Saturday, October 13, 2007

Shanghai the Mystical Land of Premium Valuations

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I noticed the strong price action of PetroChina (PTR) Friday; it was up 11% - this is no small feet considering the mega market cap. I had mentioned back in September that PetroChina (PTR) planned a Shanghai listing - now it looks like it is set for upcoming month. This could be the reason for the rise, along with the 'all things Chinese' mania we are in.
  • SHANGHAI, Oct 13 (Reuters) - PetroChina (PTR), China's largest oil and gas producer, is expected to launch its initial public offer in Shanghai near the end of this month, sources familiar with the offer said on Saturday.
  • The roadshow for investors is likely to start in the last week of October, with the shares listing in Shanghai in mid-November, the sources said.
  • On Sept. 24, China's stock regulator approved PetroChina's plan to issue up to 4 billion new A shares in the offer, which is expected to raise around $7-8 billion, making it one of China's five biggest domestic IPOs.
You remember Shanghai correct? The magical land where valuations of stocks are 150-225% higher than they are in either Hong Kong or the US for stocks that trade on all 3 exchanges. See this story for a graphical representation, but let me list the stocks and their premium valuation in Shanghai (closed to foreigners) versus the open, international market of Hong Kong
  1. Aluminum Corp of China/Chalco (ACH) +217%
  2. China Life (LFC) +143%
  3. China Southern Air (ZNH) +211%
  4. Guangshen Rail (GSH) +162%
  5. Huaneng Power (HNP) +185%
  6. Sinopec Shanghai Petro (SNI) +337%
  7. Yanzou Coal (YZC) +149%
So to put it in perspective if Google was listed in Shanghia it would be trading as the largest market cap in the world. Now the conventional wisdom is when some mainlanders are allowed to finally invest in Hong Kong there would be some meeting of the minds (i.e. Hong Kong valuations for same stock go up, and/or Shanghai down) This was the thesis behind my piece on going long iShares Hong Kong (EWH) back in August. EWH had popped from $16.50 to $18.00 on the news of potential opening of its market the massive savings/cash flows of mainland China; and now is up to $22+.

However, I wonder how this will really play out. First of all, why would the Chinese leave their free standing casino called Shanghai to go play in calmer waters - you have a good thing going, up 400%+ since beginning of 2006 - this would be akin to asking NASDAQ traders to leave the NASDAQ in 1999/2000 for such exciting exchanges like... like... Shanghai for example. Why would they leave the best exchange going in the world? Second, remember the post earlier in the week about Shenhua Energy - how it listed in Shanghia, got a 90% premium and its chairman was disappointed? Well with this IPO Shenhua now has a market cap approaching Google's and is now the 2nd largest mining company in the world. How did the Hong Kong shares react? They were down on IPO day actually....

So why the run in PetroChina when all it is doing is listing in the twilight zone exchange where values are 200% higher than anywhere else? Not sure - I suppose American and Hong Kong investors believe there will be another huge spike in the Shanghai market when it IPOs (which I am sure there will) and therefore the value of their holdings must go up - yet that did not hold true for Shenhua Energy. Who knows anymore; it's all casino action at this time. Place your bets, red or black and roll the die. And I say that with awe and fascination at watching this all unfold... I am trying to think of what could end this other than some sort of shock to the system; as we have a seemingly unending supply of savings and (as of yet) not nearly enough supply of stock to soak it up.

Long Aluminum Corp of China, iShares Hong Kong in fund; no personal positions

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