stocks in a bigger way.
It may set up an open-end fund here or undertake a reverse takeover of an existing listed company to turn it into a listed fund.
“We have not decided on the timing of setting this fund,” said China Best chairman Lu Wei in Mandarin. “We have been profitable in Singapore stocks, so this can be a demonstration to the market.”
Another private equity fund United Innovation Capital is interested in consumer plays with a strong branding, starting with S-chips and then Singapore companies with ethnic Chinese managers. This would make for ease of communication.
“Any investment should not make up more than 10 per cent of our portfolio and no more than 5 per cent of the shareholding in the listed company,” said its chief investment officer Warran Zhang.
The two PE funds, while active in mainland China and Hong Kong, are no novices in the Singapore market.
United Innovation Capital has invested in Tianjin Pharmaceutical while China Best owns stakes in Yangzijiang Shipbuilding, Techcomp Holdings, Fuxing and Sound Global, and is a top 10 shareholder at China Sunsine and Sunpower.
They are on a “Discover Singapore” roadshow organised by Financial PR, together with other private equity funds: CDB Capital, Genesis Capital, Yong Rong Asset Management and Harvest Fund.
This trip is taking place amid a backdrop of sizzling competition among private equity funds in China that is driving up valuations of mainland companies.
In contrast, many S-chips are undervalued, Mr. Lu said, adding that this is due to a proximity issue. “The further they list from the mainland, the more undervalued they tend to be,” he said.
China Best is on the prowl for companies with strong profitability and cash flows in the last five years, positive industry outlook, and good management.
“We prefer companies whose key management owns more than 5 per cent stake holding in the company,” Mr. Lu said. This, he believes, aligns the interest of management with that of shareholders.
So far, China Best has yielded an annualised return of 20 per cent for its entire portfolio, Mr. Lu said.
Even in the case of the troubled Sino-Environment where alleged fraud occurred, China Best has not lost money and still holds the shares of Avic International Investments after the latter undertook a reverse takeover of Sino-Environment.
The Chinese private equity funds yesterday met representatives from China-based World Precision Machinery and Dukang Distillers as well as Singapore’s Kian Ann Engineering and Q&M Dental.
They are scheduled to meet China Aviation Oil, Sapphire Corp, Petra Food and StarHub today.
“We believe that the inflow of PRC investment funds into the Singapore market will provide additional liquidity in the Singapore market and increase the interests in good S-chip companies in Singapore market as they can better understand the Chinese companies,” said Samuel Ng, chief financial officer of World Precision.
Chief executive officer of Q&M Dental, Ng Chin Siau, said that the group is looking at onshore renminbi funds to invest in their projects in China and there have been ongoing discussions with China-based fund managers.
The key reason: Their valuations are lower than those of firms in China
By Jonathan Kwok
13 April 2012
Local retail investors have been shunning S-chips for a while but fund managers in China are increasingly turning their attention to these Singapore-listed mainland counters.
They cite the much lower valuations compared with those of firms listed in their own country as one of the main draws.
Mr. Rocky Lu, chairman of Shanghai-based family investment firm China Best with about 500 million yuan (S$99million) under management, said: ‘The further the Chinese company is listed from China, the more likely it is that valuations will be lower.
‘Investors further away may not understand the company very well.’
Mr. Lu, one of a number of fund managers here on a rare trip to understand firms on the Singapore Exchange (SGX), has already invested in S-chips like Yangzijiang Shipbuilding, Sunpower Group and Sound Global.
The Shenzhen and Shanghai bourses are among the most active stock exchanges in the world and this has helped drive up valuations of China companies there.
The price-earnings (P/E) ratios of firms on these markets can run into the hundreds and there are very few firms with ratios below 10.
By contrast, most of the 150 or so China companies on the SGX have P/E ratios under 10, meaning that there are many bargains to be had, at least in the eyes of China fund managers.
Price earnings is a commonly-used indicator of stock value - the higher the ratio, the higher the shares are valued.
Other than S-chips, the funds are also looking at other sectors such as marine and offshore plays, telcos and food and beverage firms, said Ms. Kathy Zhang, managing director of public and investor relations firm Financial PR, which organised the trip. These may include Singapore or regional companies.
‘There’s definitely an increased interest from China funds to invest in Singapore, compared to two to three years ago,’ said Ms. Zhang.
The delegation from six funds, including government-linked investors Harvest Fund and CDB Capital, is visiting a mix of Singapore and China companies to speak to their bosses.
The itinerary yesterday included Chinese machine maker World Precision Machinery, Singapore-based heavy equipment and engine company Kian Ann Engineering and Singapore’s Q&M Dental Group. They will visit telco StarHub and minerals company Sapphire Corp among others today.
Mr. Lu said that when deciding whether to invest, he looks at the boss, the business, including cash flow and historical profits, and the sector it operates in. He wants to speak to the boss before investing and prefers an ethnic Chinese so that communication is easier.
Mr. Lu said he may set up an open-end fund here, where other investors can join in his investments, although there is no timeline. A reverse takeover of an existing firm to become a listed investment company is also an option.
Dr Zhang Xiying, chief investment officer of Beijing-based United Innovation Capital, said he was going to take a closer look at Q&M Dental and China-based winemaker Dukang Distillers, which was also on the visit schedule yesterday.
The spectre of corporate and accounting scandals is also a consideration for the fund managers, another reason Mr. Lu cited for his need to study the firms well and speak to the bosses.
Locally-listed companies welcomed the meeting with fund managers who could potentially pump millions into their stock.
‘The inflow of China investment funds into the Singapore market will provide additional liquidity and increase the interest in good S-chip companies as they can better understand the Chinese companies,’ said World Precision chief financial officer Samuel Ng.
Mr. Ngo Yit Sung, investor relations manager of Dukang Distillers, said the fund managers studied the company even before the meeting.