Oil Prices & Ramifications

Even though we saw US$93.80 for oil, in real terms, the price is not an all time high as its still below its all-time inflation-adjusted high of US$101.70 back in April 1980. However, Crude has climbed 47.3% over the past 52 weeks, and since 2001, it is up 511%, from US$18 to US$93. We have examined the reasons why & potential ramifications, here's a repeat:

a) Increasing Global Demand: Booming growth in China and most of Asia-Pacific. Add India, Korea, Russia, Brazil, and Australia to the equation as well. Even old E.U. is moving in the right direction.

b) Correcting U.S. Dollar: The dollar is at 15 year lows versus a basket of currencies. The Fed is engineering a cheaper US stocks scenario amidst credit problems in the US. The correction in USD is reflecting itself in oil prices.

c) Under Invested: We are reaping the consequences as many big oil companies and state controlled firms have under invested to replenish natural production declines.

d) Money Supply Growth: What we are seeing is not just oil prices but almost every single commodity. The growth machinery cited above coupled with aggressive money supply growth policies undertaken by most developed nations over the last 5 - 7 years have resulted in a load of liquidity swishing in the system.

e) Shift In Balance of Power: Due to the dependence on oil and their record prices, the producers have minted a lot of surplus cash. Russia has used its proceeds wisely, effectively bankrupt in 1998, now Russia has more than US$450bn in reserves. Russia is also using petro money to "control" the surrounding small countries via joint ventures and questionable deals. China, realising its vulnerability has deliberately courted African countries with proven oil and gas reserves.

f) USA May React: USA being USA will be facing untold problems if oil prices stay at US$100 for a prolonged period (say a few years). Politicians will work feverishly to control the consequences of living with US$100 oil. Push comes to shove, USA may fight certain wars for the oil - if you know what I mean.

g) Petrodollars Balance Sheet: Used to be 100% in US Treasuries - this way the US can continue to consume as the petrodollars were recycled back to lend to the US via Treasuries. Over the last 2 years,many countries with hefty trade surpluses have started huge sovereign funds to invests in foreign companies. These companies are a mask to move funds away from buying Treasuries. I don't see this trend reversing, hence I see further downside for USD.

American Baby

The indicative timing of events leading up to the listing of and quotation for the GOOGLE SW on the Call Warrants Board of Bursa Securities is set out as follows:-

Price fixing date
29 October 2007
Opening of the Offering 30 October 2007
Closing of the Offering at 3.30 p.m.
31 October 2007
Allotment of the SW to placees
9 November 2007
Listing of the SW on the Call Warrants Board of Bursa Securities
14 November 2007


Issue Size : Up to 90,000,000 SW
Entitlement Ratio : Three thousand (3,000) SW shall initially be entitled to one (1) GOOGLE Share
Reference Currency : United States Dollar (USD)
Settlement Currency : Ringgit Malaysia (RM)
Issue Price : RM0.11, being 14.59% of the Reference Price divided by 3,000 x exchange rate of USD/RM 3.3400, rounded up to the nearest sen
Exercise Price : USD680.00, being 100.4% of the Reference Price

As of yesterday's price of US$694, the premium is 12% for the call warrant at 11 sen. At 14 sen, the premium goes to 18%. Gearing would be 5.4x. I would expect a lot of over-eager buyers. Don't chase above 15 sen or when premium breaches 20%. At the current price level of close to US$700, a lot of things has to go right every quarter, even then we may not see US$750 within 6 months. So, beware.

Best Plantation Play

Hap Seng Plantations Holdings Bhd's (HSP) initial public offering (IPO) of 300 million shares is expected to raise up to RM800 million - the biggest sale of shares in Malaysia this year so far. HSP's new shares are offered at RM2.65 per share, while the institutions side appears to be priced with a 50 sen premium on top of the IPO price. HSP forecasts a 56 per cent jump in net profit to RM157.7 million in the year ending January 31 2008. The IPO closes on November 2, with the shares targeted to be listed on the stock exchange on November 16. On 800m shares, the EPS would come in at 19.7 sen. Assuming 2009's net profit rises by 20%, net EPS would come to 23.6 sen. This will be the respective 2009 PER for Hap Seng Plantations market price on listing:

RM3.30 14x

RM3.50 14.8x

RM4.00 17x

But Hap Seng Plantations is not my pick, its IJM Plantations. Coincidentally, the EPS for March 2008 is 20 sen and for March 2009 EPS is slated to rise to 22 sen. That it, both companies EPS comes in at roughly the same level. Going forward, Hap Seng Plantations has probably sold forward 50% of production, while IJM Plantations has done negligible selling. The current rally in CPO prices would see IJM Plantations as a strong candidate for major re-rating. The fact that smaller plantations companies trade at a 20%-25% discount to larger counterparts, coupled with the fact that IJM Plantations' earnings was affected severely by the January floods - all bring about a positive glow for IJM Plantations share price. Added to that, the yields at IJM Plantations is a lot better. At the minimum, IJM Plantations share price should more than match Hap Seng Plantations shares price on listing day.

Best Poker Movies

Since its a pretty dull day for business, thought I should recommend something for the holidays. Readers who have read my profile will know that I am a fan of poker, well, Texas Holdem to be exact. The game has been growing in popularity over the last 5 years thanks to the World Series of Poker tournaments. The subject matter is so simple yet complex that I am surprised not more movies has been made. There was a very well made series called Tilt, which is available on DVD, that was a blast. Rounders used tobe a cult classic among poker players. Now I am happy to say a better poker movie is available. It stars Drew Barrymore, Eric Bana, Debra Messing and Robert Duvall - it looks at what drives a fanatic poker player and how the game affects everyone around a die hard player. A side note, there are at least 10 big real poker stars in the movie Lucky You as well. Lucky You probably won't be a smash hit but will be thoroughly enjoyed by poker aficionados. Good movies fleshes out the characters well, you feel for them and you understand their motivations, Lucky You does that very well.

Poker is intoxicating as you are playing against others and yourself. Its a lot of ego, self believe and math. Best lesson from the poker table, we all get what we deserve but only the successful will admit it.

IPO Froth In Asia

Not since the internet bubble have we seen oversubscription for IPOs like these. One of the touted genuine internet China plays, Alibaba.com, has locked up about HK$450 billion, closing its retail book on Friday with the tranche 250 times oversubscribed. Its international allotment has attracted US$180 billion (HK$1.4 trillion) worth of orders. Sources said the IPO shares will be set at HK$13.50 apiece - the top end of the indicative range. Market watchers believe the shares will jump 50 percent above the offer price on their trading debut next month. Alibaba.com is more than just a flimsy internet play, we are not talking about 2000 anyway. The company has proven itself as an adequate player in the biggest potential internet market - thus explaining the enthusiastic response from international fund managers.

