Let's Think China

Tencent expanding into Taiwan??

noreply@blogger.com (Unknown) — Fri, 27 Aug 2010 09:38:00 +0000

A good example of the power of the techniques I previously posted (yes, that's Loooong time ago..)

Tencent announced an acquisition in Thailand yesterday

However, if you check out Tencent's recruitment web site you will see they have been hiring Thailand/Taiwan Country Head for some time....

Job Title: Country Manager of Taiwan//Thailand (Full-time)

Reporting Relationship: Report to General Manager, International Business Department

Location: TaiwanThailand

Roles & Responsibilities:

§ Be responsible for the general management of branch office in each country (First 1-2 years in Shenzhen, PRC, and then move back to home country, i.e., Taiwan, Thailand,);

§ Identify new business opportunities in potential international markets. Introduce, evaluate and recommend opportunities to the management team;

§ Define and structure new business agreements and models. Develop business and operation plans for international projects;

§ Negotiate and close strategic and revenue deals and manage existing partners;

§ Communicate and collaborate with cross-functional internal and external teams (product, engineering, sales, legal and top executives).

Required Qualifications:

§ High level of integrity, dedication and motivation, and great passion for the Internet;

§ MBA degree from a prestigious business school, and minimum of 3 years of prior working experience, preferably in the area of consumer product, consumer services, internet, high tech, or professional services;

§ Strong leadership potential as demonstrated by rapid career advancement;

§ Down-to-earth and hardworking, and distinctive problem-solving, analytical skills and business sense;

§ International exposure is a plus;

§ Be familiar with the culture of Taiwan/Thailand;

§ Fluency in English and Chinese.

.... they are also hiring a Taiwan Country Manager??? What for???

Does it mean Tencent is expanding into Taiwan but yet to be announced? stay tuned.....

Standard Chartered Bank (2888.HK)

noreply@blogger.com (Unknown) — Fri, 22 Jan 2010 05:00:00 +0000

Obama is proposing a list of new restrictions that basically shut down a number of major profit sources of big banks. No prop desk, no 'sponsoring' of hedge fund...
Does it mean JPMC, ML, GS need to stop their prime brokerage business?

Back to Asia, all markets dropped as a result of the big drop happened in US last night.

Standard Chartered Bank (2888.HK) dropped by 5.5% this morning and I see this a good opportunity to accumulate this stock.

Standard Chartered Bank is not a US bank, its business mainly concentrate on emerging market in Asia, and more and more hedge funds are coming to Asia (most recently Soros), if US banks cannot provide prime brokerage service, the hedge funds guy can to to Asian banks and Standard Chartered Bank will benefit with it strong presence in HK and Singapore, and growing presence in China. In fact, it has just been granted a market maker license in China in the bond market, which itself is a fast growing sector in China.

I will start accumulating this stock, half day closed at HK$108.6, which is even lower than the point when Dubai crisis broke out.

Consumer Credit in China

noreply@blogger.com (Unknown) — Thu, 14 May 2009 02:12:00 +0000

An interesting news I picked up today to share with you...

Government is indeed doing whatever it takes to boast domestic consumption in China...
But I doubt the actual effect it will produce. The saving rate in China is over 40%, people do have money to spend but just they don't spend it, how can credit help?

Besides, the pilot project will be in Shanghai where the GDP is among the highest in China, do people there really need credit to accelerate domestic spending?

City tapped to pilot consumer finance by -- SHANGHAI will be among the first cities in China to launch consumer finance companies under a draft plan released yesterday by the nation's banking watchdog.

"Shanghai has been studying a plan for consumer finance...

why CAF traded at a very high premium vs. 2823.HK A-50

noreply@blogger.com (Unknown) — Fri, 08 May 2009 01:04:00 +0000

Latest NAV for each ETF:

CAF: US$390M
2823 A-50: US$4000M

And the 3-mth average daily trading volume:

CAF: 300K shares (ie, US$11M traded daily based on yesterday closing price, which is close to nothing versus the total daily transaction in NYSE)

2823 A-50: 122M shares (ie, US$183M traded daily based on yesterday closing price, which is around 1.5% of total transaction traded in HK Stock Exchange, though it is not a big % but is still siginificant given there are over 2000 stocks listed in HK )

My interpretation is:

1) both listed ETF are traded mainly by retail investor rather than institution from the size of the transaction we observed

2) for 2823, the 'price discovery' is more efficient from the transaction amount it traded in HK vs CAF in US

3) 2823 is a VERY popular ETF listed in HK, widely covered by financial media, that explains the trading volume, however, CAF I believe is not popular at all in US relatively speaking, that also explains the inefficient price dicovery process

So I would conclude if we want to invest rather than speculate the Chinese economy growth, 2823 is a better choice.

If we want to trade the volatility, CAF will be the right choice.

All news are good news

noreply@blogger.com (Unknown) — Thu, 07 May 2009 01:05:00 +0000

Being based in HK, what are currently happening in US is nothing new to us. Our property market collapsed after 1997 and it took almost 10 years to recover, we have SARS in 2003 that hurted our economy to an unprecedented extent. Both of these are not minor issues and experience tells us that it will take long time to recover.

However, when I look at the recent market reaction globally, people are ignoring all these facts.

Is the housing market really reached a bottom in US? Even if it is how quickly can it recover? In HK it was 10 years and not 1 or 2 years which Bernanke or Obama trying to pitch. Well, both of them are having probably the most difficult job in the world, if I were them I probably will do the same thing, the only solution to the subprime aftermath is to re-inflate the bubble.

I believe the Swine Flu impact may not be as serious as SARS, however, still I will not underestimate the risk. But most people's reaction in US is just life-as-usual.

I cannot really understand what's happening over the last few weeks when all news become good news. The only thing I learnt is that I shall never work against the market trend, I short the S&P 4 weeks ago and it proved to be a big mistake.

Having said that, how long can this all-news-are-good-news trend last? I still have reservation.

Q1 earning season is over, market interpretation to most of them is simply not-worst-than-the-worst means it's good and we see stock price jumped. Do we still look at PEG in valuation? what's the new 'G' in the ratio? Market simply ignore it.

CAF (the China A Share ETF that I followed very closely in the past) has reached an all time high 40% premium, while the historical high was about 20% since its launch in 2006. What does that tell us?

On the other hand the A-50 ETF (HKSE: 2823) premium is still trading at close to zero, given there are choices I will rather bet on A-50 if we believe the Chinese market is on a sustainable uptrend.

For more background on CAF and A-50, you can read a very old story I wrote 2 years ago, the link is here, though the story is old but the background doesn't change

A50 Tracker and HS China Enterprises Index (HKCEI) Technical Analysis

noreply@blogger.com (Unknown) — Sun, 19 Aug 2007 02:20:00 +0000

Just want to share the following two set of charts, seems like no charting tool can concurrently display two MACD, I've manually paste the A50 (using 2823.hk as proxy) and HSCEI MACD side by side to better analyze the two recent opposite trends.

In hindsight, should have been alerted in early August when HKCEI MACD was developing a stronger and stronger negative divergence.

Currently A50 is also developing a negative MACD divergence, will it develop further and it's a sign of A-share market correction?

