Asian Citrus - Who Is At Fault?

Just as I was touching down in HK, I learn of a recent HK listing that went totally apeshit!! The new listing was a company called Asian Citrus. It was not really a new listing more as the introduction of a dual listing, it was already listed on AIM in London, and this HK listing is more of a homecoming of sorts, led by CLSA Asia Pacific Markets. Now the funny thing was the company went for a 1 into 10 share split on 2 November 2009, and that was already reflected in its London share price. The stupid thing was that NOBODY adjust the NAV figure for the split for its HK dual listing of its shares. Prior to the share split, its NAV was RMB 37.30 per share. After the share split, the NAV per share data for its HK listing prospectus was also the same at RMB 37.30 per share.

~ 1.0 Chinese yuan / renminbi = 1.13 HKD

As there are no new issued shares in this listing, so the initial sellers must have been people who had transferred their shares from the London market, in which case they should have been well aware that the London market was trading on a post-split basis and had closed the previous day at 45.75 pence, equivalent to HK$5.89. Technically, the IPO price for HK should be HK$5.89, and it should trade at a slight premium in HK exchange owing to the fact that it will be more liquid.

If you were trading on Thursday, you will find those screens giving company information that Asian Citrus had a NAV of RMB 37.30 and not RMB 3.73. The info provider cannot be blamed as they are just inputting information from the prospectus. The company itself cannot be faulted as its the investment banking unit that collect the fees for doing this kind of work. The company may have to share some of the blame if the CFO / CEO of Asian Citrus never reviewed the document, or if the CFO / CEO was asked to signed off on the document and they actually did.

On Thursday 26 Nov, the stock had opened at a high of HK$51.25 (in the pre-market auction session) and had been falling all morning in HK. The stock was suspended at HK$19.94 at 11:57am, after registering a turnover of 12.72m shares for HK$291.06m in value, or an average HK$22.88 per share. When trading resumed on Friday, it crashed to a closing price of HK$7.10.

The listing of ASIAN CITRUS 00073.HK stock by introduction was managed by CLSA Asia-Pacific Markets. I believe all who bought or sold can get all their losses being reimbursed by CLSA, as I can see the manager of the issue being mainly fully responsible for the documentation. Of course those who lost money will want compensation, what about those who profited, will they be asked to return the gains? I think asking those to made the gains to cough back out the money will be very very hard to do. Its a willing buyer, willing seller, and if I see a willing buyer at HK$51, and I sold, the transaction is legal.

However, the buyers who bought at HK$30-HK$51 are very likely to have RELIED on the NAV figure in doing that trade. One may argue that they should have used the London last traded price as a benchmark. That is a very weak argument as that goes on to impose so many "information hurdles" on what the actions of a fair minded normal person. A normal person is likely to look at the posted or printed NAV, because many recent China linked companies have been benchmarked to its NAV, either as a slight discount to a slight premium. At RMB 37.30, it is so easy to lure a buyer to bid at HK$40 at least as most China related listing usually trade at more than its NAV.

Heads will have to roll, unfortunately. HK Exchange has been VERY SLOW to tackle the matter. CLSA, understandably, has been very quiet, maybe busy consulting or pummeling their in-house fengshui master for NOT alerting them to this major pitfall, ... so bloody close to end of the year, ... thereby fucking up all their Asia bonus plans ... (shit, I have to forfeit the deposit on the new Cayman).



p/s photo: Anjelica Lee Sin Je

HK IPOs Sizzling Hot

HK's IPO market has surpassed other financial centers by the proverbial mile this year. The liquidity arriving into HK from China and from the US carry trade have helped fuel the boom. The thing that sets this event apart is the proximity to the recent global crisis, and the pent up demand to raise cash by many large companies. Again, as I have warned before, I am quite uncomfortable with the upcoming UC Rusal IPO, a highly questionable and large IPO. Things could be derailed very swiftly if things do not go as planned.

The Standard: Hong Kong is now the world's premier destination for initial public offerings, having raised US$13.82 billion (HK$107.79 billion) in the first 10 months of the year.

