Trading Strategies With The Chinese Covereds

This is for readers who have been following, investing, punting and trading in the Chinese covered warrants for at least the last 3 months. These are not hard and fast rules, but guidelines:

a) If you haven't participated at all in H-shares or their covered warrants, to chase on "up days" would give you a lot more risks than the inherent rewards. If you haven't participated before, you may still go in but you have to time your entry levels - there will be down days, it won't be a straight line to 10,000 that's for sure. The excitement brings about a lot of volatility in these warrants now, so timing entry levels are crucial.

b) If you followed the advice of holding till maturity, you should keep at it because even if the market there corrects, you have ample room and ample time to jump off ship. So, its better to ride the trend till expiry. If things look shaky and you wish to take some profit, go ahead but don't put those chips back at higher levels.

c) Its more of a trading market over the last couple of days. The nature of the beast has changed. When investors were buying Petrochina warrants at 15 or 20 sen, it took forever to move but you are buying for the unfolding of the catalysts, now the catalysts are unfolding, hence you are supposed to reap the full benefit, do not shortchange yourself.

d) As one fellow blogger (Seng) would say, you can reduce your average cost on rising covereds such as Shenhua, Petro or CNOOC - you can use guidelines such as everytime it rises 50% from your cost level, you take 25% off the table, and so on. That's because we never know when the peak is, especially when it goes up in such a huge quantum over such a short period. There may be chances to re-enter at much lower levels.

e) Everything being equal, I don't see a major correction, any correction will be due to external factors which is beyond our grasp. The domestic liquidity situation and the insulated nature of the Chinese financial markets looks likely to sustain a strong market. The unfolding of the migration of H-shares to Shanghai is also supporting sentiment. Things that could rattle the Chinese markets will be fiscal in nature: rise in stamp duty, capital gains tax ...

e) The latest news has it that China is studying a plan to allow arbitrage in shares of companies traded on domestic and Hong Kong exchanges, said Tu Guangshao, vice chairman of the China Securities Regulatory Commission said in Beijing. This development give a boost to the Hong Kong market and H-shares in particular, and at the same time take some steam out of A-shares in Shanghai and Shenzhen. This plan should be a reality soon as it would help stem the rise in Shanghai & Shenzhen markets, without a major correction - something the administrators would really wish to see leading up till the Olympics. Tu's remarks came after the Hong Kong exchange closed.
As most of the international covered warrants on the Bursa are H-shares, this would further spike them up. How much good news do you need?

Comments

solomon said…
For H shares structured warrant, I think the excitement will be for a while. For all the warrants, I like CNOOC-c1 (oil price topical play, cheaper entry than PetroChina call warrant)and SHENHUA-c1 (H shares (HKD 51 is still at discount to A shares = RMB88 per share).

Yes, perhaps adopt Ah Seng strategy, a ring fence approach is better thing to do now.

This call warrant playswill push up the local market for volumes.

But, what is the next theme play? I opined that the oil palm stock will follow suit. Stockists need this to heat up the market.

I do some homework, I like TANAMAS (80 something cent). Earning are back (half year RM16million), trading at low PE. I believe interested party would buy up the majority stake soon, if the current management is not up to mark. Salvatore, what say you?
deborah said…
The HK china cover warrants hve really gone up a lot... I read comments of investors of local cw that they dont make money as the local market is perceived to be more controllable.
My question is, with all the money that we hope to collect come maturity, wld it be a big dent on the income statement of the issuers?
greenbull said…
I am also curious of the fact that how it will affect the issuer whether the cws rise or fall in price? how do they get the extra cash to pay off the investors if the cw price goes up? i really hope someone will explain to new initiates like us. recently i bought ioicorp-cw and let it expire. I have still to receive the payout from them. i am supposed to get the difference in the mother and exercise price. would the return be more if i just sold the cw just before it expired? I am heavily involved in the H-shares cws, thanks to the recommendations by Salvatore. I sole some last few days but the price kept going up. I think i will just let it ride and watch them very closely. this is once in a life time opportunity to make bucks. the chances of making more far outweigh the unlikely possibility of losing all. i might even go in some of the laggards like sinopec, shenhua and cnooc.
hakiew said…
I think the issuer of the CW will do the following for risk management:
1) Keeping or trading part of the issues
2) Hedging by buying similar or more attractive options elsewhere
Rohit said…
dali,
Which H shares structured warrant can still buy till expiry?
Salvatore_Dali said…
rohit,

best two would still be the petrochinas and cnooc
kam said…
The issuers hedged their position by holding underlying mother shrs. don't worry about them losing money. Upfront they already make 15 - 20% from placement.
i would say that now is the time to pause and think of exit. One point to consider would be, Hshares are trading at its peak now and 'long' risks are getting stronger. some of the Hshares cws listed in Bursa are near expiry (2-3mths)and if we anticipate a healthy if not hellthy correction in the coming weeks, it would put alot of these valuations out of place ie some would get nothing in return. Im only afraid that those who go in now may lose their pants off if a recovery doesnt happen within the expiry time frame.

A look at some of their price earnings ratio would tell you that the bulls have charged aimlessly northbound. Time for a stop in some waterhole somewhere?

Watch, calculate and look before you leap!

Ben Graham's 15 steps before deciding to buy would be a good exercise to follow now.
solomon said…
Dear HealthyCorrection,

You are right. Bullish lead to greed and subsequent regretful(if lost your bet in the correction).

Never know when it will set in. They are still some stokists who supporting the H shares call warrants. Once they let off the hook, someone will get the hook.

The Asia market showing some weaknesses, esp the regulatory issues in India and China.

I tend to be risk averse for now.