Saturday, April 11, 2009

Factors associating with (S-share) duds

In recent months, there is a number of S-shares with suddenly collapsed share price due to non-normal reasons. In this post, I shall highlight a few associating factors on these S-shares.

One, weak balance sheets. S-shares like Ferrochina and China Print & Dye has weak balance sheet. For example, before China Print & Dye collapsed, its current liabilities is greater than its equity. Weak balance sheet increases the probability of the business foreclosure.

Two, to stretch the above further, expansion using lots of debts. For example, Celestial has expanded using lots of debts. While debts do not dilute equity's shareholdings, it increases the probability of the business foreclosure, especially in distressed periods (like now) where refinancing. (This factor also applies to Reits, as a few months ago, people are worrying whether some S-Reits can refinance their loans.)

Three, popular stocks. Interestingly, the S-shares with collapsed share price are more likely to be covered (heavily) by analyst. Notable examples are Ferrochina and Fibrechem. 

Four, founder/majority holder has lower than 40% stake in their businesses. Interestingly out of the 8 S-shares shown below, six out of 8 companies have  founders with less than than 40% stake in the business.

Nonetheless, not all S-shares' prices with any of the above factors will collapse. There are always exceptions. 

Probably, the easiest action one can take in avoiding duds is running away from companies with weak balance sheet. However, it may not be sufficient as one can hardly detect companies with majority holder's shares under mortgage. 

P.S. The above thoughts and figures may be wrong. Read/use with care.
P.P.S. The unscientific thoughts above only look at the dogs that bark. The silent dogs are not examined. 

Apr - Jun update

The market is back to its high recently, especially with Reits choinging. I don't hold a lot of Reits. Nonetheless, the sale of some s...