SGX Penny Stock- In Focus : Sincap Group Limited (Sincap)

Sincap, which is listed on the Catalist, is the most actively-traded stock today (26Aug14). The stock was up ~12.5% before the company requested for a trading halt, pending an announcement.

To be honest, I have also been a skeptic of S-Chips and believed that more should be done on all frontiers(investment banks, regulators & etc)  to ensure better end investor protection.

Below I will provide a quick thought on this company:

From Company's Website

1. Business Description

Trading of alumina & thermal coal, as well as the mining & sale of gypsum in PRC. Sincap is engaged in the trading of alumina & thermal coal as well as mining & sales of gypsum in the PRC.

Below provides a more detailed summary of each business segments:

(a) Alumina Trading

• Alumina is sourced from suppliers in Shanxi Province and  Shandong Province - used in construction, automobile, transportation and aeronautical  industries

• Wide customer base of aluminium manufacturers and traders  across Henan, Qinghai, Gansu and Xinjiang Provinces and Inner Mongolia

(b) Coal Trading

• Commenced thermal coal trading business in June 2011

• Customers are mainly Shandong-based chemical factories and power plants

• Products are sourced from upstream suppliers in Shanxi Province based on customer specifications and quotations for use in power and chemical industries

(c) Gypsum Mining & Sale

• Access to one of the largest gypsum reserves in Dawenkou Gypsum District, Shandong Province - sole and exclusive mining rights to approximately 2.92 km 2mining concession area in Tai’an City, Shandong Province

• Total production capacity of 600,000 tons p.a. (as of July 2012 IPO Prospectus)

• Exploratory rights to further area of approximately 2.4 km-squared at Xia Jia Ma Zhuang Mineralised Block

• Sale of both gypsum ores and gypsum powder of various grades

From Company's Website

2. Potential Red Flag 

PS: Below details some of the potential red flags I see which I hope investors can look deeper before they dived into the stock. Do note that I am not saying that the company is a fraud but I just want to highlight some red flags that I hope all investors can be aware of. 

Red Flag 1 - Proposed diversification of business to include property development & property investment within 2 years of listing

The company was listed in mid-2012. A quick search on the IPO prospectus back then did not include any forward statement regarding the diversification into property development & property investment.

According to the company official announcement, the company expects revenue and profit from the sale of gypsum in its core businesses to be adversely affected in the current financial year ending 31 December 2014 as some of its customers have stopped purchasing Grade 4 gypsum from the Group by substituting it with synthetic gypsum. 

Grade 4 gypsum represented approximately 26.9% of the Group's revenue from sales of gypsum products for FY2013. In addition, the company is of the view that its alumina and coal trading  business are expected to be directly affected by the soft commodities trading market in the PRC arising on the back of a slowdown in the domestic economic environment and uncertainties in the global economy. As such, the company has been looking at diversifying its business. 

This make me asks further questions - 

(a) Does the management have the necessary capability & expertise to venture into the property segment? 

(b) What is the competitive advantage they have in this new segment?

(c) During the IPO of Sincap, the company prided that they have a good reputation as a gypsum mining and supply company with almost 20 years’ track record. If the company is so experienced, why aren't they prepared to ride through this cycle, and instead diversify into other business? What experience are we talking here?

Red Flag 2 - Lack of minority investor protection

The IPO price was S$0.20. Instead of protecting the investor interest and working hard to protect shareholder value, the company decides to go ahead with issuing new issue at S$0.07. This represent a 60% discount to the original IPO price. This shows obvious lack of interest in minority investor protection.

Red Flag 3 - Related party transaction with CEO & Executive Chairman

The recent Australian property acquisition was an investment that the CEO and Executive Charirman, Ng Hong Whee, had. He holds 18% shareholding interest in that Australian investment. 

Questions:

- Why did they actually invested into something that Mr Ng had? 

- Or I should asked, if the investment is so good why did Mr Ng such a "willing" seller?

3. Conclusion 

Fool me once, shy of you. Fool me twice, shy on me. Personally, Sincap's management has disappointed investor since their IPO. Now they are trying to restructure and hope that investors can buy their new story? I'm skeptical and I hope all investor can keep their eye wide before entering into this counter.