During the dotcom frenzy in 2000, Tom.com, owned by Cheung Kong was 669 times oversubscribed and locked up HK$51 billion. The stock closed at HK$7.75 on debut, or 3.35 times the HK$1.78 offer price, resulting in investors gaining about HK$12,200 from a board lot of 2,000 shares. Tom.com, now traded as Tom Group, closed last Friday at HK$0.73. Another moverick during the internet boom time was Sunevision owned by Sun Hung Kai Properties, was 217 times oversubscribed and locked up HK$70 billion. It closed at HK$17.35 on debut, 45 percent above its HK$10.38 offer price. Sunevision closed at HK$1.16 last Friday.

What about the Petrochina juggernaut? Well, PetroChina attracted about 3.3 trillion yuan (US$440 billion) in subscriptions to its Shanghai IPO, a record for a domestic stock offer. It is offering up to 4 billion A shares to raise as much as US$8.92 billion in the offer, which is expected to be the world's biggest IPO so far this year. Well thats an over-subscription rate of 49x. The drain of funds to the huge offer sent short-term Chinese money market rates soaring to multi-year highs this week and pushed down the stock market. Liquidity in the markets is expected to improve dramatically on Tuesday and Wednesday, when funds frozen by the IPO are returned to unsuccessful applicants.

Humour 101

This is largely a repost (with some updates) of some smart-ass definition for financial jargon. Had to do it for the benefit of newer readers of the blog. Some of them are copied and some courtesy of my twisted sense of humour.

EBITDA
Earnings Before I Tricked the Dumb Auditor

EBIT
Earnings Before Irregularities and Tempering

Top-Down Investing
People with a bit of economics knowledge but scared shitless about accounting

Bottom-Up Investing
People who knows a bit about accounting but hates fiction

Unusual Market Activity
Something the management and directors always know NOTHING about

Averaging Down Investing
When you totally ignore the fact that you were wrong in the first instance

Doubling Up Investing
Making doubly sure that you are more than fully-invested when the stock eventually tanks

CEO
Chief Embezzlement Officer

CFO
Chief Fraud Officer

Second Board
What Second Board???

Margin Account
Shorter rope, tighter noose

Hedge Funds
"Institutionalised" margin accounts

NAV
Normal Andersen Valuation

NPAT
Never Pay Any Tax

EPS
Eventual Prison Sentence

Federal Reserve Board
Bank of Japan on Prozac

Equity Research
As useful as yesterday's newspaper

Equity Analysts
Hopes no one discovers how average they are

Fund Managers
Sponges off the brains of analysts and strategists and call it their own

Unit Trusts & Mutual Funds
People who hope & pray that investors don't realize that more than 90% of them cannot outperform their respective indices

Chartists & Quants With Trading Programs
People who have given up trying to understand the stock markets

Short Term Investor
Someone who is in-and-out within 3 days or less

Long Term Investor
A short term investor who cannot get out profitably after 3 days

Bull Market
A random market movement causing an investor to mistake himself for a financial genius

Bear Market
A 6 to 18 month period when the kids get no allowance, the wife gets no jewellery, and the husband gets no sex

Off Balance Sheet Items
More important than items in the balance sheet, and represent things that really should be in the balance sheet

Momentum Investing
The fine art of buying high and selling low with the crowd

Value Investing
The art of buying low and selling lower

P/E ratio
The percentage of investors wetting their pants as the Market keeps crashing

Remisier
Someone who should have kept their previous job

Investor Protection
Padded walls in broking halls

Market Correction
The day after you buy stocks

Cash Flow
The movement your money makes as it disappears down the toilet

Institutional Investor
Past year investor who is now locked up in a nuthouse

Economist
Someone who tells you why their predictions went wrong after every quarter, and proceeds to give a confident prediction for the next 3 quarters

Bursa Pursuit
Honing the art of trading warrants with less than 10 days to expiry

Bursa, Lion & Berjaya
Average but lucky buggers

China A-Shares
"A" for astronomical & absurd

HK H-shares
"H" for hapless & hibernating

Chinese Covered Warrants
Only type of China dolls approved by the wives

CDOs
Things you didn't know or understood 6 months ago

Super Link Houses
Things that didn't exist a year ago

Smart & Smarter

Probably the most astute property guy in the world - Sam Zell, main owner of Equity Office Properties Trust. Sam's parents escaped Poland weeks before Nazi invasion; Sam born in Chicago 4 months after family's arrival in America. Built real estate empire with frat brother Robert Lurie; bought up cheap real estate throughout U.S. from distressed owners, kept buying when values recovered and boomed. EOPT's first fund scored with Mexican homebuilder Homex up 1,200%. Second fund targeted Brazil. The deal of the decade, Sam sold EOPT to Blackstone Group in February this year. Details below.

Bloomberg / NYT - American REITs are now forecast to suffer their worst decline in almost ten years and could drop up to 20% within the next year, according to Bloomberg. Economists cited by the New York Times estimate that problems in the mortgage markets could ultimately cost financial firms and investors up to US$400 billion. REIT stocks have outperformed the S&P 500 every year since 2000, but are expected to suffer as higher borrowing costs put the brakes on takeovers and slash property values. "REITs are overvalued by 25-40% relative to stocks and bonds, and cash flow yields are too low," said University of California economist Kenneth Rosen. Investors are steering clear of bonds backed by subprime and commercial mortgages, and their reluctance to lend is affecting the value of trusts that own commercial properties, apartment complexes, hotels, shopping centers and mortgages. The Bloomberg REIT Index has fallen 16.5% since the Blackstone Group bought EOPT for US$39 billion including debt. Bloomberg notes that the last time the Index sank more than 10% was in 1998, when investors were pouring money into Internet stocks. The only segment of the Index not to lose value this year is warehouse and industrial, which rose 11.5%. Public storage REITs suffered most with a 19% decline. "

Blackstone Group, which completed its purchase of Equity Office in February this year, has sold so much of its office property portfolio in recent months that it has covered 70% of the deal's US$39 billion cost.
Blackstone, riding a booming U.S. commercial real-estate market, has shed at least 62 million square feet out of about 102 million square feet of office space once held by Equity Office. It even managed to sell several properties at record prices. Still Blackstone is left with quite a bit of property on their books, but at least they have a decent buffer. However, the correction over the last three months would have wiped a lot of smiles from Blackstone staffers. So, who is smarter? It would have been very difficult to dispose the entire EOPT by Sam himself. He also needed to have the foresight and guts to sell at the right time. It probably was very difficult for Sam to disassociate himself from EOPT, after having build the company up so successfully. Well, Mr. Zell took the cash and can take his time now to start rebuilding a new REIT with his cash.

Sam Zell was worth US$4.5bn as at end 2006. Following the deal he is now worth US$6bn.

The Hunt For Red Petrochina In October

PetroChina has set a lower-than- expected indicative price range of 15 yuan (HK$15.50) to 16.7 yuan for its A-share initial public offering, despite receiving overwhelming support from institutional investors in the three-day bookbuilding period this week. That was surprising considering that that the lowest bid offered by investors already hit 18.5 yuan - not to mention the highest bid of 20.5 yuan. Of the 7 A-share listings by H-share companies this year the usual discount is 11 to 20 percent to the H shares. So in actuality, the IPO price is within the accepted boundaries. However, that was interpreted by the general public as a "negative".