I’ve no crystal ball but I am a bit cautious about the recent policy risk developing in China based on what I observed and heard:

No action has been taken yet on the 5.6% July CPI figure which was announced last Monday
Rumours of new housing loan policy with down payment increased to 50% and no new loan for 2nd home

For anyone interested in treasure hunt HK stocks, especially those new IPO listed since 2006, here is an analysis of all Hong Kong IPO performance for 2006 and 2007.

Morgan Stanley China A-Share Fund (CAF) suffered from its holdings in other China funds

noreply@blogger.com (Unknown) — Sat, 11 Aug 2007 06:51:00 +0000

On 15 March in my story “Comparison of two China A-share ETFs” I queried the CAF manager why he has invested 5% of investors’ money into other China funds:

“..I really cannot understand the reason for doing so when there are a whole lot of available alternative companies in the Chinese market. So practically 5% of CAF is a Fund of Funds. This raised a question whether the CAF manager has really tried his best effort to increase the return, may be a sign of agency problem. Though 5% of the NAV is not a significant amount, I always believe minor issue can help us uncover bigger truth…”

Today I have analysed CAF’s portfolio performance using its published March holdings, I noticed that out of the 11 funds the CAF manager invested in, he exited 5 of them while 1 new “Great Wall Jiufu Core Value Equity Fund” was added.

Based on its March report the 7 funds it holds incurred a loss of 74% (US$16M) which is around 3.7% of total CAF NAV. Full analysis of its individual position return is here.

So my original query is still valid. I still challenge the CAF manager why investment in other China funds is a better option than picking stocks by himself when there are over 1500 A-share stocks he can choose from in Shanghai and Shenzhen.

Worst still he has exited the best performing fund out of the original 11 he picked, which is the iShare A-50 Tracker Fund (2823.HK).

6-month relative performance of CAF vs. iShare A-50 Tracker Fund (2823.HK):

Disclousre: I have no position in the above ETFs

Global Sources (GSOL) needs better Investor Relationship Management

noreply@blogger.com (Unknown) — Tue, 07 Aug 2007 03:43:00 +0000

Global Sources (GSOL) yesterday announced a very aggressive expansion plan for its 2008 exhibition business.

Major highlights:

Two China Sourcing Fairs in Dubai, which are expected to boost sales capacity to 900 booths, up from 500 in 2007;

Two China Sourcing Fairs in Shanghai, increasing booths available from 450 in 2007 to over 1,000 in 2008

One International IC-China Conference & Exhibition (IIC-China)in Chengdu, and, co-located with IIC-China in Shanghai and Chengdu, two Electronic Components Pavilions, increasing booth capacity from 1,000 in 2007 to over 1,500 next year.

Altogether there will be a 74% increase in number of booths to these major shows in 2008, adding to the increasing booth selling price this should be very good news to investors.

However, market either did not pick up the news or was impartial to its 2008 plan, share price of GSOL dropped a further 4% yesterday.

From the date I first wrote about GSOL on 17 May, its share price has gone up by 37% but recently free fallen significantly with only 3% gain left.

I still believe GSOL has a very solid business fundamental. Besides, with recent confirmation of Alibaba's HK listing scheduled in 2H, GSOL should deserve a re-rating.

So what’s the problem with GSOL?

It’s all about poor investor relationship management and too heavy insider shareholding.

I’ve done a comparison table as follows:

As can be seem, GSOL’s insiders (which essentially are the management team) are holding 71% of all issued shares, versus the other Chinese comparables I’ve chosen (there is no direct comparable, I’ve picked some China internet companies for the ‘China concept’) which is several times higher.

Besides, only 10% of company shares are hold by institutional investors and mutual funds, again it is significantly lower than the others.

The roller coaster share price which doesn’t truly reflect the company’s business fundamental is largely due to the light trading volume (0.2M)

Mr. Merle Hinrichs is the founder and CEO of the company, who has been running the company for 35 years. I do pay high respect to the management team for the solid business they have built, however, I wish Mr. Hinrichs can spend more time with institutional investors and increase their interest in the company.

The next 6 months probably is the best time to do that so as to leverage institutional investors’ interest in China B-B companies as created by the coming Alibaba’s listing.

For Jack Ma, founder and CEO of Alibaba, he shall seriously consider acquiring GSOL. With Alibaba and GSOL combined, it will be the clear leader in China providing integrated B-B trading, marketing and exhibition business.

GSOL will announce its Q2 result this Thurs, tighten your seat belt for another roller coaster ride!

Disclosure: I am LONG GSOL

I like Dolby (DLB)

noreply@blogger.com (Unknown) — Thu, 02 Aug 2007 10:17:00 +0000

China has committed digital broadcasting for its 2008 Olympic, I expect that is a good reason for Chinese to replace their old TV with a flat panel high definition version. Japan already has 80% of prime time programs delivered in HD, that for US is 67% (based on 2006 data). Are you ready to switch?

Dolby Laboratories Inc. (DLB) delivered another impressive report card yesterday, quarterly net income increased by 53% YoY. With 74% of revenue from licensing it’s a low risk business model as it doesn’t need to worry about inventory and fluctuation in component costs as faced by manufacturing companies. DLB is also a very profitable company with 28% net margin.
Click here for the detail numbers

DLB is the most direct proxy for digital home as its technologies covered a very wide spectrum of consumer electronic devices. Just in case you don’t know, you are paying DLB when you buy a new digital TV as all new TV shipped into US must be digital and DLB is a mandatory feature under the ATSC standard (the US version of digital TV standard).

For all Americans you must replace your existing analogue TV with a digital version (or buy a digital set top box which DLB will also collect royalty) very soon because analogue TV broadcasting in US is planned to stop in 2008. (though it may be delayed).

When you buy a new high definition DVD player, no matter it’s Blu-ray or HD-DVD you are paying DLB.

If you have bought a Playstation 3 or Microsoft Xbox for your kids, you have also paid DLB for the Dolby sounds.

Have you upgraded your PC to Windows Vista yet? DLB also get a cut of the price you paid for each license of Vista Home Premium and Ultimate editions, which according to Microsoft's most recent earnings call that accounted for the majority of Vista shipments. In fact DLB expects PC (35%) and digital TV (15%) will be 2 major sources of revenue for 2007.

Still not sexy enough? Earlier this year DLB acquired BrightSide Technologies which is a company in display technology that enables high dynamic range on LCD monitors.. I talked to a friend of mine who is a researcher in LED/LCD technology, he said BrightSide is the real market leader in terms of the number of fundamental patents it owned. (fundamental patent means the technology is so important that almost all other display technologies would likely infringe it and hence need to license it from the patent owner) DLB said that it is extending its imaging initiative to the consumer market with focus on enhancing LED backlit LCD displays using high dynamic range technology. The technology makes the whites whiter and darks darker, which dramatically enhances image quality and expect to begin seeing some initial revenue from this technology in fiscal 2008.

I like checking company’s recruitment advertisement to see what is going on inside the company. Recently I saw the following HK based openings from DLB:

Compliance Officers
* Work closely with HQ in the USA and Sales Offices worldwide to monitor licensee’s usage reports to ensure compliance to licensing agreement
* Research, investigate, and analyze market data to verify usage reports from licensees
* Assist in enforcement of Company’s intellectual property rights
* Manage international trade shows pre-planning and on-site coordination
* Experience/knowledge in IP Industry or handling of legal documents is an advantage
* Strong communication, negotiation, interpersonal, and analytical skills
* Good command of written and spoken English and Mandarin
* Native Korean speaker with good command of written and spoken English

The biggest issue for licensing model is how to get licensee to report and pay royalty. Seems like DLB is very aware of it and it is a good sign that it has a plan to deal with it.

