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China A-Shares Attractive after Steep Fall but A50CHTK-C1 out of time

China A-shares traded on mainland China exchanges become attractive valuation wise after steep decline in the past couple of months.  Up until 31st May 2010, the FTSE/Xinhua China A50 index, which tracks large free-float China shares listed in Shanghai and Shenzhen, is down about 25% for the year.  The iShares FTSE/Xinhua A50 China Tracker (SEHK: 2823) is an ETF listed in Hong Kong which track the performance of the index.  The ETF is currently trading at premium to NAV (Net Asset Value) of close to 10%.  This is the highest level of premium according to the NAV premium/discount table provided by the fund.

 

The constituents of FTSE/Xinhua China A50 index comprise mainly finance stocks, accounting for about 61% of the fund.  Its biggest component stocks include the likes of Ping An Insurance, China Merchants Bank, Industrial Bank, Bank of Communications etc.  The discount between H-shares traded in Hong Kong and its correspondent A-shares traded in mainland China has narrowed substantially.  Most banks and insurance companies H-shares are actually trading at a premium to their A-shares.  This possibly leads to the basket of stocks (A-shares) in A50 ETF trading at a discount to their H-shares in Hong Kong although not all shares in FTSE/Xinhua China A50 have H-shares listed in Hong Kong.  It is therefore not surprising to see A50 ETF trading at a premium as foreign investors see value in the fund.  Nevertheless, arbitrage activities should limit the premium of the ETF as a 10% premium is too attractive for the qualified institutions which can create more units of the fund.

Put Warrants Still Not Popular Despite Market Plunge

With the stock market sell down the past one week, the only instrument in the stock market that is likely to produce profit for its holders is put warrant.  There are a number of local underlying put warrants listed on Bursa Malaysia.  Nevertheless, the volume on these put warrants is not encouraging at all.

 

The “heaviest” traded of the local underlying put warrants, AXIATA-HA, hit a volume of 560,000 on May 24th.  This is the highest daily volume of the four local underlying put warrants from inception.

 

Why is the trading volume for put warrants so low?

 

The answer may be that there is no information or even worse, inaccurate information on put warrants listed on Bursa Malaysia.

 

The issuer for the 4 local underlying put warrants, OSK Investment Bank, did not have the put warrants listed on the structured warrants pricing table in its website.  It only contained information and indicators for call warrants.

 

What is nightmarish for investors is the incorrect premium calculation of put warrants on the trading website of most stock brokers in Malaysia.  Apparently, the premium formula is that of call warrant.

 

KNM-HA – Not Tracking Underlying Share Decline

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Put warrants quietly made its debut in Bursa Malaysia towards the end of last year.  As the market was on an uptrend over the last few months, few people pay attention to put warrants which are supposed to go up when the underlying share decline.  However, after the stock market suffered significant decline over the last few days, investors naturally try to look for ways to make money with bear instruments like put warrants.  

 

KNM Group Berhad, a very actively traded stock on Bursa Malaysia, saw its share price plunged recently when the company announced the proposed acquisition by its managing director and his partners failed.  They have earlier proposed to takeover the business and undertaking of the company for 90 sen per share.

 

Investors who bought into KNM-HA, a put warrant on KNM Group share issued by OSK Investment Bank, in anticipation of the failed bid have not benefited from the share price decline at all.  KNM-HA is not traded on most days even though there are bid and ask prices provided by the market maker.  Since the warrants issuance last November, there was only six days when the warrant has been traded.  The following table is the dates and prices where KNM-HA has been traded:

 

Why You Need To Avoid Actively Traded New Structured Warrants

Investors who intend to punt in structured warrants should look at this latest example to decide whether it is worth playing with this kind of instrument.  As illustrated in some previous articles on newly listed structured warrants such as WYNN-CA, buying an actively traded new underlying warrants would likely end up as a frustrating experience.

 

Let’s take a look on the first structured call warrants on Hartalega Holdings Berhad (HARTA) issued by CIMB as an example.  The tables below are the historical prices table for both the underlying share and the call warrant (HARTA-CA) for the first three days of trading for the warrant.  HARTA-CA has an exercise ratio of 8 and exercise price of RM7.00.

 

What does KNM Structured Warants Pricing Suggests?

Despite the fact that KNM's founder and managing director Lee Swee Eng together with two foreign funds are proposing to acquire the entire business and undertakings of KNM at 90 sen, the 3 structured call warrants of KNM traded on Bursa Malaysia are still trading at significant premiums.  Based on the closing price of KNM on 9 Feb 2010 of 80.5 sen, the offer price of 90 sen represents a premium of 11.8% over current share price.

KNM structured warrants are trading at premium higher than the takeover premium.  KNM-CB trades at premium of 22.9%, KNM-CC at premium of 14.3% and KNM-CD at premium of 22.4% respectively based on their last traded prices.  Interestingly, the only put warrant on KNM, KNM-HA is still trading at bid/ask of 21/21.5 sen despite the offer.  KNM-HA has an exercise price of 80 sen and exercise ratio of 1.  If investor buy KNM-HA at 21.5 sen, he will be looking at a breakeven only when KNM falls to below 59.5 sen if he intends to hold.

Based on the pricing of the structured warrants offered by warrants issuers, the takeover offer at 90 sen is not a "sure thing".  Nevertheless, it should be noted that there is no mention of the listing status of KNM in the takeover bid.  The offerors are only buying the business and undertakings of KNM.  This leaves some uncertainty to the share of KNM post takeover.  What if the cash paid for the business is not distributed to shareholders but used for other purposes?  Although such scenario is not probable but it is not impossible.  But the cost of insuring for such eventuality via KNM-HA may be a bit high at premium of close to 27% .  On the other hand, the call warrants' higher premium suggests a higher offer price may be possible.  Nevertheless, punting on these KNM warrants may not be very useful based on such high premiums and on a pending takeover offer.

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Analysis

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The following is the list of Warrant Ranking by Premium

Warrant Ranking 7 Aug 2016 by Premium

MALAYSIA LOAN STOCK ANALYSIS 27 MAY 2015

The following is a list of loan stock listed on Bursa Malaysia as at (date).

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Change in Shareholdings (1/5/2015 - 31/5/2015)

The following is a list of change in shareholdings as at (date).

May 2015 (1 May 2015 - 31 May 2015)

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