I think the powers to be are also aware of the significant run-up in Petrochina's H-share price over the last 2 weeks as the planned IPO wheels began to turn.

------------------------------

Breaking News

PetroChina has discovered another major gasfield in western Xinjiang, a source from the company's Tarim unit confirmed Wednesday. "The gasfield, known as Dabei III, boasts an estimated reserve of as much as 130 billion cubic meters, and will serve as an important backup supply source for the west-east gas pipelines," he said on condition of anonymity.
PetroChina's Beijing office declined to comment but Xinhua quoted officials in the Xinjiang Uygur Autonomous Region as saying the Hong Kong and New York-listed giant had discovered 130 billion cu m of natural gas.
The discovery has the potential to be the third largest gas field in Xinjiang, after Kela II and Dina II Gas fields, said Dai Jinxin, a researcher with the Research Institute of Petroleum Exploration and Development affiliated with PetroChina, the country's largest oil and gas producer.
"Gas fields with reserves of more than 100 billion cu m are considered giant gas fields even globally," Dai said. Kela II and Dina II gas fields have proven reserves of 250 and 170 billion cu m. Since more exploration and evaluation are needed at the new field, it is too early to give any specific figures, the source added. "We will drill more appraisal wells to determine the final reserve at a cost of around 200 million yuan (US$26.6 million)," the insider said. The field has an initial estimated daily output capacity of 286,000 cu m.
Although Xinjiang currently lags Sichuan Province in terms of annual natural gas production, the autonomous region has more reserves, Dai said. Reserves in Xinjiang's Tarim Basin are expected to hit around 8 trillion cu m, compared with the Sichuan Basin's 4 trillion cu m, Dai told China Daily.

-----------------------------------------

The powers to be probably also know that the run-up may not be justified, and hence adjusted the IPO price accordingly. Of course all this is moot because the IPO could be priced at HK$35.00 and still be 50x over-subscribed. Successful applicants of the IPO are basically as lucky as those who struck Consolation Prize for their 4-D tickets.

PetroChina's A-share trading debut is set for November 5. The expected range for first day of trading is 39-45 yuan. Assuming the H-shares stay at HK$19.40, we are looking at a 50% discount. However, in my assessment, I am optimistic that the A-share can reach 50 yuan, because there is only one Petrochina, and the company is the most well known to all manland Chinese investors.

China Shenhua Energy, the latest H-share company to have its A-share listing, sold its A shares at a 17 percent discount to its H-shares. China Shenhua attracted a record 2.7 trillion yuan in its Shanghai IPO on October 9. PetroChina - which plans to issue as many as four billion new A shares to raise up to 66.8 billion yuan - will shatter the record by freezing 3-4 trillion yuan. That may explain why some of the funds are tied up in the application process thus making Shanghai and HK-H shares a bit listless these few days. That's a big contributory factor to the 4.8% slide in the Shanghai index today, coupled with fears of further tightening following the release of the still robust 11.5% GDP growth for 3Q.

Institutional and retail investors can start subscribing today and tomorrow, respectively, while the final A-share price will be announced Tuesday. Beijing-based PetroChina, the mainland's largest oil and gas producer, has said it needs a total of 37.8 billion yuan for five projects to construct oil fields, upgrade technology and expand ethylene capacity. Surplus proceeds from the A-share IPO would be used as working capital. This could suggest the company may cut down the actual number of shares it ultimately decides to issue.

China Oilfield Services (2883), which listed A shares in Shanghai on September 29, trimmed its issued size of 820 million shares to 500 million after the bookbuilding period.

Templeton's baldy Mark Mobius said PetroChina is still a bargain at just 8x estimated five-year earnings. Besides being the biggest in its industry, the prospects for higher profits are there as Beijing will eventually allow oil to move towards global prices.

Seven other H-shares have debuted on the mainland this year. Premiums range from 28 percent for Ping An Insurance, China's second-biggest insurance company, to 257 percent for China Oilfield Services Ltd., the country's largest offshore-oil explorer. PetroChina plans to sell 4 billion shares in China. That amounts to less than a fifth of the 21.1 billion H shares now outstanding. The other small thing is the weakening USD and the stronger yuan over the last few days - this makes A-shares pricier and the corresponding H-shares cheaper. If Petro reaches 50 yuan in Shanghai, Petrochina can climb to HK$23-HK$24. You do the calculations for the covered warrants in HK and Malaysia.

Current Market Readings & Strategy

Investors in equity globally seem to be in a state of inertia, with the exception for HK and China, I guess. As it stand, on this day October 25, here are my market readings, concerns and strategy:

a) US dollar well underway in a progressive and managed correction since beginning of the year. When a currency goes on a prolonged weaker spell, it automatically boost competitiveness for US companies - that is a necessary evil because the powers to be (Paulson and Bernanke) know that the trade deficit, a slowing economy, correcting property prices and credit crunch could send the US economy into a tailspin.

Since they cannot get the yuan to appreciate faster, they can try to engineer a weaker USD on their own. Central banks everywhere have been reducing their US Treasuries holdings progressively over the last 18 months. Instead, many of these countries have started their own sovereign fund (ala Khazanah and Temasek; Kuwait investment Authority, Abu Dhabi Investment Authority, China's CIC, Norway's Government Pension Fund-Global to name a few) as an excuse to NOT hold bare USD.

When the USD goes lower, the stocks in US markets will gain buying support (perceived relative cheapness with other foreign currencies). If the USD did not weaken the way it did for the last 6 months, I think the Dow would have collapsed to 11,000 easily.

b) A weaker USD will also result in inflationary pressures but that is negated by an overall weaker outlook for the US economy anyway - hence Bernanke will feel comfortable lowering rates further as this will further weaken the USD gradually and managed the US economy into a soft landing. In that sense, the American stock markets are being girded by two thing, a lower interest rates regime and a weakening USD.

c) The Malaysian market seems to be in a standstill. Bear in mind that institutional funds currently really don't see much "value" in holding 100% stocks - in most markets anyway. The one factor sustaining the market at 1,350-1,400 is the outlook for the ringgit.

Currently, the Bursa looks to be an asset play more than anything else, and that's thanks to a more liberal Bank Negara and a fantastic accumulation of reserves. Bearing in mind that for most of the 1990s the ringgit traded around 2.7 against the USD. Ceteris paribus, the Malaysian economy has more structure, better depth and the companies are more progressive and better run. Hence 3.0 against the USD should not dent the competitiveness for Malaysian companies that much (target for 2008).

