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some thoughts on investing in SGX-listed stocks
July 12, 2007, 6:47 am
Filed under: investments/finance/economics

After an internship doing stock research and investing cash in the stockmarket, here are some thoughts I have on the Singaporean stockmarket. 

1. There are no Buffett-esque companies.

After looking through so many companies, none of them fit the Buffett criteria exactly. Most fail to meet the criteria of having a strong franchise which itself leads to a strong sustainable competitive advantage. The SGX is replete with faceless and garden variety technology manufacturers and China companies that sell commodity products like food and raw materials. Don’t get me wrong, I am not saying that they are bad companies, that they are not profitable and are not good investments. I am just pointing out that they do not have strong, international franchises like a Disney, Gillette or Coca-Cola.

2. What is a great company on the SGX might not be a great company in its industry- the proverbial big fish in a small pond

Unlike bigger markets like the US or London, the SGX holds companies “incompletely”. It holds a minority of companies in their sectors; this is especially the case for China-based companies listed on the SGX. This makes competitive analysis harder as the shares of similar companies trade in different markets and valuation becomes harder (e.g. P/E comparisons). Hence for example, I might find Hongguo to be a great company, with high profit margins and impressive ROE. However what I don’t know is that it is the second in its fashion shoe industry, and its leader is listed on the Shanghai exchange. Hongguo might have a much better profit margin or ROE than many other Singaporean companies but when compared to its direct rivals in China, it might be nothing.

3. China stocks are the way to go.

Small-cap China stocks are simply in a different ball game compared to Singaporean-based small-cap companies. The margins, ROE, ROA, whatever are way above that of most Singaporean companies. And many of them trade at low P/E multiples and valuations, a far cry from the superlatives we see in the Chinese market now. The business logic behind it is simple: Chinese markets are young, large and growing and hence supernormal profits and high returns on allocated capital are possible. Think of the average Singaporean company selling its goods to Singaporeans solely or if it is more internationalised, to a few other Asian (usually Southeast Asian) nations where markets are saturated already.

4. There is an end to the bullrun for Chinese stocks listed in the SGX.

This point may seem to contradict the previous point. Many if not most of the Chinese stocks are that of companies producing commodities, like milk, potato starch, paper and pork. As an economic rule of thumb, profits within commodity industries will thin out with increased competition in the future due to lack of product differentiation. The current lack of companies within these industries in China is one of the many reasons why these companies earn supernormal profits and enjoy good financial ratios. This will not persist forever, unless these companies find a way to create a niche for themselves and go international in its orientation. Meanwhile, the idea is to ride the growth while keeping an eye on competitiveness in these industries, moving money out when the growth peters out or becomes average.

That’s about all I have for now.


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