Currently traded at ~27x forward earning DLB is a reasonably priced high growth stock.

Disclosure of interest: I’m LONG DLB

Two New China A-share ETFs Launched in Hong Kong

noreply@blogger.com (Unknown) — Mon, 23 Jul 2007 07:23:00 +0000

Two new China A-share related ETFs listed in HK last week, they are:

HSBC Dragon Fund (0820.HK)
An actively managed closed end China concept fund with up to 50% of portfolio invests in A share, remaining 50% in H-share, Red chip or B share. Fund NAV is updated daily here

Profile of manager extracted from prospectus:

Richard Wong
Richard is a fund manager in the Asia ex Japan equity team. He has overall responsibility for investments in the Chinese equity market. Richard has been working in the industry since 1985. He first joined HSBC Investments in 1993, then left to work for Nikko Capital Management as a senior portfolio manager for one and a half years. Richard returned to HSBC in 1997 and moved to Halbis upon its establishment in 2005. Richard started his career at Moody’s Investors Service as a research associate in New York. Richard holds a BA in Economics and Computer Science from Columbia University and an MBA in Finance from New York University.

BOCI-Prudential W.I.S.E. - CSI 300 China Tracker (2827.HK)
which tracks the CSI300 index. The index consists of the largest 300 A-share companies traded in Shanghai and Shenzhen stock exchanges. Fund NAV is updated twice daily here.

Apart from a wider coverage than the A-50 index (which can be good or bad), significance of the CSI 300 index is that it is being chosen as the underlying index for the coming China index future which is yet to be launched.

Market reacted very favourably to the HSBC Dragon Fund, in fact is truly alarming to me. Today is the 2nd day of listing and it’s trading at ~70% premium to NAV. As this is a new CEF 100% of its assets is in fact cash.

CSI 300 Tracker is trading comparatively ‘humble’ with 13% premium.

When we look at other similar funds, Morgan Stanley China A-share Fund (CAF) is trading at ~15% discount. A-50 China Tracker (2823.HK) trades at ~1.7% premium.

So practically people are anticipating the HSBC manager will beat the China market by at least 70% !

Not sure whether I am too stupid and not able to understand the secret rationale for paying $170 cash for $100 cash + a remote wish. I’ve NOT seen any active China fund which can beat the already very high growth A-share market index by extra 70%!

OK, let’s look at history and check on historical 12-month premium of some other popular emerging market ETFs.

Here I listed several of them which I’ve been closely following:

Morgan Stanley China A Share Fund (CAF)

Templeton Russia & East European Fund (TRF)

India Fund (IFN)

Morgan Stanley India Investment Fund (IIF)

As can be seen from those charts, most of the emerging market funds had their premium reached a peak around Dec 2006 timeframe. The highest premium was 38% with Templeton Russia & East European Fund (TRF) and that for Morgan Stanley China A Share Fund (CAF) was ~16%.

This new HSBC Dragon Fund (0820.HK) for sure has broken a lot of ETF records and I wish all those who invested in this ETF good luck and have their wishes come true. On the other hand, the HSBC manager can in fact consider buying CAF at its current 15% discount to lock in some immediate returns.

Will I buy the CSI300 tracker? No, I would rather stick with A-50. I am only interested in those true market industry leaders listed in Shanghai. For those smaller companies (in CSI300) listed in Shenzhen, my gut feeling is that the return/risk ratio will not be as good as A-50. Besides, I am not going to pay 13% premium with CSI300 Tracker when I can pay 1.7% for higher quality stocks (with A50), this is apple-to-apple comparison as both are listed in HK versus CAF which is listed in US and investors there are trading the ETF at a discount instead of premium.

Today I've opened a new LONG position in a HSCEI index linked derivative, with the interest hike and interest tax reduction announced last Friday, I believe it will be another few months of bull market before the next significant correction. Near term risk is the coming launch of the China Index Future, the exact plan is still unknown and that's the policy risk we are taking.

Top 5 most influential stocks of the Hang Seng China AH Premium Index

noreply@blogger.com (Unknown) — Tue, 10 Jul 2007 08:31:00 +0000

The Hang Seng China AH Premium Index ("AH Premium Index") was officially started yesterday, real time indices are shown in the following table:

Real Time Index:
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I’ve further analyzed the composition stocks and ranked the top 5 stocks with the biggest impact to the index. They are namely China Life, Sinopec, Bank of Comm, Ping An and Chalco. 5 of them already contributed around 20% premium, with the remaining 22 stocks altogether contribute another 10% giving a total premium of ~30%. (as of 9 July)

The full table is shown here.

A-share companies will begin reporting of their half year results this month, China Merchant Bank and ICBC had pre-announced their result last night with impressive 100% and 50% net profit growth respectively.

While H-share has gained very strong momentum over the past 2 weeks versus its A-share counterpart, whether it can keep the steam going will be very much dependent on the result announcements this month.

I would refine my Q3/Q4 strategy after seeing those results. In addition to catching the A-H convergence, I would start accumulating Olympics related stocks. I expect the heat will start in 2H till the event takes place in Aug 2008. In terms of sector I would look at media, hotel and sports related companies.

A Very Important Index Is Launched - Hang Seng China AH Premium Index

noreply@blogger.com (Unknown) — Fri, 29 Jun 2007 14:15:00 +0000

HSI Services Limited announced today the introduction of a series of Hang Seng China AH Indexes to help investors track the performance of those Chinese companies dual listed in China and Hong Kong.

The most significant one is the Hang Seng China AH Premium Index (“AH Premium Index”), an index measuring the weighted average premium (or discount)of A-share prices to H-share prices of the constituents. The index is designed in a way that the higher the index, the larger the premium of A shares over H shares, and vice versa. When A-share prices are at par with H-share prices on average, the index will be at 100.

Initially the index will have 27 large AH companies that have completed share reform as constituents.

As at 27 June 2007, the AH Premium Index closed at 146.73, meaning A shares are trading at an average premium of 46.73% above H shares.

The trend from Jan 06 to Jun 07 is shown in the following chart.

How to play this index?

No tradable derivative product is announced yet.

However, if you believe the A-H price gap will converge like I do and cannot wait, one possible way to play is to long a number of the 27 constituents. Regardless of the structure of derivative product, issuer has to hedge its position by long H and short A (if the index is trending down, ie, tightening of the A-H gap).

Instead of looking at the full list of 45 A-H dual listed stocks, we shall better focus on this shortened list of 27. I've updated the full list HERE with level of H-share discount sorted in order.

The index will be available and disseminated starting 9 July 2007.

Impact of A Share H Share and Red Chip Convergence to 3 ETF (CAF, FXI, A-50 Tracker)

noreply@blogger.com (Unknown) — Sat, 23 Jun 2007 07:46:00 +0000

"There's no reason why stocks listed in Shanghai cannot through some financial instruments be traded in Hong Kong. Similarly, I do not see why Hong Kong stocks cannot be co-listed in the Shanghai stock market through an arbitrage arrangement. We are discussing the mechanics of it."