Having said that, I see current foreign funds holding and buying Malaysian stocks to be persuaded mainly by the ringgit outlook. Because we do not have a deep ringgit bond market, stocks are the next best thing. In addition, Malaysia is one of the very few net beneficiaries of a US$100 per barrel of oil scenario. As long as the outlook is still good for the ringgit, the Bursa could push towards 1,400-1,450 over the next 3 months. Further out, its difficult to say as many things are still fluid - further potential fallout from subprime and the niggling oil prices. Having said that, the best exposure will still be oil & gas, which had a good pause for the last couple of months.

d) As high as the Hang Seng index is now, the outlook is actually the best for HK stocks (inclusive of H-shares). They will be strongly favoured by the weaker USD and lowering of rates by the Fed. Owing to the HKD peg, the HK's monetary policy is basically guided by the Fed's actions. I see 32,000 for the HSI by Chinese New Year. Property and banking stocks to lead from the front.

Vietnam Calling

If you examine Gamuda's earnings forecast for the next 3 years, much of it relies on the success of its Vietnam property and construction projects. Vietnam is the new India or Colombia, the really exciting emerging market today. Foreign funds have been piling into Gamuda and other Vietnam proxy plays. The valuations are such that nothing much can go wrong. Vietnam, for many Malaysian property developers, has become the land of milk and honey. Today, almost every big player wants a piece of the action.

Well, Gamuda is not the first, in fact Singaporean & South Korean companies have been piling in much earlier. On conservative estimates, there are RM200bn on-going projects that is supposed to be completed within the next 5 years. In Vietnam, obtaining an investment licence is very crucial, because without it, foreign developers cannot commence their projects. Berjaya Land Bhd is the first Malaysian company to be given an investment licence to start work in Vietnam. To date, BLand has identified four major projects in Vietnam, three of which are in Ho Chi Minh City (HCMC) and one in Hanoi. BLand is one of the early birds that have made significant progress in its foray into Vietnam. In Hanoi, it is the first Malaysian company to be given an investment licence to undertake the Thach Ban project. In HCMC, its proposed projects include the Vietnam Financial Centre (VFC) and the Vietnam International University Township in the North West Metropolitan Area, about 19km away from HCMC centre. In the province of Dong Nai, BLand is planning the development of a gated community and three apartment blocks on 20 acres of land, with a gross development value (GDV) of US$120 million (about RM408 million). Together, the GDV of BLand's projects in Vietnam is RM31.9 billion.

Investors do note that BLand does not have a track record in overseas projects. The issue of funding is also cited as a possible constraint. So far this year, some US$13 billion in FDIs had flowed into Vietnam. Indeed, demand for properties thus far has outstripped supply, and a major source of this demand is from the Viet Khieus (overseas Vietnamese).

Besides licensing issues, other potential problems include the relocation of squatters, shortage of skilled labour and lack of transparency in business dealings.

The largest foreign investors is South Korea, followed by Singapore. Vietnamese authorities has a list of FDI amounting to US$50bn seeking and awaiting approval as I write. Last month CapitaLand announced a joint venture to develop 1,200 apartments in HCMC - the fourth project by CapitaLand in HCMC, now it has 2,800 new homes in the pipeline. Keppel Land also announced an even greater number - 20,000 homes in Vietnam.

What is luring so many developers there is the margins and pricing. A US$250,000 link/semi-dee in Malaysia will fetch about US$450,000 currently in Vietnam top locations. Its not cheap. Things are looking good in Vietnam, and with "good things newly discovered" there will be a rush of capital to tap the potential. Just like internet was a big thing in the late 90s, VCs fell over themselves to invest in internet startups to jump on the golden bandwagon. The internet itself is a good thing and yes, there is money to be made from it, but it is also true that more than 95% of all ventures started in the late 90s and early 2000 went to zero very fast. This is typical development in any "gold fields being discovered", and the same is being witnessed in Vietnam. Capital is a big extractor of real value. Even when 95% of internet startups fail, the remainder do extract real value and evolve into viable new businesses.

In Vietnam's case, there doesn't seem to be a solid masterplan to accomodate the capital coming in. The pubescent stockmarket is not financially sound enough to support the FDIs. The credit markets there are also not sophisticated enough for the amount of FDIs coming in. The good thing supporting the long term prospects of Vietnam is their adequate population, which is more than 87m. That is sufficient critical mass for a competitive labour force to be galvanised initially. Later as per capita grows, the domestic economy will fuel itself much like where China and India are at now. GDP growth was 8.17% in 2006, the second fastest growth rate among countries in East Asia and the fastest in Southeast Asia. We have to remind ourselves the country is still a socialistic country trying to move into a market economy. The infrastructure is still inadequate and requires rigorous planning.

Property developers are all looking at 30% margins on their projects. It is achievable if supply ties in with demand. RM200bn or more property coming on stream over the next 5 years is no joke. All is hunky-dory because not much has really reached finished status yet. Everyone is selling off the plan. I am not trying to bash the Vietnam investments, but its not as great as everyone makes it out to be. There are still a lot of unknowns. The dependence on returning expat-Vietnamese to buy is one. Pricey property has to be supported by strong industries and a strong job market, we all know there is still a lot to be done to foster FDIs into long term investments. Hence the 30% margins will look increasingly iffy down the road. I would be more comfortable if companies such as Gamuda and BLand were to tone down their margins expectations, maybe to 20%.

Over-investment is a normal trait into exciting markets / industries - just look at China, the internet, India, Brazil, Colombia - investors still need to guard themselves from over-optimism.

The Root Causes Of Subprime

The Last Laugh (featuring John Bird & John Fortune) - Thanks to Boon (Trade Bursa Malaysia), I came across this bitingly funny, sarcastic poke at investment pros. The dry British wit is refreshing, not so in-your-face Americana style of comedy. However, there is too much truth within the comedy ... much too much truth! Watch the youtube link below...

http://www.youtube.com/watch?v=SJ_qK4g6ntM

Priced To Perfection

Trying to find a SELL report on Gamuda is near impossible. Going ex-today for its 1-for-1 bonus. RM4.60-4.70 now, seems to me too many positives have been priced in. When all the positives have been priced in, everything needs to go right. When everyone is a buyer, all the longs can only sell in the future.

The Positives:

a) Gamuda has supposedly received an offer from Kump Darul Ehsan to buy out its 40% stake in Splash water concession. KDE currently holds a 30% stake in Splash. Splash is the largest water producer in Selangor (supplying 43% of the state's needs). Concession ends in 2030. Gamuda may get RM700m-RM1bn. If the deal goes ahead, there could be a special dividend in the works of about 40 sen per share.

b) The high scale Vietnam project. Its an excellent exposure for the company and foreign institutional investors see Gamuda as a good proxy play into Vietnam. The project is expected to make up more than 30% of Gamuda's earnings in 3 years time. The Yen So Park is expected to have GDV of RM8bn and will feature grade A office towers, high class hotels and entertainment centres. The linked RM1.5bn sewerage project has already started.

c) Losing Splash potentially but has made headways in bidding for the RM5bn tunnelling portion for the Pahang-Selangor intertstae water transfer tunnel. Gamuda is also the frontrunner for the RM11bn Klang Valley LRT upgrade.

d) Other secured big projects keeping Gamuda busy include the RM6bn northern railway tracking project and the RM2bn 32-year Nam Theun hydroelectric project.

e) Dividend yield more above 4%.

