Tuesday, May 15, 2007

H-Shares As A Precursor Of Things To Come

Hang Seng Record Turnover - Following the news on QDIIs the HSI surged to an intraday all time high of 21,065 and ended up 2.5% yesterday. Turnover was a record HK$95bn (US$12.2bn / RM41.4bn). The previous record turnover was, wait for it, yes its February 28 this year just before the mini collapse, at HK$80.5bn. The H-shares, thought to be the prime beneficiary of the QDII ruling, rose 5.36%. The estd. US$7.5bn injection into H-shares in HK actually only makes up 1% of total mkt cap of all H-shares currently, so the market is running ahead of fundamentals on expectation of future releases.

H-Shares As An Indicator - H-shares are China mainland companies having a dual listing in HK. Similar shares in China have always traded at a huge premium to H-shares owing to the lack of choice in China. H-shares are generally the bigger caps and better run companies, hence China local investors accord an even bigger premium in Shanghai and Shenzen exchanges. The premium has always been around 20%. This premium has surged significantly over the last 3 months, an indication of the froth in China markets vis-a-vis the HK exchange primarily, and also the rest of Asian exchanges to a lesser extent. At the beginning of 2007, the discount was 26%, which was on the high side already. Just before the QDII ruling, the premium was a silly 46.5%. Even with the surge yesterday, the premium is still 42%.

Those who look at the figures may think H-shares are a great buy owing to the huge discount, but that is assuming the mainland shares will stay at present levels for the longest time. The surge in premium for mainland shares is a very good indicator of the froth in China markets. 42% is a huge premium, and one of two things has to happen: one, the H-shares rises more than mainland shares to narrow the premium back to 20%; or two, mainland shares to correct substantially to narrow the premium back to 20%. Place your bets, of course the latter would be the wiser bet. That is also why, even at 42% discount to mainland shares, HKers and funds are not stupid enough to think H-shares are at an attractive discount to mainland shares.

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