China Covered Warrants - Essentials

p/s did not factor in the exchange rate earlier, end result still good

PetroChina-C1
5 covereds to buy one share
Conversion Price: RM10.40 / HK$10.40
CA Price 0.195
Expiry 9 months from issue date
Yesterday's Closing Mother Share: 10.72
Premium: 5 x 0.195 = 0.975 + 10.40 / 10.72 = 14%
Gearing: 10.72 / (0.975 / 0.43) = 4.76x
Verdict: Good value, good upside, low premium

ICBC-C1
2 covereds to buy one share
Conversion Price: RM4.38 / HK$4.38
CA Price 0.175 Expiry 9 months from date of issue
Yesterday's Closing Mother Share: HK$4.10
Premium: 2 x 0.175 = 0.35 +4.38 / 4.10 = 27%
Gearing: 4.10 / (0.35 x 0.43) = 5x
Verdict: Good leverage, good value

ChinaMobile-C1
50 covereds to buy one share
Conversion Price: RM76.10 / HK$76.10
CA Price 0.16
Yesterday's Closing Share Price: HK$72.85
Premium: 50 x 0.16 = 8.00 + 76.10 / 72.85 = 30%
Gearing: 72.85 / (8.00 / 0.43) = 3.9x
Verdict: The best stock for upside, leverage still good, good value

The 3 covereds traded unlike the last bunch on Malaysian stocks where premiums went haywire and leverage does not make any sense. Due to the uncertainty, lack of information and understanding: these covered are priced nicely. Before investors get all panicky over the correction in Shanghai and Shenzen, these covered are pegged to the H-shares traded on HKSE: a very different thing altogether. Please re-read all postings on H-shares in my previous postings. The key here is that H-shares always traded at a huge discount to their counterparts in China. Before the big run, the discount has been averaging slightly above 20%. However, when the China markets went berserk over the last 12 months, this discount has shot up to over 40%. You cannot arbitrage because H-shares is convertible only in HK and vice-versa. This, as explained before, is a reflection of how frothy the China markets were. For example, ICBC in Shanghai-A closed yesterday at 5.08 yuan, even not taking into account the stronger yuan, the discount in the H-share in HK is 5.08/4.10 = 24%. Not all H-shares are listed back in mainland China, so the H-shares is indicative only. Thus you can say that the excesses in Shanghai and Shenzen are not translated totally into H-shares in HK. So, investors are not necessarily buying into the bubblish China market by buying these covereds.

There are two more important factors why investors should gobble up all the 3 covereds at current prices:

a) QDII (please read previous postings on QDII and China divesting out of USD) - Beijing has allowed more funds to invest outside of China via QDIIs, this is to allow for a valve for funds to move outside of China. First destination is buying into H-shares listed in HKSE, especially PetroChina and China Mobile, as they are not yet listed in Shanghai or Shenzen. They have just allowed US$400m and more will come.

b) There have been strong calls from Beijing for some of the H-shares to move back their listings to Shanghai. China Mobile and PetroChina will be under great pressure to do so. A move as such will move both shares much higher in anticipation of higher valuation back in Shanghai.

Hence, you heard it here first, all 3 covereds are good value. Strong buy and hold regardless of whether Shanghai tanks or not. This is probably the most significant blog posting for a long time.

Kudos to OSK for being first off the blocks to put these covereds here. Can start issuing more as appetite will grow by leaps and bounds.

Note to Yus-baby/Bursa/OSK/CIMB - From just this posting, I found it quite cumbersome to calculate the premiums and gearings, don't even mention coming up with implied volatility. Please try to ensure that investors can ACCESS information easily to value these issues easily, or have a live board monitoring the live prices of the respective shares in HKSE, and a table indicating the premium, gearing and implied volatility. Maybe you guys should have planned ahead instead of throwing these issues into the market and expect all investors to be savvy and informed. We all know how difficult it is to get live share prices from other exchanges. Please take note.