China Covered Warrants - Essentials

p/s did not factor in the exchange rate earlier, end result still good

5 covereds to buy one share

Conversion Price: RM10.40 / HK$10.40

CA Price 0.195

Expiry 9 months from issue date

Yesterday's Closing Mother Share: 10.72

Premium: 5 x 0.195 = 0.975 + 10.40 / 10.72 = 14%

Gearing: 10.72 / (0.975 / 0.43) = 4.76x

Verdict: Good value, good upside, low premium


2 covereds to buy one share

Conversion Price: RM4.38 / HK$4.38

CA Price 0.175
Expiry 9 months from date of issue
Yesterday's Closing Mother Share: HK$4.10

Premium: 2 x 0.175 = 0.35 +4.38 / 4.10 = 27%
Gearing: 4.10 / (0.35 x 0.43) = 5x
Verdict: Good leverage, good value


50 covereds to buy one share

Conversion Price: RM76.10 / HK$76.10

CA Price 0.16

Yesterday's Closing Share Price: HK$72.85

Premium: 50 x 0.16 = 8.00 + 76.10 / 72.85 = 30%

Gearing: 72.85 / (8.00 / 0.43) = 3.9x

Verdict: The best stock for upside, leverage still good, good value

The 3 covereds traded unlike the last bunch on Malaysian stocks where premiums went haywire and leverage does not make any sense. Due to the uncertainty, lack of information and understanding: these covered are priced nicely. Before investors get all panicky over the correction in Shanghai and Shenzen, these covered are pegged to the H-shares traded on HKSE: a very different thing altogether. Please re-read all postings on H-shares in my previous postings.
The key here is that H-shares always traded at a huge discount to their counterparts in China. Before the big run, the discount has been averaging slightly above 20%. However, when the China markets went berserk over the last 12 months, this discount has shot up to over 40%. You cannot arbitrage because H-shares is convertible only in HK and vice-versa. This, as explained before, is a reflection of how frothy the China markets were. For example, ICBC in Shanghai-A closed yesterday at 5.08 yuan, even not taking into account the stronger yuan, the discount in the H-share in HK is 5.08/4.10 = 24%. Not all H-shares are listed back in mainland China, so the H-shares is indicative only. Thus you can say that the excesses in Shanghai and Shenzen are not translated totally into H-shares in HK. So, investors are not necessarily buying into the bubblish China market by buying these covereds.

There are two more important factors why investors should gobble up all the 3 covereds at current prices:

a) QDII (please read previous postings on QDII and China divesting out of USD) - Beijing has allowed more funds to invest outside of China via QDIIs, this is to allow for a valve for funds to move outside of China. First destination is buying into H-shares listed in HKSE, especially PetroChina and China Mobile, as they are not yet listed in Shanghai or Shenzen. They have just allowed US$400m and more will come.

b) There have been strong calls from Beijing for some of the H-shares to move back their listings to Shanghai. China Mobile and PetroChina will be under great pressure to do so. A move as such will move both shares much higher in anticipation of higher valuation back in Shanghai.

Hence, you heard it here first, all 3 covereds are good value. Strong buy and hold regardless of whether Shanghai tanks or not. This is probably the most significant blog posting for a long time.

Kudos to OSK for being first off the blocks to put these covereds here. Can start issuing more as appetite will grow by leaps and bounds.
Note to Yus-baby/Bursa/OSK/CIMB - From just this posting, I found it quite cumbersome to calculate the premiums and gearings, don't even mention coming up with implied volatility. Please try to ensure that investors can ACCESS information easily to value these issues easily, or have a live board monitoring the live prices of the respective shares in HKSE, and a table indicating the premium, gearing and implied volatility. Maybe you guys should have planned ahead instead of throwing these issues into the market and expect all investors to be savvy and informed. We all know how difficult it is to get live share prices from other exchanges. Please take note.


keehoo said…
I thought the conversion RM to HK is not 1:1 but almost 1:2. This may raise up the premium!
Hin Lun said…
How do i find out the volatility of these H-shares?
kam said…
Hi! tks for the posting.

Just wonder, based on my own calculation for example Premium for ICBC-C1 should be 26.52%.

Exercise Px = HKD 4.38

Market Px = HKD4.10

Currency ex rate of HKD/RM0.4335.

May be U forgot the ex rate.

ToeBear said…
I'm of the same opinion with you on PetroChina and ChinaMobile...
though the timing is a tat too late but still considerably early to bring many others to these counters. Good call!
after factoring the currency xchange rate...

a) Petrochina : Premium 14%
b) ICBC : Premium 27%
c) China Mobile : Premium 30%

is this right??

Salvatore_Dali said…
thanks guys, yes I left out the bloody exchange rate, lol... made the necessary changes, end result still good though not as screaming a buy as before... for covereds under 20 sen, its very good value... for once, unlike the local covereds under 20 sen

tks again, pls reread article
iamsobloodysick said…
Hello Dali,

For ICBC-C1 the gearing should be halved. You divided the mother share by ONE covered warrant. Shouldn't it be TWO?