To me, it is certainly better in terms of regional exposure. Even though its property projects in Malaysia are decent, at least they are not dependent on that division ( yes, I am already bearish on mid-high end Malaysian property). Their biggest is Horizon Hills with a GDV of RM2.5bn. Next will be the Bandar Botanic with a GDV of RM1.6bn and Jade Hills with a GDV of RM1.5bn.

Its 2008 revenue is expected to jump some 40% to RM2.1bn. Many houses expect Gamuda to make a net profit of at least RM350m (RM185m in 2007) in 2008. That's an EPS of 21 sen. At RM4.60, we are looking at 22x 2008 earnings ... are we in Shanghai Exchange? That's not the frothy part ...yet. Gamuda has been going on numerous roadshows, putting itself as a Vietnam play. Gamuda's 2009 revenue is slated to reach RM4.3bn in most analysts' projections. Net profit is expected to jump to RM650m in 2009 or an EPS of 39 sen (a PER of 11.8x on today's share price). Decent enough .. but wait.

Its all hunky-dory because Gamuda feels it will be able to extract much higher margins from the huge Yen So project in Vietnam. Here comes the danger: for 2007, their EBITDA margins came in at a believable 7.7%; that is supposed to rise to 12% in 2008; and the margins is supposed to reach 14% in 2009. While the company can justify those projections based on current sentiment in Vietnam and Asian property markets in general, this also brings about a lot of execution risks and exposure risks, after all we are talking about Vietnam and not Singapore. Plus we are talking of 2-4 years out in the future in a newly emerging economy. Hence the substantial jumps in margins may be asking for a lot of optimism on just one big project.

Hence for all the positives, Gamuda is priced for Perfection, and priced to Perfection. Upside very limited, may have more downside instead.

A Price For Everything

TradeSter said...
On first trading day of Zijin-C1, the mother share closed in HK at HKD12.52, exercise price is HKD10.90 (convert to MYR by multiply currency rate 0.435), ratio 20:1, seems like my calculation for Zijin-C1 comes to very high premium 50-53%. Anyone can verify this high premium thingy on the 4 newly issued warrants today?
10:21 PM
Hedge Fund said...
Prop desk manipulation. Beware!
8:11 AM
TradeSter said...
ZIJIN-C1 and HKEX-C4 premimu is very high which is more than 50%. I wonder why people is so foolish to chase over it? Why are the market makers not doing their job correctly to set the warrant price relative to the mother share. Overvalued warrant price will definitely hurt those who chase them.

Comments - Both are very expensive, the premiums are too high for both HKEx-C4 and Zijin-C1. When its 50%, it takes a lot to work down the premium and the leverage is good but not that fantastic. Very rarely do you find CWs or even China shares go on a straight line up. Premiums tend to be very high for the first few days of trading as there are not many sellers only buyers. The situation will turn around very soon. Just look at how other China-H shares covereds have been trading, open initially on high premium, loses the premium very quickly as well after just a couple of week. Especially when you are looking at Zijin, which will have to queue behind Petrochina and CNOOC for an A- share listing, no hurry to latch on. Wait for premium to go to 20% first. It will get there.

Zijin Mining... Hmmm

China dolls still arriving at our shores despite protestations by the wives. I am just going to highlight the interesting ones.

Business - Principally engaged in the exploration, mining, processing, refining and sale of gold and non-ferrous metals and other mineral resources in the PRC, and is a large mining conglomerate primarily engaged in the production of gold and non-ferrous metals.

Business Review - For the year ended December 31, 2006

Summary - Favorable Production and Operation, Gold Business Remains the Main Business, Business of Copper and Zinc Continuously Improving

1. GOLD MINE BUSINESS - During the reporting period, the Group totally produced 20,700 kg of mine gold (665,520 ounces) which was mainly from 3 main gold mines, representing a growth of 35.6% over last year, of which, 13,870 kg (445,930 ounces) was produced at Zijinshan Gold Mine, 3,240 kg (104,168 ounces) was produced at Shuiyindong Gold Mine, and 1,100 kg (35,366 ounces) of gold was produced in the form of concentrates at Huichun Shuguang Gold and Copper Mine, which was amounted to about 88% of total mine gold of the Group. Remaining 12% gold outputs was contributed by new productive gold mines such as Shanxi Yixingzhai Gold Mine, Sichuan Jiuzhaigou Gold Mine, and Yunnan Dixu Gold Mine which produced 2,490 kg (80,055 ounces) of gold in total. During the reporting period, the Group produced 28.510 kg (916,617 ounces) of refinery gold, representing a growth of four times over last year, of which, Henan Luoyang Zijin Yinhui Company produced 27,660kg (889,289 ounces) of refinery gold, Zijin Science and Technology produced 850 kg (27,328 ounces) of refinery gold. The substantial growth in the Group's turnover was mainly contributable to the growth of sales of refined gold from Louyang Zijin. Sales income from gold business of the Group represented 70.4% of the total annual sales income, and net profit of gold business represented 54% of the total net profit.

2. COPPER MINE BUSINESS During the reporting period, the Group produced 40,302 tonnes of copper, representing a growth of 102.83% over last year. Ashele Copper Mine successfully achieved the production plan and produced 30,018 tonnes of copper in concentrates form. Zijinshan Copper Mine produced 6,781 tonnes of copper cathodes. Hunchun Gold and Copper Mine produced 3,169 tonnes of copper in concentrates form. Bayannaoer Refinery Plant produced 334 tonnes of copper from other associated metals. Copper mine business grew rapidly. Its sales income represented 16.4% of the annual total sales income, while it represented about 32% of the total net profit.

3. ZINC MINE BUSINESS The Groupˇs zinc mine business rapidly rises as a new force. During the reporting period, 13,303 tonnes of zinc was produced in concentrates form, representing 8.38 times over last year. Yunnan Huaxi Yunye Jingyuan produced 2,945 tonnes of zinc in concentrates form. Ashele Copper Mine produced 9,439 tonnes of zinc from other associated metals. Other mines produced 199 tonnes of zinc from other associated metals. Wulatehouqi Zijin produced 17,017 tonnes of zinc in concentrates form. It is an ore provider to Bayannaoer Refinery Plant. In order to avoid duplicate calculation, its production was not included in our statistics. Bayannaoer Refinery Plant commenced production in July 2006, and has met the production plan quickly by producing 41,400 tonnes of zinc ingot. Sales income of zinc mine business represented about 10.7% of total annual sales income, while net profit represented about 13% of the total net profit of the Group.

