Thursday, August 23, 2007


H-Shares Covered Warrants On Bursa

These covered warrants had a double fillip for the last couple of days. One, was the recovery in all Asian markets following the Fed's rate cut. Second, the allowance by Beijing for its residents to buy HK listed shares with no restrictions. Most have more than doubled in price over the last couple of days. Are they still good buys?

I have been harping on the H-shares and the related covered warrants. The discount buffer is still there, hence I believe strongly that there will more upside in store. The H-shares warrants comes at a unique time, probably investors won't another chance like this. Great discount buffer of 20%-40%. Beijing issued notice that more H-shares will need to come back to list in Shanghai to boost options/supply for mainland investors. QDII rules. Most recently, the permission to buy HK listed stocks.
Read the WSJ just now and they had a negative slant on the size of the liquidity that would be investing in HK listed shares. They cite factors such as mainlanders having a bigger belief in the uptrend of Shanghai and Shenzhen bourses, and the currency factor. I have to say that WSJ have gotten this one wrong. One of the key positives from the new rules is not so much that they can buy HK listed shares, but that they can keep proceeds in currencies other than the yuan. Plus, there is no limit like before. WSJ may be underestimating the amount of funds swishing in China that falls under the "grey areas" (illegal businesses, unreported revenues, business transactions not done at arm's length, "corruption", slush funds, improperly diverted government funds, etc...). This is a great avenue to get these funds out of the country, before they get themselves out of the country.
Even putting the dark side aside, on fundamentals its a prime opportunity and Chinese being Chinese would easily recognise a big opportunity.

Below are the top picks with negligible premiums:
warrant px / maturity

Top Buys

CCCC-C1 0.28 / 31 Jan 2008

China Life-C1 0.42 / 17 Jan 2008

China Mobile-C1 0.17 / 4 March 2008

China Mobile-C3 1.14 / 13 Jan 2008


Buys

China Mobile-C4 0.18 / 30 March 2008

ICBC-C1 0.16 / 4 March 2008

ICBC-C3 0.13 / 2 Jan 2008

Petrochina-C1 0.14 / 4 March 2008

Shenhua-C1 0.06 / 25 Feb 2008

Sinopec-C1 0.075 / 31 Jan 2008

11 comments:

yusuf said...

U r right...but this is the Chinese Government's way of containing a bubble within China hence the need to let off steam by them investing in HK. Let's assume the HK shares hit the same level, will the policy flip again. Of course no denying this is a good opportunity but alas the only worrying point is the change of policy when HK shares are higher than local mainland share.

SAMMY MU said...

Update on Shanghai composite.
It is now a mirror image of the NDX back in 1999-2000 in terms of duration, percentage terms and even absolute terms. Recall that when the Fed Funds moved into six handle rates, the bubble broke. This bears watching.

dummy said...

I shall be very happy when the HK shares are higher than the local mainland shares. That's when I can sell my covered warrants here. Sir, are you worried ?

Salvatore_Dali said...

dummy,


errrr, the H-shares WILL NEVER be more expensive thanShanghai or Shenzhen counterparts ... they will always be at a discount, the catalysts cited are there to narrow the discount substantially from 35%-45% down to maybe 5%-10%.

simon_alibaba said...

Dali, u r right on the pick but wrong on the timing call, i think. No pun intended. We bot last week when it was 40 to 50% cheaper. The sub-prime ignited correction has just BEGUN! not yet done.

Salvatore_Dali said...

simon,

i don't think its a question of timing as I have maintained a very strong buy on all china covereds consistently and repeatedly, just go through the archives... my reason for highlighting the covereds this time is whether they are still worth buying AFTER the sharp gains due to the new rulings.

Puntamentalist said...

You should trade in and out of call warrants, not buy and hold. Very wasteful to do that considering that you have at least 3 times to double your money with any of these warrants, say CHMOBIL-C1. Its H-share hit all time high today! So H-shares is still much better to own than the blue chips in Malaysia for a long long time!

hellthy correction said...

i must say that i have reservations about Hshares cws simply becoz due to the ridiculous conversion ratios the issuers placed upon it. Say for example chmobile c1, at 50 to one then taking the exchange rate into account, i would say it balloons almost to more than 100 to 1! Hindsight, these cws could easily go 'out of money' once its underlying share prices comes down. I think issuers are taking advantage of the thirsthy appetite for derivatives and the lack of knowledgeable use of it amongst retail investors. What should be done is to promote a fairer and level playing field.

dummy said...

I think we have to work out the arithmetic of the covered warrants to arrive at their valuation correctly. I think Chmobil C1 is a very good buy despite the exercise ratio of 50:1. Please comment. Thanks.

KC said...

CIMB & OSK CREATED THE GAME, WE PLAY IT ! THEY R THE SURE WINNER. WE R JUST A GAMBLER IN CASINO.

Salvatore_Dali said...

yes, i have bashed bursa for allowing houses to issue 50 to 1 conversions or even higher ratios as that trick is to issue at very low px, but causes too many to jump in without proper calculation ... the situation for HK-H shares are diff as lot of the are closer to HK50 or HK100 in px, hence I can tolerate that conversion ration

final word, its not the conversion, its the Premium and Leverage / Gearing that makes a warrant worthwhile as a trading instrument ... As a rule of thumb, gearing must be at least 5x for those with 4-6 months time value left ... and at least 8x for those with 1-3 months left

Premium should not be more than 25%-30% for 4-6 months and not more than 15%-20% with 1-3 months left