China A Shares vs. H Shares: Tracking the Changes in the A-H A H Price Difference

Transcription

1 8 th Annual Masters of Investment Management China A Shares vs. H Shares: Tracking the Changes in the A-H A H Price Difference Vincent Kwan Managing Director 28 September 2007 Version 2.0

2 Agenda 1. Why A / H shares trade at different prices? 2. Should they trade at the same price for the same company? 3. Any methods to measure the price differential? 4. Does any profit opportunity exist for investors? 1

3 Why A/H shares trade at different prices? 2

4 Will you Be Surprised? Shop A Shop B Shop C Coke $5.50 $4.50 $3.00 Plasma TV $21,500 $18,500 $17,500 Why do we accept Identical product selling at different prices at different location? 3

5 How About Across Different Countries? The retail price of a Big Mac (Jan 2007) Country Big Mac Prices In Local Currency In Dollars Country Big Mac Prices In Local Currency In Dollars United States $ Hong Kong HK$ Canada C$ China Yuan Britain Argentina Peso Denmark DKr Saudi Arabia Riyal Japan Australia A$ Source: McDonald s; The Economist They are very different 4

6 The A/H Price Anomaly (As at 25 Sep 2007) A shares (CNY) H shares (HKD) A-share Premium Datang Power 大唐發電 % Tianjin Capital 天津創業環保 % Air China 中國國航 % Huadian Power 華電國際電力 % Jiangxi Copper 江西銅業 % CHALCO 中國鋁業 % and many others CNY 100 = HKD What s the difference between A/H Shares and Big Mac? 5

7 EUR Possible Reasons for the A / H Price Differential Hong Kong Mainland China USD NOT convertible HKD JPY CNY Limited Convertibility 6 QDII Individual PRC citizens QFII Company H shares A shares Local Investors Domestic Investors Int l Investors

8 Can We Accept This As Normal For Now Hong Kong SAR Nationalisation Internationalisation Mainland China ONE COUNTRY TWO MARKETS TWO CURRENCIES TWO PRICES TWO SYSTEMS 7

9 Two Currencies, Two Prices A / H Price Ratio (%) 1, Tsingtao Brew CNYHKD Since Jan 1994 to Aug 2007 Better overall performance in A-share market CNYHKD CNY appreciation Launch of QFII in Launch of QDII in

10 Two Markets Top 10 AH Companies by Market Cap (As at 12 Sep 2007) A-share MV (USD Mn) H-share MV (USD Mn) Company Full FAF Freefloat Full FAF Freefloat ICBC 工商銀行 213,206 4% 8,528 53,867 45% 24,240 China Life 中國人壽 145,983 5% 7,299 35, % 35,407 Bank of China 中國銀行 139,719 3% 4,192 37,490 40% 14,996 Sinopec Corp 中國石油化工 149,854 6% 8,991 17, % 17,844 Ping An 中國平安 63,788 20% 12,758 26,518 55% 14,585 Bankcomm 交通銀行 47,160 7% 3,301 26,393 65% 17,155 CHALCO 中國鋁業 58,400 15% 8,760 10, % 10,333 CM Bank 招商銀行 55,393 40% 22,157 9, % 9,778 CITIC Bank 中信銀行 39,656 5% 1,983 9,206 40% 3,682 China COSCO 中國遠洋 32,614 15% 4,892 7,109 90% 6,398 Total 945,773-82, , ,419 9

11 Same Company = Same Price Can Be Achieved An arbitrage mechanism should offset the different pricing of shares listing in different locations of the same company Example: HSBC Shares traded in HK and London are closely tracked Indexed Return (%) London Hong Kong Indexed Return (%)

12 Should A shares and H shares trade at same price for the same company? 11

13 The Lessons from Big Mac What s the use of the Big Mac Index No one believe a Big Mac should cost the same in different countries Demand, Supply, Level of Competition, Taxes, Duties, etc.. might explain the price differences But being used as a way to predict exchange rate movements Market exchange rates usually differ from what being predicted by the Big Mac Index 12

14 Conditions for Same Product, Same Price Free Trade in EC0101 Goods are tradable (transportable) Lack of Trade Restriction No import duties, tariff No import quota No transaction costs The world is never that perfect 13

15 The Arguments for AH Shares Shares are different: Same underlying assets Same company prospects Same rights Same entitlements Investment, not consumables More importantly, Shares (Financial Assets) are: Easily transferable Low transaction costs Free of impedance 14

16 Can QFII / QDII / HSAHP Help to Narrow the Gap? QFII (Qualified Foreign Institutional Investors): Introduced in Nov 2002 as a provision for foreign capital to access China financial markets Quota Granted: ~ USD 10 Bn Slowing QDII (Qualified Domestic Institutional Investors): Launched in Jun 2007 that allows domestic institutional investors to invest in overseas capital markets Quota Granted: ~ USD 25 Bn Expanding fast Shortcomings: Only for Qualified Investors and Limited Supply 15

17 Questions Who know the companies better? A-share or H-share price better reflects the value? Should A-share price to fall? or Should H-share price to surge? 16