Thanks for the posting.
Salvatore_Dali said…
keehoo, kam, totomaster, iamsobloodysick... u guys are correct, thanks for pointing these things out ... I shudder at what the average joe public investor will come up with in trying to value the

hinlun, try and goto he has some good links
Hi all, the link Dali posted nextrade.blogspot is wrong - it should be nexttrade.blogspot - his fingers left out a "t" LOL

Anyway, anyone know where I can see the term sheet for these warrants. Tried osk's but couldn't find it. Perhaps it's for members only? If so, that's bloody silly, no?

Also anyone knows the ticker for the underlying shares and where I can see the latest quotes?

btw RM1 is approx HKD2.3 now
Puntamentalist said…
The OSK call warrants on H-Shares are on average double the price of similar strike level such warrants in Hong Kong in terms of premium. OSK is making big by buying up similar warrants in HK and sell the same in KL. Best business in the world to issue this kind of warrants. Hopefully, competition from CIMB and Deutsche will bring down the valuation in KL. Who wouldn't if you can make 100% from this business. BIG SELL on these H-shares warrants. It will plunge when the interest shift elsewhere in a few weeks time.
zentrader said…
Dear Dali,

Thank for the miniskirt site. Very low cut meaning high volatility? Cannot go lower else can see underware loh. :)

Ah, puntamentalist very clever. I was just thinking about what disclosures/info KLSE should require from issuers as compulsory info.

Yes, if there's an arbitrage opportunity there, OSK can use it to hedge their position and even profit big time too... something most of us retailers can't do.

So I'd like issuers to disclose
1. what other derivatives are extant on the same underlying shares and where they're trading

2. link to a webpage where investors can see the current market quote of the underlying share.

3. link to a webpage that displays the termsheet of the CW or SW. In fact, it should be in the KLSE trading/info system just like basic company info is available

Whoever trades without knowing 2 & 3 is really trading blind. Come on, buck up klse - make these issuers disclose the info!
ikanair said…
Hi, what is the actual conversion price?

If it is MYR then this is how i calculate it

5 covereds to buy one share
Conversion Price: RM10.40
CA Price RM0.195
Yesterday's Closing Mother Share: 10.72HKD
Premium: 5x0.195=((0.975+10.40)*2.28)/10.72 =242%

1MYR = 2.28HKD

Verdict: Lousy value.
You don't make money unless Mother Share go above 26HKD, or pray MYR drop like crazy.
dummy said…

Exercise Price = HKD10.40 and not MYR10.40, please.
ikanair said…
Thanks Dummy for the clarification
wesurvive said…
Hi! Thanks for the write up. Been following ur Blog lately.

I am glad someone is on the same wavelength.

Not so much on optimism of China Covered Warrants, but rather efforts to indulge in the researching and home-working on the China/HK Market and subsequently blogging it out your know-hows, right here in Malaysia!

By no means disregard Bursa, its time for us to direct our next unfolding chapter of equity investment to nowhere but China.

With the interest you have shown on both markets, I believed you have made headway into them.

I together with 3 friends have started venture into SSE since Apr, and I can testifies its 10 times more exciting than our Bursa! Of course the same could not be said of our initial seed moneys of 1.2M. Nevertheless, we doubled it out taking into account the sell-off and the recent floor- level acquisitions.

I agreed on both front regarding QDII and H-Share Call Back and I would like to add a third which make ChinaMobile my no.1 pick: The sectoral and thematic play of 3G.

Being one of the 2 Mobile Phone Operator and by subscriber-based the largest in China, ChinaMobile quest for a 3G license is just a matter of formality. With its on-going smooth execution of TD-SCDMA's trial run and the urge to launch Commercial 3G Service before the Olympic, the play is currently hyping up and I can feels it already! With H-share call back being planned for 3/4Q07, ChinaMobile will inevitably join the fray of China Unicom for a very strong run-up.

With the recent sell-off and runup of H-Market, the H/A ratio have spiked to the highest level ever. Sveral of the 44 H-shares are now towering above their A counterparts. Real encouraging!

With the 9 months expiring period and general concesus that China market will resumes and continues its surge ahead of Olympic, I am immensely optimistic.

Let's ride on it my friend!
Pricechart said…
Let's ride on it....

Ride up or ride down?

Die loh .....Die loh!
Salvatore_Dali said…

I agree that there are more cheaper priced warrants on HKSE, but as this is new and fresh still on KLSE, it still represents good value. Of course OSK can hedge by buying those on HKSE and sell those to KLSE but first mover advantage. Secondly, warrants on HKSE have much shorter time to expiry, another note to factor in.

If we are going to play China shares, H-shares is the best way to go. Next best is to open a hk account with OSK and trade direct.

While opinions differ on the value of the warrants, its not cheap when compared to HK listed ones but its decent still. Considering that its still below 20 sen, absolute price wise, its an ok punt for 9 months. China Mobile is the way to go, have a lot of positives going for it, esp going back to Shanghai.
veritas said…
summary of salient terms available on Bursa website.
formula for cash settlement amount has an unquantified item, "exercise expenses" embedded.
how can this be allowed ?
Mightydopy said…
I tried to find these on the HKEX.
there were hundreds of calls, but not with the numbers you mentioned.
could you please help me?
Mightydopy said…
I tried to find these on the HKEX.
there were hundreds of calls, but not with the numbers you mentioned.
could you please help me?
Salvatore_Dali said…

the cimb warrants link is good, but you have to be a client to sign up for the daily charts and tables... contact your remisier at cimb