A descent into the SGX abyss

You have wandered far from the gleaming towers of Singtel and DBS and the verdant hills of Bukit Sembawang. Nay, these places are not for your kind. The minimum lot size is too big and the share price is too high.

Staring glumly at a NetLink Trust manhole, studiously ignoring the Rowsley touts, you wonder: Is there anything more edgy?

And that's how you found yourself deep down by the dark waters of the Singapore Exchange (SGX) sewers.

The S-chip stench is the first smell that hits you, as you grope your way through a dim cavern oozing with corporate effluence. You gag slightly from the whiffs of corporate governance scandals past, missing cash, failing businesses, uncollectable receivables and disappearing executives in China's Fujian province.

Something almost makes you trip over. Brandishing your National Day Parade Funpack lightstick, you see a lump of coal with the word "Noble" etched on it. It looks like a cheap - albeit dirty - paperweight, maybe a potent weapon to ward off short-sellers. Why not? You shrug and slip it in your pocket.

As your eyes get adjusted to the darkness, you see more lumps of coal. Odd. It seems like you are heading into an abandoned coal mine.

A half-used reel of detonating cord was hastily discarded near a rock. Wiping away the dirt on the handle, you see the words: "Fabchem China".

An explosives maker, Fabchem doubled on its initial public offering (IPO) debut in Singapore in 2006 to what would be S$3.20 a share today. It even attracted the venerable explosives maker Dyno Nobel - now part of Australia-listed Incitec Pivot Limited - to take a 29.9 per cent stake in 2007.

Today, Fabchem trades under a 10th of its book value. Perhaps there's no telling what else will get impaired as the economy slows and mining activities drop.

Yet it just disposed of its loss-making ammonium nitrate unit. A booster production line might be resuming operations after having to cease due to safety directives. Annual profits was once more than its current market cap.

Fascinating. You make a mental note to return to the spot, and carry on exploring. Fallen but apparently profitable S-chips with plenty of potentially bad debt are scattered around, you realise.

There is aluminium panel maker China Haida, which managed to increase its profits in the past year despite falling revenues. A mountain of trade receivables, half of which are past their due date, continue to increase.

Sticky tape maker Luxking Group actually runs a cash-generative business, according to its cash flow statements. But it is weighed down by a substantial pile of debt and interest payments.

Telco solutions provider Ace Achieve Infocom has racked up unbilled trade receivables, outstanding for more than three years, of almost 198.7 million yuan (S$40 million).

But hey, what's this? You see a trail of discarded pirated CDs and DVDs next to a number of cigar butts.

Intrigued, you follow a winding path into a dimly lit, vast cavern, and stop in awe. There are gold coins, gems and jewellery for as far as your eyes can see.

Prophecies of the sublime

Stunned, you vaguely recall prophecies of the sublime mystical treasure of Swing Media Technology.

At just 0.09 times book, and just over one times earnings, it looks like a steal. For the past financial year, profits and revenues are up. And property, plant and equipment alone is worth HK$894 million (S$156 million). Debt is more than twice covered by inventories and receivables.

Almost HK$500 million of operating cash flow before working capital changes was generated in the last two financial years.

But cash flow in the financial year ended March 31, 2016 got sucked up by a HK$157 million purchase of "other current assets", showing up as "deposits to suppliers". It was mostly "for the machines purchased to enhance production, which are currently testing and will be converted to fixed assets eventually", the firm said in its annual report.

And in financial year 2017, cash flow again got directed into HK$300 million worth of purchases of property, plant and equipment, "as the group continued to upgrade its facilities to maintain the quality of the products as well as to improve the production capacity".

Minor worries, you say. DVD sales and trading income continue to improve, the company said. It even placed out shares to buy a massive Australian wagyu cattle farm which will supposedly have 7,000 cattle and 200 sq km of land.

Sounds tasty. And YouTube aside, DVDs surely have potential. Swing Media is worth just S$26 million but is generating more than S$12 million of net profit every year. Depreciation is S$30 million, meaning that its cash flows are much higher. Why isn't the market realising this fortune?

Visions flash before you. For one thing, you are finally going to buy that S$100 million GuocoLand penthouse. You take one step forward and thrust your hands into a pile of rubies.

Instantly you know something is wrong. The ground shakes violently beneath you. Amid rumbling and hisses of smoke, you know an ancient, scaly, fire-breathing reptilian scourge has awoken.

Creditors!

You still have a weapon in your pocket - that lump of Noble coal - but as you grasp at it, you are surprised to find that it has shrunk to a 10th of its former size. Blast that share consolidation!

Scrambling to escape, you barely dodge a furious spit of fire as the cavern walls tremble and rocks tumble around you. As you run for your life, you only have one thought: Should have stuck to that Singtel.

Cai Haoxiang

24 July 2017