18 Any method to measure the price differential? 17

19 Any method to measure the price differential? 1. Any objective measurement of overall price differential? 2. How to measure the performance of these companies across both markets? 3. Any interaction between A-share price and H-share price? 18

20 Hang Seng China AH Index Series Hang Seng China AH Index Series 恒生 AH 指數系列 Hang Seng China AH Premium Index 恒生 AH 股溢價指數 Hang Seng China AH (A+H) Index 恒生 AH 股 A+H 指數 USD Hang Seng China AH (A) Index 恒生 AH 股 A 指數 Hang Seng China AH (H) Index 恒生 AH 股 H 指數 CNY HKD Same constituents for these 4 indexes 19

21 Hang Seng China AH Premium Index ( HSAHP ) Objectives To provide market with a simple and easy-to-use barometer to gauge such a premium (or discount) Measurement To measure the average price premium or discount of A shares over H shares, weighted by freefloat market cap 20

22 Calculation Methodology Formula Valuation of constituents based on A-share price Index = x 100 Valuation of constituents based on H-share price Freefloat number of shares (A+H) x A-share price = x 100 Freefloat number of shares (A+H) x H-share price Premium Index A shares at a discount A shares at a premium Lower than Higher than

23 Index Performance Hang Seng China AH Premium Index (3 Jan 2006 to 25 Sep 2007) High: (17 Aug 07) Low : (13 Apr 06) Jan May Sep Jan May Sep Daily Change Average 2.06 Max Min

24 Long-term Direction for the A/H Price Differential? 200 Hang Seng China AH Premium Index (2 May 2007 to 25 Sep 2007) H-shares followed global market down on US sub-prime crisis Announcement of resident s direct investment scheme May-07 Jun-07 Jul-07 Aug-07 Sep

25 What are the Values of AH Premium Index? For benchmarking and market reference For forecasting the potential price movement of the A shares and H shares Particularly useful to track the A / H price differential phenomenon when China opens up its market through the QFII / QDII / Tianjin Pilot Project For derivative product development Hedging Arbitrage Difficulty: the A-share market is not completely open for foreign investment 24

26 Hang Seng China AH Price Indexes Hang Seng China AH (A+H) Index 恒生 AH 股 A+H 指数 USD Hang Seng China AH (A) Index 恒生 AH 股 A 指数 Hang Seng China AH (H) Index 恒生 AH 股 H 指数 CNY HKD Same constituents, same weightings Show purely price effect 25

27 Pro-forma Index Performance 4,500 3,500 AH (A+H) (USD) AH (A) (CNY) AH (H) (HKD) Backdate Performance of the AH Price Indexes (3 Jan 2006 to 25 Sep 2007) 4,500 3,500 2,500 2,500 1,500 1, Jan Apr Jul Oct Jan Apr Jul Closing Index 1 month 6 months % Change over 12 months Since 3 Jan (As at 25 Sep 2007) Annualized Volatility 1 (%) AH (A+H) 3, USD AH (A) 4, CNY AH (H) 2, HKD 1 Over the latest one year 26

28 Any profit opportunity exists for investors? 27

29 Any Profit Opportunity? 20 Aug 2007: Announced the launch of Tianjin Pilot Program that allows Mainland Chinese citizens to invest in Hong Kong equities Hang Seng Index 5.9% H-shares Index 8.7% Investors have shown great interest in purchasing H shares trading at deep discount relative to A shares after the news USD CHALCO 中國鋁業 Times USD Datang Power 大唐發電 Times x +100% x H-share Price (LHS) A/H Price Ratio (RHS) % x H-share Price (LHS) A/H Price Ratio (RHS) x August 2007 September 2007 August 2007 September 2007 A-share Price +37% A-share Price -9% 28

30 A/H Price Differentials Narrowing, But Not Disappearing Sentiment, Liquidity A shares Price H shares Price 29 H Share Company Return Red-chip Return Index Futures? Insurance Company Invest Companies QDII Individual Investors Global Market

31 Profit Opportunity If the A / H price differential is to diminish and return to the par level, an investor might be able to make profit at a return rate: A / H Price Ratio (%) Current A-share Premium at about 60% A / H Price Ratio (%) 1 Year 3 Year 5 Year Annualised Rtn: 60.00% Annualised Rtn: 16.96% Annualised Rtn: 9.86%

32 Is There a Way to Play the AH Market? Premises: Now A-share Price 160 H-share Price Year A-share Price = H-share Price (90% chance) Question: Method1: Method 2: How to make the 60 dollar profit? Short A shares, Long H shares Short the instrument that can track the AH Premium Index Or Long the instrument that is inversely correlated with the AH Premium Index 31

33 Where is the Market? Who wants to Short the AH Premium Index? Those who believe the A share premium will disappear over time Who wants to Long the AH Premium Index? Those who want to long A shares but being restricted by QFII Long H shares + Long AH Premium Index = Long A shares 32

34 Making H-Share More Available to Mainland QDII Direct Investment in Hong Kong market QDII Funds in China Selling to them at spot Index Fund in Mainland? ETFs in Mainland? 33

35 HSI Services Limited 34