Hong Kong SAR Chief Executive Mr. Donald Tsang said in an interview with Financial Times on 18 June.

Mr. Tsang is a very smart politician and he is especially good in gaining trusts from his bosses in Beijing, that’s why he could replace Mr. Tung Chee Hua, the past HKSAR Chief Executive in the middle of Mr. Tung’s tenure.

Mr. Tsang has also been very cautious in delivering messages from Beijing, he would not disclose any plan on change of Chinese policy unless it is 100% confirmed.

As such I would expect new policy leading to price convergence of dual listed shares in Hong Kong and China would be announced very soon.

The convergence has in fact already been started, we see a very strong upward momentum of Hong Kong listed Chinese companies since the Chinese market correction earlier this month. See the chart below comparing SH Composite with HSCEI (Hang Seng China Enterprises Index):

A Shares in Shanghai or Shenzhen are trading at premium to their H share counterparts listd in Hong Kong. As of 22 June H shares are discounted by 1.5% to 88%.

If you are holding any funds or ETF with A, H or Red Chip as underlying assets, you shall evaluate such convergence impact immediately.

Three such most common ETFs traded in US and HK are :

Morgan Stanley China A-Share Fund (CAF)
iShares FTSE/Xinhua China 25 Index (FXI)
iShares FTSE/Xinhua A50 China Tracker (2823.HK)

Following is my analysis of the potential impact to these 3 ETFs:

As the actual market reaction is impossible to predict, I’ve made the following assumptions in my analysis:

Only constituents of each fund which are dual listed in HK and China are considered
Uniform convergence of each dual listed stock
The price gap between H and A share would not be completed closed, for illustration purpose I assumed H shares to go up by 70% (of the gap) and A shares to go down by 30%.
Correlation of H share and Red Chip movement is ignored.
Impact to "A only” shares (i.e., not dual listed as “A” and “H”) is ignored.
Similarly impact to Red Chips is ignored.

In this TABLE I listed the H share discount for all 44 dual listed Chinese shares, composition break down for each of CAF, A-50 and FXI, and multiplied the discount and composition % to arrive at the potential impact. You can study the impact down to each stock in the table if you are interested.

In summary:

FXI has 39.55% of NAV invested in 10 H-Share companies (out of the 44 dual listed) giving a positive upside potential of 7.7%

CAF has 22.25% of NAV invested in 7 A-Share companies (out of the 44 dual listed) giving a potential downside of 1.8%

A-50 Tracker has 30.3% of NAV invested in 20 Chinese A-Shares Access Product (out of the 44 dual listed) giving a potential downside of 2.2%

Several Very Important Remarks :

My assumption of uniform price correction to all dual listed stocks is for simplicity only. I expect high quality H shares would experience a stronger re-valuation. So buying those shares with heaviest H discounts would not guarantee you profits.
As Red Chips will be returning home to list as A share in China too, we can anticipate similar re-valuation of those Red Chips, which is beneficial to FXI (or other funds or indices with strong Red Chip exposure) as it holds several high quality Red Chips such as China Mobile and CITIC Pacific.

What is my investment strategy to profit from this trend?

I have bought HSCEI index products, on top I have overweighed several selected H shares and Red chips as potential profit enhancers. How to pick those star companies? Let's discuss together in my Discussion Group !

Lets Think China Discussion Group

noreply@blogger.com (Unknown) — Thu, 21 Jun 2007 07:50:00 +0000

Dear "Lets Think China" readers,

Thanks for your interest in my blog. I've created a discussion group for idea exchange on any China stock/fund/ETF/ADR related opportunities.

If you are interested to exchange ideas with me and other members, just follow this link to join us !

Thanks and I look forward to seeing you in the Group!

Best Regards,

Siwei Zhong

Chinese RMB Yield Curve

noreply@blogger.com (Unknown) — Tue, 19 Jun 2007 01:57:00 +0000

The yield curve adjustment in US market was the biggest event last week and the effect has rippled through to other part of the world. While China is a red hot subject nowadays, how come nobody talks about the Chinese RMB yield curve? Do you have any idea as simple as the shape of the curve?

You probably are not interested because RMB is not a freely traded currency, and you are not allowed to buy RMB bonds.

But are you investing in Chinese H-share or A-share based ETF such as Morgan Stanley A-Share Fund (CAF), iShares FTSE/Xinhua China 25 Index (FXI) or iShares FTSE/Xinhua A50 China Tracker (2823.HK) ?

Do you know all those funds are having a significant proportion of their assets invested in Chinese banks and insurance companies?

For example, the following list shows the 25 constituents of FXI, almost 40% of its assets are in Chinese banks and insurance companies

So how does this relate to the RMB yield curve?

If you are indirectly owning so much Chinese banks assets, you may be interested to know how do Chinese financial institutions manage credit risk, how do they perform mark-to-market financial assets valuations, how do they report VaR (Value-at-Risk) or CAR (Capital Adequacy Ratio) which are critical measurements of banks’ health.

In other part of the word, yield curve is the most fundamental element to derive discount rates for cash flow projection, which itself is the basis for any financial assets valuations.

However, you may be very surprised to learn that this seems to be obvious matter is a brand new policy just imposed last week ! On 15 June CBRC made an announcement that banks should make reference to RMB yield curves in financial assets valuation and reporting starting from Oct 2007. Before this is enforced Chinese banks are not referencing to RMB yield curve and they derive their own discount rates based on arbitrary and subjective measures. So there is in fact not a common point of reference when we interpret reports from different Chinese banks. Is the credit management of one bank better than the other as indicated from its annual report? I am not too sure.

It is still a very long road to a mature capital market in China. What we have seen in the A-share market is just a beginning of the overall Chinese capital market reform. Without a solid equity market foundation it would be difficult to move forward to develop a corporate debt market. RMB yield curves are in fact incomplete because secondary market for corporate bonds is inactive. Without a well developed debt market the Chinese goverment would find it difficult to solve banks’ non performing loan problems because there is not a vehicle for a more balanced distribution of risks to different classes of investors. Bank loans are currently the major source of funding for all Chinese firms. Based on PBOC statistics, in 2006 Chinese firms raised a total of RMB 4000b, of which RMB 3300b (82%) were bank loans, only 5.6% (RMB 230b) was from equity market.

My View

China is speeding up in debt market development which is crucial to the overall health of Chinese economy
A healthy stock market is the fundamental requirement for debt market development, I cannot believe the Chinese government will do any stupid things to destroy what they have painfully developed over the past few years. Tackling the astronomical sum of non performing bank loans and ultimately listing all banks were huge achievements. Though the system is far from perfect, it is a one way road, the Chinese market can only be healthier.

Finally, here is the RMB yield curve in case you are interested.

Filtering market noise in China

noreply@blogger.com (Unknown) — Fri, 15 Jun 2007 06:56:00 +0000

The inconsistent message from the Ministry of Finance about stock transaction duty tax hike caught the market by surprise and caused an almost 21% correction from its peak of 4335 on 29 May to its lowest of 3406 on 5 June to the Chinese Shanghai Composite index.

Though I’ve profited from my H-share and A-share index call warrants which I bought on 7 June, what interested me more is to see what lesson I can learn from the incident.