Shanghai along with the increasingly hot Brazilian stock exchanges as well as New York were left in the wake of Hong Kong by the end of October, according to the World Federation of Exchanges after its latest month-by-month review.

Hong Kong was ranked top as the largest listing market by fund-raising size, the federation revealed. In taking the No 1 spot, it knocked the Shanghai exchange from the perch it had occupied for three straight months since July. Shanghai's IPO take for the year now stands at US$12.37 billion.

Yet funds being raised are still comparatively modest when compared to the 2006 and 2007 golden years - a period that was brought to a crashing end by the financial tsunami. In each of those years, the Hong Kong exchange counted more than HK$300 billion, driven by heavyweight listing candidates such as Industrial and Commercial Bank of China (1398). That raised HK$124.9 billion in 2006.

Hong Kong is now seeing investment capital pouring into the listing market "as there is no other way to go due to the low interest rate," said Bright Smart Securities general manager Nelson Chan Kai-fung.

The number of offerings this year to yesterday was 62 percent up on last year. Forty-seven companies have turned to Hong Kong this year for flotations, and two-thirds of them were listed in the July

-November period, according to Hong Kong Exchanges and Clearing (0388). "I believe the number of listing candidates will continue to climb in early 2010," said Prudential Brokerage's Mark To.

Companies are eager to cash in on market liquidity "before the central banks tighten monetary policy in the wake of economic recovery," To added. The surge in listings is also expected to continue next year because the SAR is considered a main beneficiary of efforts by the mainland to maintain its momentum. Indeed, brokers see China as the economy with the most growth potential. "The world is looking to tap the China market, and Hong Kong is the place which enables other economies to have access to it," To said. "Nearly 99 percent of the listing candidates generate income from the mainland."

Chan has a similar reading on the potential for the Hong Kong market. He believes it will draw more listing candidates from other countries, helped by an intense effort by HKEx to attract overseas firms.

Continuing the trend, UC Rusal, the world's biggest aluminum maker, is likely to be the first Russian firm to list in Hong Kong. It has a listing hearing on Thursday. It hopes to dual list 10 percent of its shares in Hong Kong and Paris this year - a move with an estimated value of US$2 billion.

p/s photos: Zhou Weitong

Chinese Equity A Bubble In The Making?

Well, that should not even be a question, its a fact. The question should be for how long. Just because a market is considered expensive, does not mean one should get out immediately. It will be a tug of war. A bubble is usually because there is a concentration of liquidity and a flush of liquidity, as explained numerous times in this blog. Yesterday saw China markets doing a whipsaw, falling dramatically but still regaining some ground back. That is a prime example of a very strong momentum market. It will be volatile but the investors and players are not ready to leave the playground yet. Hence on rumours of possible tightening by the central bank, the markets will take that as an excuse to take profit and take some chips off the table. I don't think the China markets and HK market included will be paralysed so soon. Judging from the liquidity exhibited in recent IPOs in HK and Shanghai, this rally has some legs. Still, one has to react swiftly, in and out, its a traders' market not a buy and hold market.

After falling 70% from its peak in late 2007, the Shanghai Composite Index is up more than 80% off its low in November 2008 and 70% for the year. China's total market cap has risen 122% in 2009 to more than 10 trillion yuan. Valuations have more than doubled from their lows in November, but are still well below their peak in January 2008. In July IPOs resumed after new rule changes were put in place.


• July 10: The Shanghai Composite Index is up 70% in 2009, after falling 70% from the peak in late 2007. The Shenzhen index is up 87% in 2009. Trading on the first IPOs in nine months was halted after they jumped more than 20% from their opening price. The Chinese equity markets have rebounded on the back of the fiscal stimulus, expectations of a recovery in property markets and signs of improvement in domestic demand have given markets another boost
• Some of the new loans extended during the Q1 surge in bank lending likely found their way into the equity market as investors seek better return on assets, this could imply that the lending surge is not being invested in sectors that will boost growth- and that stock market gains are vulnerable especially given that Chinese equity returns have become more correlated with global trends
• China and other emerging markets have outperformed developed markets in 2009, suggesting that investors believe emerging markets have "decoupled" again. Another view is that emerging markets underperformed on the way down, and are over-performing on the way up—suggesting not decoupling but rather that they are performing like high-beta assets
  