Investment - In the first half of year 2007, the Group investigated 43 projects in the PRC and abroad, among which, contracts of 7 domestic mine projects were officially concluded, including the Xinjiang Wulagen Lead and Zinc Mine, Sichuan Songpan County Dongbeizhai Gold Mine,Malipo County Tungsten Mine and an integration of associated resources, Hunan Anhua Liaojiaping Antimony Tungsten Mine, Hunchun Yangjingou Tungsten Mine, Yunnan langdu Copper Mine, Lannitang Copper Mine and as a result that the resources controlled by the Group increased dramatically. The Group also successfully acquired two international projects. The Group’s associate company-Zijin Tongguan successfully acquired 89.9% equity interest of Monterrico by way of offer, and as a result, it gained the exploration right of a substantial large copper and molybdenum mine in Rio Blanco, Peru. The takeover has successfully been completed. The Group’s wholly owned subsidiary – Xinjiang Zijin has successfully acquired the whole equity interest of CBML recently and accordingly controlled the ZGC Gold Project in Tajikistan.

Projects - Domestic projects progressed smoothly, including, the Zijinshan Gold Copper Mine joint technological renovation, Dongping Gold Mine technological renovation, Guizhou Shuiyindong Phase III technological renovation, Guangdong Xinyi Gold Mine and Tin Mine technological renovation, Xinjiang Fuyun Reduced Iron Project, Wulatehouqi 200,000 tonnes per year process plant technological renovation, Zijin Copper Company Copper Sheet Belt Project, Makeng Iron Mine Phase II technological renovation, Tibet Yulong Phase I Project etc. Some of the above projects will start production soon, and will provide powerful support for the Group’s future development. As to the international projects, the exploration, development, and construction of Mongolia Nari Tolgoi Gold Mine proceed on schedule and is expected to be completed and production is to commence by the second half of year 2007. The Vietnam Ha Giang Lead-Zinc Mine is in production and its 300 tonnes per day production plant was in operation. Russia Kuton Gold Mine and Tuva Lead Zinc Mine were also in the process of applying for approval and have in place certain preliminary preparation work for project construction.

Year / Revenue / Net Profit (Renminbi)

2005 / 3.064bn / 704m

2006 / 10.87bn / 1.7bn

2007 (e) / 18.5bn / 5.8bn

Market Cap: approximately US$22bn

Positives:

a) Massive GOLD play, gold looking good now and near term

b) Do not have an A-share listing yet

c) Good commodity play on other metals as well, a Chinese BHP?

Negatives:

a) PER already 60x 2007 earnings, that is very high for a H-share, its not an A-share, thus limiting upside

b) Surprise, surprise, A-share listing plans on the way

Verdict - Very good, though not as good as CNOOC and Petrochina because of its high H-share valuations already. Good for buy trade.

Black Gold & 3 Treasures?

kafka said...
Me again... just to add on a bit. Since you recommended CNOOC & Petrochina. How about ZC-CIMB (Black Gold)? It is a basket warrent consists of CNOOC, Petrochina, Sinopec, Scomi & Sapcres. Coincidentally, I remembered you recommended at least 4 out of 5 of the stocks above. Furthermore, it is traded at ~4% premium, decent maturity, and above average gearing of ~4. Though Basket Warrant calculation might be harder to maintain...hopefully CIMB investment manager knows how... :p

The Details - CIMB Investment Bank launches new basket call warrants 26 Sep 2007 CIMB Investment Bank Bhd launched two new basket call warrants today which give investors exposure to the share prices of listed regional stock exchanges or share prices of oil and gas companies. The 3 Treasures warrant is issued at 42 sen each. With 50 warrants, an investor gains exposure to a basket of two Bursa Malaysia shares, a half share in HK Exchanges & Clearing and one share in Singapore Exchange. At market close yesterday, these shares were worth RM105.59 in total. The warrants' exercise price is RM108.88.

The Black Gold warrant is issued at 32.5 sen each on a basket of oil and gas stocks, comprising one share each in Scomi Group, SapuraCrest Petroleum, Petrochina Co, CNOOC Limited and China Petroleum and Chemical Corporation (Sinopec). At yesterday's closing prices, these shares were worth RM19.41 in total. Ten warrants are exerciseable into one basket of shares at an exercise price of RM19.38.

"By grouping a selection of thematic or sectoral stocks together, these basket call warrants allow investors to take a view on the value of a particular sector at a fraction of the aggregate value of the underlying shares. Launching 3 Treasures and Black Gold now is timely, as there is market demand for these products," says Lim Jong Hau, Head of Equity Derivatives Group at CIMB Investment Bank.
The constituents of the two basket call warrants comprise highly volatile stocks, making 3 Treasures and Black Gold very attractive to short-term investors. Lim explains: "Call warrants have unlimited upside potential, while the maximum loss is limited to the investment amount."

Comments - (Caveat - Currently the entire warrants & derivatives team at CIMB is not on my good books) The stocks that make up Black Gold are attractive. However, the bloody thing is at a discount even with a gearing of 4x. What does that tell you? It tells you people are not that keen on the basket of warrants. To follow the basket, you need to be able to calculate on a daily and even intra day basis. Its just a lot of work, imagine Sapcrest rising 10% in a day and CNOOC goes limit up, but Sinopec drops 4% - go calculate, and the dynamics changes a lot during the day.

Diversification, its not really diversification, all are oil & gas plays. When you put multiple counters of the same industry, its really an oil & gas exposure. Why the 5 companies? Why do you want the average returns of the 5? Maybe investors only like 3 of them, some the other two, some only one, etc.. - issuer is assuming they know best.

It will fail as trading warrant owing to the difficulties mentioned. You cannot follow the data, you cannot price them readily, you won't trade. But it has a lot of value since it has a low premium. Can buy and keep till maturity if you are bullish on oil prices for the next 6 months - if you try to trade in and out, you'd go bonkers valuing it. Hence the low valuation despite the grand names in each of the baskets.

Ditto for the 3 Treasures - what a name, definitely a dish at every Chinese restaurant. So who got spayed on the issuance of these two Z warrants? Those who got the warrants on distribution (yes, the well connected and rich buggers in town who always get the early placements), they got the warrants at a decent premium, now its lost some of its premium after barely a few weeks... dude, where's my premium?

p/s this posting has an alternative headline "How To Make Enemies Without Really Trying"

CIMB Warrants Team, Buck Up Pls

kam said...
Hi, Based on CNOOC RM0.44, Premium is 7.8%. Gearing 2.34.Tks

edwin said...
Dali, i think CIMB is really really wrong.. they made on fatal mistake in their calculations..When calculating the premium, they did not convert the warrant price into HKD (multiplied by ~2.25). Thats is why the premium for CCCC-C1 is ~25% on the digest while in actual fact it should be at about 3% at yesterday's closing prices.Sinopec-c1, should actually have a premium of 12% not a discount of 9%. Time to call CIMB and scold them!