A recap of the chain of events:

22 May:

Market rumoured that transaction duty would be raised from 1% to 3%

23 May:

“Responsible representatives” (the exact wordings in Chinese are “有关部门负责人”) from Ministry of Finance and The State Administration of Taxation (国税总局) confirmed with a reporter of Shanghai Stock News (上海证券报) that they have not heard of such policy change. After such story was published by Shanghai Stock News, it was widely quoted by other online and print media in both China and Hong Kong.

29 May:

Ministry of Finance announced the 1% to 3% increase of transaction duty

I tried to dig out speific names of the spokespersons on 23 May. I’ve searched Baidu (the most popular search engine in China) and Xinhuanet which is the official China News Agency web site, my effort was in vain.

Anyway, I believe the comment from the unidentified persons were unintentional. Most likely the reporter from Shanghai Stock News was unable to approach related senior officials for comment and so he/she just picked anyone reachable. Unfortunately in this incident the individuals who provided comments might not have enough knowledge of what the real government plan was.

Catch you by surprise (出其不意)

This 29/5 incident reminded me of another one happened in July 2005 when China announced its currency policy reform with RMB referenced to a basket of currency instead of US dollar alone.

For that incident, Premier Wen Jiabao has in fact pre-announced his plan when he told the world his intention. Back on 14^th March 2005 Premier Wen has told the media that China was planning on a significant currency reform and he further added that “it might catch you by surprise” (出其不意) when being asked about the timing.

What were the differences between these two incidents?

One comment was made by an anonymous person while the other was made by a highly respected Chinese leader.
One was to cool down (not to kill) the local stock market while the other was to avoid foreign speculators to take advantage of the RMB appreciation.

So what have I learned?

I will take comments from unidentified sources with a grain of salt.
Any significant correction caused by rumours in China is good buying opportunity (the Feb correction was also caused by rumours of same nature). Refer to the chart below to see how quickly the two corrections were fully recovered. I maintained my long term bullish view on China.

A-50 tracker ETF (2823.HK) is the best instrument I can access having the highest correlation to Shanghai index. I was using CAF as a proxy but it proved to be a failure. CAF is still having 20.9% discount to NAV while A-50 Tracker (2823.HK) has almost completely closed the gap with only 2.6% discount as of today’s closing. Why CAF is lagging? Apart from supply/demand dynamics the performance of its underlying against index is other contributor.

A-Share Price Premium

noreply@blogger.com (Unknown) — Wed, 13 Jun 2007 03:44:00 +0000

A share and H share trade in two different markets (Shanghai/Shenzhen vs. Hong Kong) and there is no channel to arbitrage, adding to that the huge imbalance between supply and demand of high quality stocks in China has caused most A shares to trade at a premium over their H share counterparts.

The premium ranges from a few percents to several hundred percents when translated into HK$ equivalent.

For ease of reference, I would from time to time publish such table. Stay tuned !

Heading

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Learning investment

noreply@blogger.com (Unknown) — Tue, 12 Jun 2007 11:06:00 +0000

To have first hand feeling how the Chinese investment heat is, I visited a Shenzhen bookstore over the weekend, there are at least 500 books all about investment, some are by local author, some are translated version such as "One up on Wall Street" by Peter Lynch. Suddenly all Chinese are busy studying investment analysis and they are especially interested in charting/technical analysis from what I observed.

Here are some photos I took:

Morgan Stanley China A-share Fund (CAF) Top 10 Constituents Performance Relative to Index

noreply@blogger.com (Unknown) — Mon, 11 Jun 2007 09:15:00 +0000

The following table shows the top 10 holdings of CAF (Morgan Stanley China A-share Fund) as of last report.

To understand the stock picking skill of the manager, I have extracted the relative performance chart of each stock against Shanghai Composite, these charts are dynamic and will be updated daily.

In each chart, RED line is the Shanghai Composite Index, BLUE is constituent stock.

Individual Stock Vs. SH Composite (latest 3 months)

600015 Huaxia Bank Co. Ltd

600036 China Merchants Bank Co. Ltd

600005 Wuhan Iron & Steel Co. Ltd

601111 Air China Ltd

600000 Shanghai Pudong Development BA

601006 Daqin Railway Co. Ltd

600066 Zhengzhou Yutong Bus Co.

600808 Maanshan Iron & Steel

000022 Shenzhen Chiwan Wharf Holdings

000612 Jiaozuo Wanfang Aluminum Manuf

Who Moved The Chinese Market?

noreply@blogger.com (Unknown) — Thu, 07 Jun 2007 09:00:00 +0000

Shanghai closed today at 3890.8, up 3.03%. It is also the first time that there are more advances then declines (894 vs. 378) since the announcement of the tripled duty tax on 29 May.

Over the last 7 trading days, Shanghai Composite has corrected by 21% from its peak of 4335 on 29 May to its lowest of 3406 on 5 June, and still by 10% as of today.

This size of correction is totally unexpected by the government, over the last 2 days there were various government officials trying to comfort the over-reacted crowds with bullish comments in different media.

In addition, 4 new equity oriented mutual funds are approved and will be launched next week. Last time when a large number of funds were concurrently approved was on 6 Feb, when the market collapsed by 10% from 30 Jan to 5 Feb.

Obviously the government is trying to fix the aftermath.

So what was the cause for this latest correction? It was not the tripled duty tax, as I mentioned in my last article the practical impact of it is insignificant.

The real cause was the poorly managed and inconsistent message from the government. Just a few days before the 29 May announcement was made by the Ministry of Finance, the media had confirmed with another spokesperson of MoF that there was no such plan.

It is exactly this inconsistency which caused the market panic, as investors have no clue which message could they trust in future.

I think such inconsistency was unintentional, I believe Chinese authorities would learn from this incident and be more careful when government officials talk to media.

Another by-product of this correction is a tightening of the A-share/H-share price gap from the previous 30%+ premium exhibited by A-share. As can be seen from the chart below the Hang Seng China Enterprises Index (which tracks H-share in Hong Kong) has in fact gone up while the A-share index was free falling in the period.

This is the first time inexperienced Chinese investors (17% of the total trading accounts in China were freshly opened in past 4 months) got their fingers burned, at least for a period of time that 17% of the retail investors would remember this incident.

I believe Chinese investors would also start looking at other less risky investment vehicles which they are familiar with, such as QDII (Qualified Domestic Institutional Investor) funds the government recently relaxed. (Up to 50% of a QDII approved fund can be invested in equities from 0% in the past). As Hong Kong is the only authorized market QDII funds can put their money, most of such funds would likely allocate their equity portion to Hong Kong listed H-shares, red chips and Hong Kong blue chips which are all familiar names to Chinese investors, that would be a catalyst to H-share index though the absolute amount is still small comparing to the HK market cap.

Besides, there are more mainland Chinese investors using a grey channel to invest directly in Hong Kong stocks without going through QDII. Though RMB is not a freely traded currency, Chinese citizen is allowed to buy up to US$50K per year for their spending when they travel to Hong Kong. For a family with 3 members it’s already US$150K which is not a small number at all from Chinese standard. Though officially it is not allowed, still some of them would open a HK stock trading account when they travel to HK and place orders over internet or phone. In fact a local Hong Kong broker said today around 50% of its orders are coming from mainland customers. I would not under-estimate this effect which would even be more significant than the QDII channel.

