Friday, December 14, 2007


China Rail-CW

It takes 6 months for us to come out with 4 or 5 China Mobile or Petrochina covered warrants. Guess how many covered warrants were issued in one day for one H-share company in HK?

46 ... forty-six warrants of China Railway Group started trading today, breaking the record of China Merchants Bank which had 38 warrants issued in one day last year. China Railway's share price yesterday surged to a record high HK$9.11 and hit a low of HK$8.45, with intraday volatility getting as high as 78 percent. The stock closed at HK$8.68, down 4 HK cents or 0.46 percent. Since its listing last Friday, China Railway has traded lowest at HK$6.70 from an IPO price of HK$5.78. Thanks to the 46 covered warrants, hedging activity and rebalancing will cause China Railway to trade actively and should account for at least half the trading volume.

The warrants' exercise prices range from HK$5.68 to HK$10.80 and are all call options, most of which are either at the price or near the price. Expiry dates range from six to 20 months. However, it almost look more like a stock call option with exercise price at HK$6, others at HK$7 and HK$8. Ho added that as the market is not bullish these days, it is difficult to estimate the response towards the warrants.

China Railway did not get perked up in a share price jump despite the numerous covered warrants being issued because the current environment was not as bullish - and many issuers probably hedged via some other instruments to control the gamma risk. Unlike China Merchants Bank and China Communications Construction which were listed in a bullish environment last year, their options and shares were well received. As a result, issuers have to buy more shares from the market for hedging, that caused both shares to jump appreciably.

China Railway is also allowed to be short-sold starting today. Short-selling does not mean the share price will be volatile as it may not be easy to borrow shares for short-selling. Having that many same call warrants with minor changes in the exercise price and time to expiry will mean that pricing will be aggressive, and the issuers themselves will be trading each other's issues even more aggressively. In fact, I would not be surprised if issuers account for more than 60%-70% of actual total volume for the entirety trading volume for these covered warrants.

Long way for local brokers before they catch up/on HK.

1 comment:

zentrader said...

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