H-Shares Warrants

Referring back to my postings on 8 June 2007 on H-shares, and 6 June 2007 on the H-shares covered warrants listed on KLSE: the rerating and catalysts favouring H-shares are coming true fast. Warrants on the H shares of mainland companies gained a substantial portion of the Hong Kong warrant market in the second quarter as the turnover of the market continued a surge that is destined to set a record for the year.

The H-shares warrant market in HKSE is the most active in the world. (H-shares are mainland companies listed in HKSE.) Turnover of all warrants in the Hong Kong market totaled HK$1.36 trillion for the first half, a growth of 81 percent compared to the same period last year. It also represents 76 percent of the total of HK$1.79 trillion for the whole of 2006. If turnover in the warrant market continues to grow at a comparable rate in the second half, turnover for the whole year could surge to HK$2.72 trillion.

Turnover in H-share warrants picked up substantially in June, with daily turnover mostly staying above 60 percent of total warrants turnover. This contrasted with January 2006 when H-share warrants were only around 30 percent of turnover. Investors chased warrants on PetroChina (0857), which overtook those of China Mobile (0941) as the third most active warrants in the market in the period after Hang Seng Index and China Life (2628) warrants.For the first half, China Mobile still held the third place, followed by China Construction Bank (0939) and ICBC (1398).

Considering that there were ONLY only 26-30 H-shares warrants issued, its an astounding surge in interest. Again, backing up these buying interest:

a) There still exists a huge gap in Shanghai listed shares compared to the H-shares in HKSE of about 20%. This discount gives buyers a great buffer.

b) The discount is bound to narrow due to the quick activation of QDII scheme, which will allow Chinese funds to buy into H-shares directly.

c) The discount is bound to narrow with Beijing authorities wanting the top few companies to shift their H-shares back to mainland. This is to provide for more shares and investing options to satisfy mainland investors. To initiate such a move, there could be a total buyout of the H-shares prior to reselling in Shanghai.

d) The climbing euphoria levels and feel-good factor following the celebration of 10 year reunification, in particular Beijing's statements supporting the financial development of HK: all played a part in the rerating exercise.

A long way for the covered warrants to run.