Are Higher Valuations Sustainable?
• Stocks on the Shanghai Index traded at 28.1 times earnings in early June 2009, more than double the 12.9 factor they traded at in Nov, but below their peak in Jan 2008 at 50 times earnings
  
• Citi: Ample liquidity continues to push up asset prices. After strong lending growth through April, the market expects a slowdown in May/June. But May’s volume could be close to April’s (RMB591.8b), and June could see further growth, thanks to the non-seasonal pick-up in economic activities for the summer months
• DBS: State-owned enterprises' profits track exports more closely than GDP growth, suggesting that profits will remain under stress even as domestic conditions improve. Sticky wages and increasing commodity input prices increase the pressure from the cost side. Further, because inflation is likely to pick up before corporate profits, SOE's will likely face tighter credit conditions before their balance sheets improve
• Policy responses have boosted confidence and prevented further contractions of consumption and investment. Property, retail, and auto sales are healthy in volume terms, even if prices remain deflationary. The real impact of the stimulus will take time to filter through the economy and will show up in H2 2009
• The Chinese equity market continues to be speculative because hedging tools are limited (deterring institutional investors) information on the companies is sparse. Level of government meddling in the market makes true transparency difficult Many retail investors (who led the boom in 2007) retreated to demand deposits
• After a surge of IPOs in 07-08, there have been no new issues since Sept 08, when regulators feared new supply could further damage existing shares. The China Securities Regulatory Commission issued new regulations for listings on June 11 and has taken legal actions intended to ensure that Chinese markets are less prone to manipulation; IPOs are expected to resume soon
  
• New listings and release of block shares could drain funds from existing shares, threatening this year’s gains. The rule changes are intended to increase access for retail investors to IPOs, and limit the valuation surges that followed flotations in 07-08
• In an apparent attempt to reduce market volatility as new IPOs come online, the government is requiring that SOEs that have listed since 2005 transfer 10% of their shares to the social security fund, which will be subject to a 3-year lock-up period
• In 2007, regulations intended to deflate Chinese equity markets were implemented (stamp tax raised from 0.1% to 0.3% in May 07), these were mostly reversed in 2008 when markets fell sharply (stamp tax repealed completely in Sept 08). In an attempt to boost existing shares, IPOs were suspended in Sept 08
  
• The average daily volume on the Shanghai exchange has more than doubled to 13.6bn yuan in May 2009 from a low of 4.4bn yuan in Aug 2008
  

Sectoral Outlook
• Citi: Consumer-facing sectors could benefit from policy shifts that would help boost domestic consumption. Auto sector profits trail sales growth, banking sector profits down y/y but show q/q momentum, cement and food/beverage sectors should outperform, and insurance sector looks positive
• UOB: A pick-up in demand in H2 2009 should benefit energy producers. Dropping property inventories and the massive reduction in equity ratio requirement (20% from 35%) for new ordinary residential projects will boost the property sector, in turn boosting demand for steel and aluminum, as well as energy
• Planned massive infrastructure spending on the mobile network over the next 3 years should boost the telecommunications sector. Export-oriented industries (steel, shipbuilding, coal), despite stimulus spending, are reliant on a pickup in global demand
• Fidelity: railways, materials and the property companies may benefit from stimulus efforts. Industry leaders may benefit from consolidation. The large scale railway expansion should also boost demand for steel and cement. Conversely financial services and energy companies place more challenges ahead
  
• Domestic retail sales continue to grow on the back of government subsidy programs and the wealth-effect of rising asset prices, however exports remain in contraction.
• Chinese oil demand returned to positive growth in April, and Chinese oil firms were able to use favorable credit conditions to purchase assets abroad when oil prices were depressed

p/s photos: Suzanne Sae

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