I’ve also adjusted my trading strategy and would allocate part of my portfolio to H-share index ETF (2828.HK) rather than purely on A-share related ETFs (CAF and A-50 Tracker). Now I am equally bullish on both A-share and H-share.

Disclosure: I have LONG positions in H-share index call warrant and A-50 index call warrant

Global Sources (GSOL) Q1 Result and Alibaba’s new business initiative

noreply@blogger.com (Unknown) — Thu, 31 May 2007 15:50:00 +0000

GSOL delivered a very strong Q1 result. Revenue and Net Income increased by 16.4% and 48.1% respectively, that were mainly due to significant increase in exhibition revenue from a semiconductor show in China.

We can also see from the numbers below, the increase in opex was 9.1% which was much slower than the 16.4% grow, such strong operating leverage resulted in an impressive 48.1% net income growth.

For the first half of 2007, GSOL has revised revenue guidance upward that represents an increase of about 16% comparing to 1H 06.

In my last story on GSOL, I said the coming listing of Alibaba will give a strong push to GSOL share price due to a revaluation of GSOL’s online business. Here I want to do a further comparison between the two companies.

Since Alibaba is a private company, information about its business is very limited. However, we can still do our analysis using some unconventional approaches.

First of all, to understand a company’s new business direction, one very effective source of information is to check out its recruitment advertisment to see what sort of people it is hiring. I found that Alibaba is currently is hiring the following Hong Kong based positions:

Manager, Buyer Services & Development

Based in Hong Kong, he/she will be responsible for the acquiring, planning and managing the relationship for Big Buyer's account.

* Acquire active International Buyers to Alibaba.com marketplace
* Increase Alibaba.com mindshare and brand presence in International markets through the establishment or partnership & alliances

Senior Copy Writer

Based in Hong Kong, he/she will be responsible for creating all English-language content in all buyer programs for Alibaba.com. The individual have to work closely with the other business units to ensure that any buyer facing materials will be adhering to the branding and strategy of the company.

From the positions it is hiring I would interpret that Alibaba is trying to expand its international buyer user base.

As I have mentioned last time, Alibaba is the largest B (domestic)-To- B(domestic) trading site in China. However, I would expect the service fee Alibaba is charging must be much lower than that of Global Sources because GSOL is doing B (domestic)-To- B(international) and it is intuitive that you can charge more if your site can attract international buyers.

To attractive a truly international mix of buyers, English language is an obvious requirement, and hence Alibaba is also hiring a Senior English Copywriter !

So I would say Alibaba is planning to increase its service fee by improving the quality of those buyers who are sourcing products from its site.

As both Global Sources and Alibaba are providing services through internet, another trick to verify my interpretation above is to check out the visitor sources to their sites.
Alexa.com can provide very good web site visitor profile information and I’ve extracted related reports for both Alibaba.com and Globalsources.com below:

As we can see from GSOL’s web visitor profile above, 72.6% of its visitors are coming from outside of China. That confirmed GSOL's business model that it is focusing on international buyers who procure from Chinese manufacturers.

On the other hand, Alibaba is having 61.6% of its web site visitors from within China, this also confirmed that Alibaba currently is mainly linking up Chinese buyers with Chinese manufacturers.

So is Alibaba’s new business initiative a threat to GSOL?

My view is that it will take Alibaba a considerably long period of time to develop such business:

GSOL has been doing B (domestic)-To- B(international) for 35 years, it would take a long time to build up such user base and it is not easy to switch those buyers from one service to other.
GSOL provides a truly integrated service in addition to online catalogue, as we can see from its income sources above, it is also a famous trade show organizer in the region. One significant barrier to exhibition business is the ability to secure popular exhibition venue. For example, GSOL has already entered into a long term lease with the Asia World Expo that gives it a very strong competitive advantage.
We all heard about the recent toxic toothpastes which were manufactured in China. What buyers care about is the creditability of suppliers, to ensure information provided by those suppliers are correct, GSOL would send its sales rep to physically visit all of its clients before their product information are posted to GSOL’s online catalog. According to GSOL company information they visit over 40,000 clients every month.

I will maintain my long position in GSOL and anticipate a revaluation of GSOL that likely would happen when Alibaba officially launches its IPO.

Disclosure: I have a long position in GSOL

Reading between the lines: China's tripled stamp duty

noreply@blogger.com (Unknown) — Wed, 30 May 2007 15:19:00 +0000

[31 May 2007: Corrected version]

Mr. Xiang Huaicheng, former Minister of Finance and current Chairman of the National Council for Social Security Fund recently commented on the stock market craze with a “beer bubble” analogy, saying beer would not be as tasty without bubble. Market well received his message as an indication that the government would not impose drastic measures to cool down the market.

To most people’s surprise Ministry of Finance made an announcement very late last night that the stamp duty would be trebled. So is Chairman Xiang’s message inconsistent with that the action from Ministry of Finance?

To interpret that let’s first look at the related entities under the Chinese government structure:

MoF, CSRC, CBRC, Social Security Fund and PBoC are entities all directly reporting to the State Council, that is to say heads of those entities are at same rank within the government structure and each entity is supposed to have its own authority to impose new policy within its scope of responsibility, that explained the action of MoF last night.

Having said that, as action from each entity would also have significant impacts to China’s economic well being, I would tend to believe they would work very closely while independently and communicate with each other before any new policy or significant change in policy is announced to public. So I suspect Chairman Xiang was well aware of MoF’s action beforehand though he might not know the exact announcement date, he didn’t see that as drastic measure at all and that’s why he talked about his ‘beer bubble’ theory just one week before MoF’s action.

Let’s also look at the timing of last night's MoF announcement. It was announced at almost midnight on a Tuesday while most announcements of this type were made on Friday after market or right before or during a long holiday so that public can have time to digest such announcement to avoid irrational impulsive market behaviour. On the contrary, this time MoF deliberately made the announcement at such an unconventional timing in order to encourage impulsive market reaction. That was very effective and caused the market to drop by 6% in both Shanghai and Shenzhen. I would say such market behaviour was irrational because what impact in absolute sense is the 0.2% tax increase when the market has been going up at a rate several order of magnitude faster than that?

MoF’s objective is to cause a sudden abrupt change in market direction in order to give a more remarkable signal to the market participants that the government can and will do something if necessary. However, as the real impact is minimal, I foresee the market will totally recover in no more than a few days.

The ‘beer bubble’ analogy from Chairman Xiang and MoF’s deliberate choice of timing together made me believe the government really would not want to cause the market to correct drastically while occasional correction of 10% or so would be expected.

I take this as a good buy opportunity and I've bought some CAF while writing this article. The discount gap of ~20% between CAF vs. A-50 tracker (2823.HK) is too attractive to miss.

Disclosure: I have a long position in CAF

A Review of My Previous Prediction on Chinese Banks Performance

noreply@blogger.com (Unknown) — Thu, 17 May 2007 09:22:00 +0000

On 6 Feb 2007 I’ve written an article “Chinese Banks: A Non-Traditional Approach to Predicting Their Performance” in which I described how I rate 3 Chinese banks' future performance based on their historical non performing loan (NPL) problems and my argument is simply “bad habit dies hard” especially in China where management appointment is more based on relationship (though it's changing).

