S-chips lagged the market. The Singapore market has been on fire, with the Straits Times Index (STI) surging over 27% YTD. The S-chips, despite its higher betas, have lagged behind the general market with a 23% growth over the same period. However, 21 out of the 133 stocks in the S-chip universe saw stock prices double.

Plagued by corporate governance and transparency issues. S-chips are still hampered by corporate governance issues, no thanks to the shenanigans of firms like China Printing and Dyeing, Fibrechem Technologies and Oriental Century. Some potential red flags include companies with high gearing and convertible bonds. Firms which have been shoring cash and not returning to investors through dividends despite having little capex requirements are also looked upon suspiciously.

Still guarded. We are still taking a cautious approach on the S-chip sector, and do not believe it is time to go aggressive yet. Our guarded stance is evidenced by our limited BUY calls among the S- chips under our coverage despite the improving market sentiments. This is also a result of some of our stocks shooting past our target prices, including agricultural plays China Fishery and China Milk.

Top picks. Our top S-chip picks are Midas Holdings and Longcheer. We believe Midas will be a chief beneficiary of China’s stimulus package, as RMB2t is budgeted for the expansion of the railway system over the next three years. Longcheer, which has a healthy cash balance, is expected to get a boost from the rollout of China’s 3G network. Moreover, both companies have consistently dished out dividends, which lend credibility to their financials.