China A-H Shares

HK H shares continued a stunning ascend yesterday, adding more than 2.5%. Over the week, the Hong Kong China H-shares index has added more than 10%. From a purely technical point of view, the huge spike at the open followed by a closing near the opening levels may suggest that we are in a capitulation stage, with ‘all buyers already in’. This may as a result see some near-term profit taking. Nevertheless, trading the spread between the A-H shares remains an attractive concept. The narrowing of the premiums of A to H shares is essentially inevitable, as the convergence of the price difference for a company’s share traded at different venues presents clear arbitrage opportunities. In the case of the A-H shares rate at which this spread will ‘completely’ close would be when both tranches become fully fungible. Unlike the linear deterioration of time premium for derivatives such as warrants and options, the rate of narrowing for the A-H spread depends more on the pace of opening of the finance and securities sector in China which is probably a more unpredictable path. With this random pace, even the most humble of traders will be able to identify trading opportunities along the way.

Noble in muddy waters

A fresh assault was made on Noble yesterday. This time the aggressor is reputed short seller Muddy Waters, who has declared a commercial interest in seeing Noble’s stock sell off. While Muddy Waters concurred with most of Iceberg’s previous allegations, their own report only managed to offer new angles that were at best marginal compared to those of Iceberg’s. The damage was done, however, with Noble’s stock hammered as much as 8% at one stage. With Muddy Waters declaring having an open short position on the stock, they may have been buyers in the market yesterday, progressively covering their shorts. More than 130million shares in Noble traded yesterday. As we have maintained in our previous reports on Noble, the biggest risk for their business remains with the perception that key counterparties may have. This group could include bankers and trade creditors, with any unfavorable change in credit lines or terms of trade being a larger risk than the negative moves in share price. If we use Noble’s Credit Default Swap as gauge for the risk perceived by this group of stakeholders, they certainly did not show any heightened state of alarm overnight. Noble’s 20/06/20 CDS closed almost unchanged at a level of around 343. This compares to a recent high of 480 reached during the time of Iceberg’s third report.

Chart of the Day- Fast Retailing

Following our report on Wednesday highlighting the ‘new breed’ of Japanese companies making their mark in the global arena competing against the world’s best companies, Fast Retailing, the parent behind the Uniqlo brand, hit record highs this morning after guiding up their forward profit forecast by as much as 20%.
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