At that moment while all analysts were promoting ICBC (saying ICBC is the largest bank in China, ecomomies of scales, with the most advanced IT system, etc) and BOC (saying BOC is the only Chinese bank with international presence), I analyzed them using a totally non-traditional approach and rated China Construction Bank (939.HK) as the best performer versus ICBC (1398.HK) and Bank of China (3988.HK)

Today I’ve revisited their relative performance both from the date of my article and also their recovery capability after the Feb market correction.

The following charts will speak for themselves

From the date of my article on 6 Feb (click for a clearer image)

From the early March market correction (click for a clearer image)

In my last article I said:

“..We also noticed that CCB was also the first state owned bank listed overseas. This is by no means a coincident. The Chinese leaders have to ensure the success of the first listed so as to set a stage for the others, as such it is reasonable to assume that the leaders should have selected the best bank to be the pioneer. Who else would have better insider information than the Chinese leaders? It would be your decision to bet with the Chinese leaders' choice or analysts' DCF models…”

In general I do not believe in DCF models, I think even the CEOs CFOs themselves are unable to tell you what are their firms' grow rates for initial years/terminal growth rates, nor could anyone predict the interest rates for next 10 years (or whatever horizon in the model), while DCF analysis is very sensitive to those assumptions how valuable is this time-value based modelling of a firm's fair price? I would rather use P/E comparables if I want to have a gut feel of a firm's value.

In my analysis of the Chinese banks, my approach is totally unscientific. While it's a common belief that historical data cannot predict future performance, that may not be completely true for China and I would continue to give my vote of confidence to our great Chinese leaders than forecasts based on DCF models!

Here is my previous story again in case you are interested.

Disclosure: I own CCB (0939.HK) at the time of writing this article.

Opportunity to Profit from the growing China Trade Surplus – Global Sources (GSOL)

noreply@blogger.com (Unknown) — Thu, 17 May 2007 02:46:00 +0000

According to the official Xinhua news agency, China exported $97.45 billion of goods in April and imported $80.57 billion. While such large trade surpluses are causing much friction between China and its trading partners abroad, there is one company which is benefiting from the growing export volume.

The company is Global Sources (GSOL), a Hong Kong based company listed in NASDAQ, its business is simple – linking Chinese manufacturers (suppliers) to international buyers.

Here is its official company description:

The company provides sourcing information to volume buyers and integrated marketing services to suppliers. It helps a community of over 560,000 active buyers source more profitably from complex overseas supply markets. With the goal of providing the most effective ways possible to advertise, market and sell, Global Sources enables suppliers to sell to hard-to-reach buyers in 230 countries.

The company offers the most extensive range of media and export marketing services in the industries it serves. It delivers information on 1.8 million products and more than 150,000 suppliers annually through 13 online marketplaces, 12 monthly magazines, over 100 sourcing research reports and nine specialized trade shows which run 22 times a year across seven cities.

Suppliers receive more than 10 million sales leads annually from buyers through Global Sources Online (www.globalsources.com) alone. Global Sources has been facilitating global trade for 36 years. In mainland China it has over 1,600 team members in 44 locations, and a community of over 1 million registered online users and magazine readers for Chinese-language media.

BUSINESS FUNDAMENTALS

A business with strong growth potential

In FY2006, net income increased by 108% with main driver derived from tradeshow business which grew by almost 200%.

For online and print, organic growth alone I believe it shall be able to maintain 15-20%. Real potential is in tradeshow business with 2 strong drivers:

Moved its flagship ‘China Sourcing Fair’ venue from Shanghai to the new Asia World Expo in Hong Kong which significantly increased the available booth space. (total of 3,500 booth sold in 2005 vs. 13,000 in 2006)

Introduction of more shows.

For example, in 2007 GSOL has introduced the following new shows

China Sourcing Fair: Dubai June 2007
China Sourcing Fair: Underwear & Swimwear: April and October 2007, Hong Kong

An extremely loyal management team

(year of service with GSOL)

Apart from the CEO who is the founder, the management team has been with the company for 21 years on average. I would say it’s difficult for competitor to gather a team like this who has such strong operational experience in China.

Besides, there is a reason for me to believe the whole team is working hard to create a home run in 2007 as this is a very rare strategic window with all factors acting very positively towards GSOL. (China story, China trade surplus, internet story, China domestic consumption story so on and so forth). With 21 years' of loyalty they deserve their fair share of reward !

Growing China Export Volume

The growing imbalance in export/import is to the benefit of GSOL, though there is no breakdown of the source of online revenue I believe majority of it shall be outbound, i.e., Chinese manufacturers using GSOL service to export overseas.

A very strong cash generation engine

Day sales outstanding (DSO) improved from 20 days to 17 days from 05 to 06. Tradeshow and online services are both paid-in-advance cash business. No worry about account receivable!

Strong sales team on the ground

They have 1600 (75% of total headcount) sales and customer servicing people on the ground in mainland China to service its manufacturer clients. This can create a higher level of stickiness comparing to EBAY you would have nobody to call in China in case you need help. According to company information they visit over 40,000 clients every month! This is not something new entrant can imitate in a short period of time.

NEW CATALYSTS FOR 2007

Growth through acquisition of HC International

In Dec 2006 GSOL has acquired 13% of HC International. (HK GEM listed 8292.HK)

HC’s main business is in operation of its B (domestic)-To- B(domestic) online trading site www.hc360.com

Currently GSOL’s business is more in B (domestic)-To- B(international), HC would be a complementary business to GSOL and help expand its domestic revenue.

By June 2007, GSOL would have a right to buy an additional 35% of HC and trigger the requirement for a general offer as required by HK listing regulation.

According to HC company disclousre, HC CFO has already resigned, is it a hint to the acquisition result?

Following chart is how GSOL segments its competitors (extracted from its 2006 annual report) :

Alibaba IPO shall be a STRONG PUSH

According to news from China, Alibaba.com – the largest B (domestic)-To- B(domestic) trading site in China, is planning for a listing in Hong Kong in Q3 2007.

Alibaba is 40% owned by Yahoo and remaining shares majority owned by Alibaba’s founder Jack Ma, a celebrity in China’s internet industry.

Alibaba’s valuation would not be priced cheap. Average P/E for China internet stock is around 36, while EBAY is 37. With a China story and Mr. Jack Ma’s personal brandname I guess 30% premium can be warranted and that would give Alibaba a P/E of 48, versus GSOL at 30.

Re-valuation of GSOL

If HC acquisition is successful and GSOL can turnaround the money losing hc360.com business. Let's do a Sum-of-the-parts re-valuation of GSOL.

Assumptions:

As there is no breakdown of P/L of each individual revenue stream from the GSOL annual report, I can only equally allocate the net profit to each segment based on revenue.

HC net profit margin is assumed at 8%, which is 50% discounted from GSOL’s 17%. I believe domestic buyers can afford less on GSOL's service and hence the domestic revenue stream shall be less profitable. Besides, it takes times to fully integrate HC with GSOL though there can be great leverage with GSOL’s existing platform both from technical and human resources point of view, but it won’t be fully realized in 2007.

Online and Print each grows at 15%, Tradeshow at 30%.
PE of 20 for Print, which is ~40% premium over industry as GSOL produce high value added trade catalog vs. ordinary print business
trade show valued at industry PE of 14
Online valued at 48x PE, my estimate for Alibaba

With HC’s 2006 revenue at RMB291M (~US36M) that would contribute 0.068 EPS to the combined online revenue, and Sum-of-the parts valuation would price GSOL at US$26.7. An upside of 43% from current price of around $18

If HC acquisition failed, GSOL would still worth $23 giving 23% up side.