Elizabeth wong :
Dear Dali
Sorry to be such a bother... Had another look at the cimb warrant digest, I think they made a boo boo with the prem info... of chlife c3 and c4 too...
Chlife C3 and C4 are at a prem of 19.5% and 9.1 % respectively. CIMB's fgures were a discount of 8% and 12%. Errors occur becuz warrant cost was not converted to HKD. CCCC-C1 discount is only 2.1%, contrary to what cimb is saying.. Incidentally, for cccc-c1, it is consistently traded at a small discount bcuz of shorter expiry, higher cost (ppl punt the lower cost warrnts it seems..) and as such, more often than not, it is a buyers' market. Holders cld give up on the market and go to osk and exercise, but if the discount is so small, why bother....
A quick scan of my list shows, 90% of the HK warrants are at gearing of around 2 times, so that is not much differentiation on that count.
Incidentally, u rated hscc-c1 as cheap... U are right in a way, basing on price prem, and the fantastic gearing. Underlying stock price although at a low of 13+ times, has not been performing, unlike BOC or ICBC I think. It is still not in the money yet. At yesterday's close of 40.5 sen, underlying stock price must increase to HKD163 to breakeven. While all those china H shares were climbing, HSBC has not caught on. What is the probability of warrnt holders of HSBC-C1 (at cost of 40.5 sen) get back their cost, to begin with???? HSBC-C1 will expire on 4 January 2008 and that is not a long way to go, is it? Could u pls share about the prospects of HSBC??
Your blog is highly respected and your views are being followed. Pls keep up the good effort as you have been a great resource to the investing community.
Thank you readers for highlighting CIMB's errors, about time I draw up my own excel file but very lazy la... CIMB, stop passing the buck of compiling IMPORTANT DATA to juniors, or are we to assume that the Unit Head/Manager also don't know how to calculate??!!

Obviously nobody checks them!!! Any CIMB dealers or remisiers even bother to tell the buggers off??? These data are inside a spreadsheet (I hope), surely somebody must spot the "wrong formula"???!!! How to trust CIMB?? I can close one eye if it was just ONE mistake, but its ALL OVER THE PLACE!!! Pretty embarresing, man. Yup, the top investment bank in the country ...

p/s posting on Expensive / Cheap covereds taken down as the figures relied upon (CIMB warrant digest) were largely incorrect ... my apologies for not double checking them myself...

In light of the revised figures, the best H-share warrants to hold would be Petrochina and CNOOC still.

What About The Issuers?

deborah said...
The HK china cover warrants hve really gone up a lot... I read comments of investors of local cw that they dont make money as the local market is perceived to be more controllable. My question is, with all the money that we hope to collect come maturity, wld it be a big dent on the income statement of the issuers?

greenbull said...
I am also curious of the fact that how it will affect the issuer whether the cws rise or fall in price? how do they get the extra cash to pay off the investors if the cw price goes up? i really hope someone will explain to new initiates like us. recently i bought ioicorp-cw and let it expire. I have still to receive the payout from them. i am supposed to get the difference in the mother and exercise price. would the return be more if i just sold the cw just before it expired? I am heavily involved in the H-shares cws, thanks to the recommendations by Salvatore. I sole some last few days but the price kept going up. I think i will just let it ride and watch them very closely. this is once in a life time opportunity to make bucks. the chances of making more far outweigh the unlikely possibility of losing all. i might even go in some of the laggards like sinopec, shenhua and cnooc.

hakiew said...
I think the issuer of the CW will do the following for risk management: 1) Keeping or trading part of the issues 2) Hedging by buying similar or more attractive options elsewhere

Comments - I have seen comments in chatboxes proclaiming the issuers of CWs as blood sucking tyrants, and that people should leave them alone, and that issuers are all locking in easy gains... etc... That is simply not true. In fact, issuing CWs is a pretty tough way to make money. There are a couple of houses who lost a bundle on the first few CWs because they did not hedge properly or even know what managing risks is all about. I had the opportunity to participate in the first big wave of warrants and convertible bonds as I was with one of the top 3 Japanese securities house in the late 80s. It was a madhouse, a lot things did not make sense, sometimes we were paying companies to issue bonds so that we can strip the warrants out to trade. We had to manage risks in a different way as it was a company's warrants. Managing risks in a call warrant or covered warrant is very different. A company issued warrant can be covered by just issuing shares whenever somebody wants to convert. An independent issuer has things very different indeed.

a) Can they lose money? Yes, issuers can and do lose a lot of money if they do not manage risks properly. E.g. you issue 10m Petrochina covered warrants convertible at HK15.00, and the market price was HK14.50 with a 6 month maturity. If it was 1 warrant for 1 share, you could price the covered warrant at a distribution price of HK$1.50. At HK$1.50, the premium would be 16.50/14.50 or 13.8%, with a gearing of 9.6x, very attractive and should have no problem placing out, though can probably place out at HK$1.70 even easily.

The issuer can cover their asses totally by buying 10m Petrochina shares prior to issuing the warrants (nobody really does that btw). Because that will only cover the upside risks. The issuer only gets HK$15m in IPO premium when selling the warrants, but you would have to cough up HK$145m to buy 10m shares. The HK$145m would be naked exposure, and you have to calculate the opportunity cost and exposure risk. Having the 10m shares can only cover your upside, but what if Petrochina shares drop by 20% in value come maturity date, that would be a book loss of HK$29m, totally wiping out the HK$15m premium.

If Petrochina goes up during the 6 months, you are safe and can sit pretty. Assuming a capital cost of 5% for the 6 months, the HK$145m purchase to hedge would have incurred interest expense of HK$7.25m. So in actual fact, its not a huge margin business for the risks to be assumed.

b) Dynamic hedging - Have some shares, have some covered on your books. This is the way to buy and sell volatility, sell when premium is high and vice versa. Its dynamic as exposure needs to be updated and careful monitoring is necessary. Some issuer do not sell all the proposed block during initial release, esp if they think it will be well received. Not to simplify things, there are also other instruments such as futures and options which can be used as imperfect hedges (close correlation in beta, but not 100%). Dynamic hedging is the preferred way to manage risks and also use limited capital exposure to maximise gains.

c) When do issuers make a lot of money? - Basically, the issuer locks in the premium on Day 1. The issuer has a comfort circle, which is issue price + conversions price = 1.50 + 15.00 = 16.50, as long as the warrant does not go beyond 16.50 on maturity they will make the difference. Naturally they will make even more when the warrants expire worthless.

d) For those who think that issuers will keep maybe 50% of supposed issue for themselves to sell later, and by that way will make supernormal gains - its a huge fallacy in thinking. Back to the Petrochina example, if say the issuer only sells 5m warrants on Day 1 at HK$1.50 = HK$7.5m, the issuer is selling at a premium of 13.8%. if the shares go up and the warrant reaches HK$3.60 after a few weeks and decides to sell the balance at HK$3.60, the issuer will get HK$18m. That looks to be "profits" but its not. When the warrant is HK$3.60, the actual premium may have dwindled down to 5% only, so in actual fact the second batch of Petrochina was issued at a huge disadvantage to the issuer!

e) As for hedging by buying other covereds at lower premiums, that may work but only if the maturity dates sync up. Plus its a sissy way to run a business, as you only piggyback. That kind of team will never amount to much.

