Hold Till Maturity?

Received an email from Celine Weng-Tse Chung, who asked the following questions:

1) By holding the covered warrants(cw) to maturity, rather than flogging them - what is the mentioned
full bang benefit?

2) I appreciate that by buying cw we have the rights but not obligations to exercise our rights. In the case of say, the 1st of your Top Buy pick, CCCC-C1 - upon maturity, should the investor decided to exercise his rights, herein what do the investor "buy" ?

Reply - Reasons why I suggested to hold these covered warrants till maturity are:

a) I think the China A-shares and H-shares have more upside from current levels come December 2007 and April 2008.

b) The biggest worry on any kind of warrants is the depreciating "time value" and the corressponding premium it NEEDS to work off before becoming profitable. However, if you look at the recommended covered warrants, the premium are usually less than 10%. That is cheap to me esp after you factor in the leverage of btw 4x-10x. With that kind of gearing, it is very easy to work down the premium and be "in the money". Which is why, by holding to maturity, I expect many of these to be "in the money" come November.

c) The danger in holding warrants till maturity is the level of "out of money", or the premium it commands as the maturity date gets closer. If you are still out of the money with less than 1 month, the price of the warrant goes very quickly to 1 sen and then zilch, you lose everything. As I expect most of the recommended covereds to be in the money come November, there is a huge comfort level in buying and enjoying the ride till maturity.

Just imagine you are now holding HKEX-C3, the exercise px is HKD133.88 and the current share price is already above HKD200, plus you still get a gearing of 5x. Its great esp if you got the C3 below RM1.50 as the C3 is at RM2.20. Come maturity in April 2008, if the price of HKEX reaches HKD240, can you imagine the price of the C3 come March 2008. Another great example is holding China Mobile-C3.

d) Upon maturity, you will get the difference between the exercise price and closing market price of the mother share, after taking into account the various currency translations and commissions.

Comments

i would say that some of the CWs issuers are very 'dirty' especially when the expiry of each cws gets closer. Take for example genting. The price of this stock was subbornly supported at 7.80 before the final suspension of trading of its cw on the 26th sept. Knowing that anything above 7.80 the issuer have to fork out some form of returns to those holding the cw. So somehow even the news about landmarks (genting's associate company) possible casino license only got out right after the 26th. Two days after the final trading of its cw, genting is now trading at 8.10
There are many examples of trading irregularities in corelation of underlying mother shares and its call warrants.

What we can learn from here is that we should not overly expose ourselves to such trading instruments when it could be easily manipulated by the issuer itself.

Now on the other hand overseas call warrants are different. With bigger market caps, our big boys are 'ikan bilis' or 'chicken feet' compared to the bigger international boys.

My personal view is to stay CLEAR of local cw and go LONG on the foreign ones.