GSOL’s Q1 result will be announced on 22^nd May. Let's keep a very close eye on its development.

Disclosure: I own GSOL at the time of writing this article.

Relative attractiveness of H-share Fund vs. A-share Fund

noreply@blogger.com (Unknown) — Tue, 15 May 2007 03:44:00 +0000

Hong Kong market reacted very favorably to Chinese policy maker’s relaxation of QDII (Qualified domestic institutional investor) restrictions, Hang Seng Index and Hang Seng China Enterprises Index (HKCEI) went up 2.49% and 5.35% respectively yesterday.

China started the QDII program in July 2006, allowing QDIIs to raise renminbi funds from domestic individuals and institutions and convert them into foreign currency for overseas investment. So far, 30 financial institutions (11 domestic banks, seven foreign banks, 11 insurance companies and one mutual fund) have been granted QDII status. Total quotas granted are about US$19B (~ RMB 146B), which is about 2.7% of free floated A-share market cap. Previously QDII funds were only allowed to invest in fixed income products until last week when the Chinese government announced removal of such restriction. Under the new policy QDII funds are allowed to invest up to 50% of assets in overseas stocks and structured equity products, with no more than 5% of assets invested in any single stock. Hong Kong is the only market endorsed by the Chinese authority for such investments and as such there is a high expectation that HK listed H Shares, Red Chips and blue chips would be the major beneficiaries of this new policy.

Can the latest relaxation increase QDII’s attractiveness to Chinese investors?

Take a typical Hong Kong equity fund as reference, the Manulife Hong Kong Equity Fund retuned 31% in last 12 months, and 23% annualized in last 3 years. Even if the performance of Hong Kong market is still as promising as it did in the past 3 years, any QDII fund with 50% investment in equities (mainly Hong Kong listed blue chips, red chips and H-shares) can provide no more than 10-15% annual return. So is that a strong reason for Chinese investors to re-balance their portfolios into QDII funds?

Now let’s examine the following figures :

The size of Chinese household saving is 3.2 times of the free floated A-share market capitalization, i.e., Chinese are only investing around 30% of their savings into stock market. (Taking corporate saving into account, that would be around 15%). Though the QDII potential return is still far less than that provided by the A-share market, as the total size of QDII is only 0.4% of the total domestic saving pool, it would be easy to siphon such tiny amount from the huge pool to Hong Kong especially for corporate clients who aim at longer term investment horizon.

Is Hong Kong’s market reaction justified?

As can be seen from the above table, QDII is only 1/96 of the total market cap of Hong Kong Stock Exchange, and 1/48 of those Hong Kong listed H and Red Chips. The best case scenario shall further be halved as only up to 50% is allowed to be invested in equities. Look at it from another angle, total fund size of QFII is around 1.5 days of Hong Kong Stock Exchange’s trading turnover. (~HK$50b daily). Based on the above figures, investors may have over-reacted to such news.

Is H-share a more attractive investment than A-share now?

Will QDII close the gap of those dual listed stocks with H shares on average having ~50% discount over their A share counterparts ? Is that a good opportunity to switch from A-share funds such as Morgan Stanley China A-share Fund (CAF) or iShare A-50 tracker (2823.HK) to H-share funds such as Hang Seng China Enterprises Index (“H-shares Index”) tracking ETF (2828.HK)?

My view is that, unless there are drastic change in Government policies leading to a hard landing, A-share market is still more attractive than H-share because the craze can sustain for a long period of time:

A-share traded in a closed market, only domestic investors or QFII can participate, as a result more rational international investors would have no impact to A shares market price. (because total QFII quota is only a negligible 1% of A share market cap)

Investment alternatives to local investors are extremely limited, apart from parking their money with saving accounts which give ~2% after tax return, they can only invest in property, stocks and mutual funds.

Chinese investors speculate on mutual funds the same way as they do on stocks, they have a common mis-conception that lower priced funds would provide higher upside, what they do is to redeem old funds and subscribe to new and ‘cheaper’ funds. To supply ‘cheaper’ funds to the market, managers will split old funds into sister funds so as to lower the unit NAV and make the new sister funds look ‘cheap’. Besides, more and more new funds are introduced to the market to address investors’ huge demand which will push the market even higher.

As of end of April, domestic individual equity accounts has reached 94 million which is over 7% of population. New account openings on April 30 alone exceeded 1 million, and total new individual account openings in the month of April exceeded the sum of years 2005 and 2006. As a result, about 17% of the total existing accounts were opened just in the past 4 months. Suddenly investment related books become top sellers in all bookstores, investment talk shows also flooded all TV channels. There are more gamblers than investors in China, what can you do to stop gamblers from placing higher bets? I’m not saying investors in Hong Kong are not gamblers, otherwise Hong Kong would not become the largest warrant market globally in terms of turnover. The only difference is that Hong Kong investors in general have a higher level of risk awareness. Most investors in China with only a few months' investment experience have never experienced any major market correction and never burnt their fingers before.

As a result, I believe the A-share craze will still go on until one of the followings happened:

Chinese Government starts dumping stated owned shares into market

Free floated A-shares constitute only around 30% of all issued shares, majority of the shares are owned by the Government. Apart from those ‘pillar industries’ such as Telecommunication, Banking and Insurance, Government can gradually reduce its holdings and increase the size of free floated shares. This is a more effective way to absorb the excess liquidity originated from household savings than increasing interest rates which would itself affect the well managed RMB appreciation rate.

Introducing Index Futures

Currently Chinese investors can only bet one way as there is no channel to express pessimism.

Trial run of index futures has already been started and the initial trial result was that it significantly increased market volatility, as such it is believed that the policy maker will need more time and further estimation of the impact before such products are introduced to market.

Unless the above happened I think other measures such as imposing capital gain tax, increasing interest rates (unless a drastic increase or very frequent small step increments) etc could hardly clam down Chinese investors’ overly excited sentiment.

If the Government cannot or do not want to manage the “P” in P/E, what it can do in the meantime is to increase the “E” so as to lower the P/E to a more reasonable range:

Injection of profitable unlisted assets into listed company

For example, Guangzhen Railway (0525.HK,ADR: GSH,601333.SS) returned home and listed as A-share in Shanghai in Dec 2006. The newly raised proceed RMB10.3B was used to acquire new railway assets from its mother company. With the acquisition Guangzhen Railway’s total railway operating distance is extended to 481km from 152km, however, it is still only a faction of the 4400km owned by its unlisted mother company. This is an example of the huge assets injection potential.

Red Chip Companies To Return Home

Under the current policy Red Chip companies (e.g. China Mobile, CITIC Pacific) are not allowed to list in Chinese market because those companies are not registered in China. It is rumored that policy amendment is ready and Red Chips can return home very soon. With such high quality listings Chinese investors would have more choices and hopefully they would divert their investments into those less risky stocks.

To conclude, I do not believe the price gap of H and A dual listed shares will be completely closed though it would be tightened a bit because A share price is going up at a much faster rate than its H share counterpart. I would maintain my long term positive view on A share market performance. In the meantime I would closely monitor Government’s action such as introduction of index future.

Disclosure: I do not own any of the above mentioned stocks