Wednesday, July 29, 2009

Hot Enough For You?!!


Readers of this blog will be aware that I have been saying the unbridled lending in China will need to find its way into assets, be it property of stocks. While I am concerned that this will end tearfully, I do think they will have a rambunctious party time before the sobering after effects. I only see things getting out of hand or collapsing sometime 2H 2010. Now we are seeing definite signs of this liquidity typhoon. Its rearing its ugly head viciously in HK's IPO markets.

That is one part of the equation, the other is the massive amount of liquidity resting by the sidelines for most of the past 12 months, and the equally massive stimulus programs, injections of liquidity and free printing press in the US and Europe ... all tipping their toes into the markets now. What we have been seeing are stock prices running ahead of fundamentals and recovery status.

Most analysts are trumpeting the same mantra: sell into strength, and being proven wrong royally (me included). Sometimes we can be wrong, but can we argue against momentum?
We all have some sort of a "model" for valuing what is "fair price". So called experts (analysts, strategists, fund managers) have a more sophisticated model, in that we take into account in varying degrees ... interest rates, growth rates, bad debt levels, inventory levels, investment into R&D and purchasing, employment outlook, PE bands, breakeven levels for products, etc... many others have their own version, or heck, just when it feels right, its good enough.

The massive diversion of funds away from stocks into cash and T-bills 9 months ago has come back to haunt us in a different way. Just a sprinkling of monies back into funds (including international funds) will cause many fund managers to need to deploy into the markets. Especially if you are managing Asian based funds because the last thing you want is to try and time the market as you could MISS OUT.

Imagine if you were managing an Asian fund of just $150m as at April 2009, then suddenly over the last 4 weeks you see these feeder funds, these feeder channels plowing $50m of fresh funds into your fund each week. What are you to do? You have a strategy and market direction that thinks that stock prices may have run a bit ahead of fundamentals, but you now have an additional $200m added to your $150m, you run the risk of underperforming the Asian benchmark massively if you miss out - heads will roll and your company will suffer. If you put the $200m to work, and Asian markets correct a couple of months later - hey, you will still have a job, you are still marked to your Asian benchmarks. That's the craziness of being a fund manager.

Thats the same kind of craziness we are witnessing in this "hot money" flow. Can criticise them but don't stand in the way. In recent months, flows of hot money into China have accelerated. As a result, China's foreign reserves surged to a record high of $2.13trillion in June, even though it had only enjoyed a smallish second quarter trade surplus of $34.8 billion. Apart from hot money, massive lending by mainland banks is creating abundant liquidity, causing the Shanghai stock market to surge by 88.8per cent this year. In the first half of this year, mainland banks rushed to extend 7.37 trillion yuan in fresh loans. It sparked fears that fresh asset bubbles in China might be forming, as the money was diverted to stocks and property. To cope with such a surge of liquidity, Morgan Stanley said China may 'simply be allowing more hot money outflow indirectly into the Hong Kong stock market'.


Even Malaysia has benefited despite not being the center of the liquidity inflow. Just check out how the big indexed stocks have been performing over the last 3 weeks, and you have a very good idea that many international funds are parking in big index stocks so that they won't miss out: Tanjong, Commerz, Genting, Axiata, Sime Darby, AMMB, Parksons (even), B Toto, KLK, IOI etc.


In the unofficial market yesterday, the mainland cement maker surged 62.38 percent to HK$10.36 from an offer price of HK$6.38. Back to the HK's IPO: new Hong Kong listing BBMG Corp became this year's best performing player on the gray market as it soared more than 60 percent yesterday ahead of its stock exchange debut today. Based on its gray market price, BBMG was also the most profitable initial public offering stock as investors earned a paper gain of HK$1,990 per board lot of 500 shares.

Amber Energy, which saw a rise of 36 percent on the gray market, rose 63 percent on its debut early this month. BaWang International, which increased nearly 29 percent on the gray market, climbed 27 percent on its debut.

A total of more than 404,000 applications were filed by retail investors, worth HK$461 billion. BBMG's shares were oversubscribed 773.6 times. Investors who subscribed for 12 lots of BBMG shares are guaranteed one lot. The company reaped net proceeds of HK$5.575 billion from the global offering.

Meanwhile, mainland firm Sany Heavy Equipment plans to raise at least $200 million (HK$1.56 billion) in the Hong Kong listing market in the fourth quarter. For the mainland market, automaker Great Wall Motor is considering resurrecting plans for a domestic A-share IPO. China State Construction Engineering will list on the Shanghai bourse today after raising more than 50 billion yuan (HK$56.7 billion) as the world's largest IPO this year.

You know things are really getting hot when both Las Vegas Sands (Macau) and Wynn's (Macau) both are filing for IPOs in HK already. Iron is hot, iron is very hot... Las Vegas Sands Corp, controlled by billionaire Sheldon Adelson, plans to apply in Hong Kong for an initial public offering of shares in its Macau casinos in early August. The Las Vegas-based casino operator also seeks amendments to its bank borrowings in Macau, including covenant relief and permission to sell as much as $1.5 billion in new debt, said the person, declining to be identified as the plans aren’t public. Wynn Resorts has submitted an application to list its Macau unit on the Hong Kong stock exchange, hoping to raise between $500 million and $1 billion.
The following are some of the major companies planning initial public offerings
on the Hong Kong stock exchange:
China National Pharmaceutical Group (raising HK$1.3bn)
China Metallurgical Group (raising HK$1.3bn)
China Minsheng Bank (raising HK$2.93bn)

Agricultural Bank of China (raising HK$35 billion) in IPOs
split equally between Hong Kong and Shanghai.




p/s photos: Chrissie Chau


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