Anyone wants to start a CW team, let me know, but its not going to be cheap... lol.

Trading Strategies With The Chinese Covereds

This is for readers who have been following, investing, punting and trading in the Chinese covered warrants for at least the last 3 months. These are not hard and fast rules, but guidelines:

a) If you haven't participated at all in H-shares or their covered warrants, to chase on "up days" would give you a lot more risks than the inherent rewards. If you haven't participated before, you may still go in but you have to time your entry levels - there will be down days, it won't be a straight line to 10,000 that's for sure. The excitement brings about a lot of volatility in these warrants now, so timing entry levels are crucial.

b) If you followed the advice of holding till maturity, you should keep at it because even if the market there corrects, you have ample room and ample time to jump off ship. So, its better to ride the trend till expiry. If things look shaky and you wish to take some profit, go ahead but don't put those chips back at higher levels.

c) Its more of a trading market over the last couple of days. The nature of the beast has changed. When investors were buying Petrochina warrants at 15 or 20 sen, it took forever to move but you are buying for the unfolding of the catalysts, now the catalysts are unfolding, hence you are supposed to reap the full benefit, do not shortchange yourself.

d) As one fellow blogger (Seng) would say, you can reduce your average cost on rising covereds such as Shenhua, Petro or CNOOC - you can use guidelines such as everytime it rises 50% from your cost level, you take 25% off the table, and so on. That's because we never know when the peak is, especially when it goes up in such a huge quantum over such a short period. There may be chances to re-enter at much lower levels.

e) Everything being equal, I don't see a major correction, any correction will be due to external factors which is beyond our grasp. The domestic liquidity situation and the insulated nature of the Chinese financial markets looks likely to sustain a strong market. The unfolding of the migration of H-shares to Shanghai is also supporting sentiment. Things that could rattle the Chinese markets will be fiscal in nature: rise in stamp duty, capital gains tax ...

e) The latest news has it that China is studying a plan to allow arbitrage in shares of companies traded on domestic and Hong Kong exchanges, said Tu Guangshao, vice chairman of the China Securities Regulatory Commission said in Beijing. This development give a boost to the Hong Kong market and H-shares in particular, and at the same time take some steam out of A-shares in Shanghai and Shenzhen. This plan should be a reality soon as it would help stem the rise in Shanghai & Shenzhen markets, without a major correction - something the administrators would really wish to see leading up till the Olympics. Tu's remarks came after the Hong Kong exchange closed.

As most of the international covered warrants on the Bursa are H-shares, this would further spike them up. How much good news do you need?

Scomi Marine, Back On Radar Screen

On September 4, 2007 EPF collected another 36.84m shares in Scomi Marine and now holds over 5% of the company. Catalysts include the probable sale of its 29% stake in CH Offshore Ltd. The sale should proceed because the price that can be obtained now will be very high on historical standards. Plus, Scomi Marine could put the proceeds to better synergistic use by focusing on specialty vessels such as barges, which gives better margin and sees better demand. The stake was acquired for 40 Singaporean cents a share. At the time of writing, Ch Offshore trades around S$1.00.

The move is likely because Scomi Marine has RM340.8m in debt. If we look at Scomi Marine's current share price of between RM1.21-1.25, the stake in CH Offshore alone is worth 60 sen minimum. The sale is also likely because even though it has a 29% stake, Scomi Marine does not really have a say in management. More importantly, it can only equity account the results and basically rely on dividends from CH Offshore for actual positive contribution to cash flow. It makes sens to own a lot more or to sell off the stake. The former is highly unlikely.

Another buffer is that the book value is almost 1 to 1 with its share price. For 2007, net profit should come in at RM77m or an EPS of 10.4 sen. The estd. net profit for 2008 is circa RM100m or 13.6 sen. Forward PER outlook is undemanding relative to share price.

Operationally things are not that good, its OK, but I wouldn't buy for their operations. I am interested in it as a probable catalyst in the works, for a swift trade. As the potential sale of CH Offshore should very likely lead to an exaggerated special dividend of 40-50sen. Target price when sale occurs, RM1.60.

Too Much, Too Fast, Too Soon?

The markets in H-shares and Hang Seng index have moved way too fast, too much in too short a period of time. While I am still bullish on H-shares, especially the chosen ones such as BOC, Petrochina, Shenhua, Sinopec, CCCC and CNOOC - the movements yesterday and today look dodgy and over exuberant (to borrow a phrase from Greenspan). PetroChina shot through the roof to become the world's second-largest company by market value. The market is now driven by psychology and the need NOT to be left behind - everyone knows that is not a good strategy.

There is a lot of greed in terms of people's price expectations. Greed is good, and greed is why people are in stocks, so no problem there. Its the expectations side, when expectations are very high, it creates mania. Plus, there has been an overwhelming belief that nothing can go wrong in China - that is probably the biggest short term worry, nothing can go wrong, nothing is supposed to go wrong, surely they will not let the markets fall during the important Congress meeting...??? When more and more participants believe that nothing can go wrong, who is there to take the shares from the buyers and owners? A market that is driven by bulls and bears in roughly equal ratio makes for a better balanced market and their rise is more sustainable.

The benchmark Hang Seng Index gained 2.44 percent or 702.41 points yesterday to close at a record 29,540.78 after touching an intraday high of 29,562. Hong Kong stocks were led by oil and energy plays on higher crude oil prices. Shares of PetroChina surged 13 percent to a record close of HK$18.78, boosting its market cap to HK$3.36 trillion, eclipsing General Electric's US$420.4 billion (HK$3.28 trillion). PetroChina is now second worldwide in value to Exxon Mobil Corp's US$518.5 billion. Meanwhile, CNOOC, China's largest offshore oil company, gained 9.75 percent to close yesterday at HK$14.86.

The H-share index jumped 671.32 points or 3.52 percent to close at a record 19,752.67. Market turnover was HK$174.46 billion, compared to Friday's HK$195.98 billion. The bull run that has driven the HSI 41 percent higher in less than two months is raising concerns of a bubble. The blue-chip barometer is now trading at 19.69 times earnings - the highest since March 2004. The H-share index is trading at 31.2 times earnings. But some fund managers continued to be bullish on Hong Kong stocks, noting they are still trading at big discounts to mainland shares. The Shanghai Composite Index gained 126.82 points or 2.15 percent to close at a record 6,030.09.

Strategy - While I am still bullish on H-shares, the risks have surged appreciably in just a couple of days. I would rate this a trading market. Lock in profits and look for lower entry prices later when there are mini-selldowns (they will come). I don't think there will be a massive correction despite the mania-like run-ups, but surely the volatility will be exaggerated. Lastly, you may trade but now is not the time to gear up, or go on margin. Still good, but have a healthy profit taking attitude, you cannot make all the money, ... some risks are not worth taking.