Black Gold & 3 Treasures?

kafka said...
Me again... just to add on a bit. Since you recommended CNOOC & Petrochina. How about ZC-CIMB (Black Gold)? It is a basket warrent consists of CNOOC, Petrochina, Sinopec, Scomi & Sapcres. Coincidentally, I remembered you recommended at least 4 out of 5 of the stocks above. Furthermore, it is traded at ~4% premium, decent maturity, and above average gearing of ~4. Though Basket Warrant calculation might be harder to maintain...hopefully CIMB investment manager knows how... :p

The Details - CIMB Investment Bank launches new basket call warrants 26 Sep 2007 CIMB Investment Bank Bhd launched two new basket call warrants today which give investors exposure to the share prices of listed regional stock exchanges or share prices of oil and gas companies. The 3 Treasures warrant is issued at 42 sen each. With 50 warrants, an investor gains exposure to a basket of two Bursa Malaysia shares, a half share in HK Exchanges & Clearing and one share in Singapore Exchange. At market close yesterday, these shares were worth RM105.59 in total. The warrants' exercise price is RM108.88.

The Black Gold warrant is issued at 32.5 sen each on a basket of oil and gas stocks, comprising one share each in Scomi Group, SapuraCrest Petroleum, Petrochina Co, CNOOC Limited and China Petroleum and Chemical Corporation (Sinopec). At yesterday's closing prices, these shares were worth RM19.41 in total. Ten warrants are exerciseable into one basket of shares at an exercise price of RM19.38.

"By grouping a selection of thematic or sectoral stocks together, these basket call warrants allow investors to take a view on the value of a particular sector at a fraction of the aggregate value of the underlying shares. Launching 3 Treasures and Black Gold now is timely, as there is market demand for these products," says Lim Jong Hau, Head of Equity Derivatives Group at CIMB Investment Bank.
The constituents of the two basket call warrants comprise highly volatile stocks, making 3 Treasures and Black Gold very attractive to short-term investors. Lim explains: "Call warrants have unlimited upside potential, while the maximum loss is limited to the investment amount."

Comments - (Caveat - Currently the entire warrants & derivatives team at CIMB is not on my good books) The stocks that make up Black Gold are attractive. However, the bloody thing is at a discount even with a gearing of 4x. What does that tell you? It tells you people are not that keen on the basket of warrants. To follow the basket, you need to be able to calculate on a daily and even intra day basis. Its just a lot of work, imagine Sapcrest rising 10% in a day and CNOOC goes limit up, but Sinopec drops 4% - go calculate, and the dynamics changes a lot during the day.

Diversification, its not really diversification, all are oil & gas plays. When you put multiple counters of the same industry, its really an oil & gas exposure. Why the 5 companies? Why do you want the average returns of the 5? Maybe investors only like 3 of them, some the other two, some only one, etc.. - issuer is assuming they know best.

It will fail as trading warrant owing to the difficulties mentioned. You cannot follow the data, you cannot price them readily, you won't trade. But it has a lot of value since it has a low premium. Can buy and keep till maturity if you are bullish on oil prices for the next 6 months - if you try to trade in and out, you'd go bonkers valuing it. Hence the low valuation despite the grand names in each of the baskets.

Ditto for the 3 Treasures - what a name, definitely a dish at every Chinese restaurant. So who got spayed on the issuance of these two Z warrants? Those who got the warrants on distribution (yes, the well connected and rich buggers in town who always get the early placements), they got the warrants at a decent premium, now its lost some of its premium after barely a few weeks... dude, where's my premium?

p/s this posting has an alternative headline "How To Make Enemies Without Really Trying"