Research from Quam Securities, Quam Securities

Quam Securities Research

Research from Quam Securities

Quam Securities

Since its inception in 1986, Quam Securities Limited (Quam Securities) has grown to become one of the few mid-tier securities brokerages in Hong Kong with global execution capabilities for both private and institutional clients. It boasts a well-established network in Greater China including Taiwan and in major world markets through the Global Alliance Partners (GAP). Quam Securities is well-positioned not only to harness and drive business within the China Tonghai International Financial Limited but also between China and the world markets.

Thematic (Sector/Industry)

<ul style="list-style-type: disc;"><li>Shipping rates continued their downtrend last week with the WCI Composite Container Index fell 5.4% w/w and the rate for one of the mostly watched key routes, SH-to-LA falling 9.2%</li><li>Dry bulk rates fell even more with the Baltic Dry Bulk Index falling 15.4% w/w and the latest level of 1082 basically normalized to pre-pandemic levels</li><li>Crude oil tanker rate was flat w/w and continued to outperform the other two sectors</li></ul>

Shipping rates continued their downtrend last week with the WCI Composite Container Index fell 5.4% w/w and the rate for one of the mostly watched key routes, SH-to-LA falling 9.2%Dry bulk rates fell even more with the Baltic Dry Bulk Index falling 15.4% w/w and the latest level of 1082 basically normalized to pre-pandemic levelsCrude oil tanker rate was flat w/w and continued to outperform the other two sectors

Tactical Trade Idea – Shipping Sector : Shipping Rates Remained Under Pressure

SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Asia’s leading multi-asset exchange

Singapore Exchange Ltd (SGX)

Singapore Exchange is Asia’s leading and trusted market infrastructure, facilitating the exchange of capital and ideas to create value for people, businesses and economies. As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, SGX is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services.

With about 40% of listed companies and over 80% of listed bonds originating outside of Singapore as well as established linkages across the region and in Europe, SGX is Asia’s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN.

As Asia’s pioneering central counterparty, SGX is globally recognised for its risk management and clearing capabilities, and was one of the first globally to adopt the Principles for Financial Market Infrastructure.

Headquartered in AAA-rated Singapore, SGX has over 800 employees including offices in Beijing, Chicago, Hong Kong, London, New York, Mumbai, San Francisco, Shanghai and Tokyo.

Equity Bottom-Up

Yangzijiang Shipbuilding / Equity Bottom-Up

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Since Yangzijiang Shipbuilding announced an agreement with SITC International Holdings Co Ltd to build and deliver a dozen 1,800 TEU containerships on 31 Aug, the shipbuilder’s share price has gained 8%, with the FTSE ST China Index gaining 7% and the FTSE China A50 Index gaining 3%. 
	 </li>
	<li>
Prior to the announcement of the US$126 million agreement with SITC, the price ratio of the benchmark FTSE China A50 Index to Yangzijiang Shipbuilding was trading at 11-year highs. While the two markets do not maintain a strong correlation, their price ratio reverted to the 3-month mean within two weeks. 
	 </li>
	<li>
Investors that bought Yangzijiang Shipbuilding Share Futures and sold SGX FTSE China A50 Futures on 1 Sept, then closed the position when the price ratio of the two underlying markets reverted to its 3 month mean on 11 Sept, generated a 35% return (excl. trans fees) on initial margin requirements. 
	 </li>
</ul>
Yangzijiang Shipbuilding (Holdings) (“YZJ”) is Singapore’s twentieth most traded stock in 2020. The stock has generated a decline of 8.0% decline in the year-to-date, with an average daily turnover of S$23 million. Recent years have seen YZJ consistently rank among the Straits Times Index (“STI”) stocks with the highest daily trading ranges in terms of basis points (“bps”). YZJ has averaged 300 bps in daily trading range so far this year. Experienced investors are also now able to trade the stock in the form of Futures Contracts which provided a recent opportunity to trade the relative value of YZJ to the FTSE China A50 Index (“China A50”). Yangzijiang Announced US$126 New Order on 31 Aug 
Following the market close back on 31 August, YZJ announced it had entered into an agreement with SITC International Holdings Co Ltd (“SITC”) for the building and delivery of twelve 1,800 Twenty-foot Equivalent Unit (“TEU”) containerships (click <a href="https://links.sgx.com/1.0.0/corporate-announcements/6Z7F5I9BZCPVPKIL/74d13dd811c6273726b8564d932e68bc093f96ea753c8bcf03c2e49c2c6153e3">here</a> for more). The Group noted:

 

<ul>
<li>Out of the orders for the twelve vessels, six were firm orders worth US$126 million in total, and were accompanied by six option orders for identical vessels, to be exercised in three stages, two options each;</li>
	<li>If all exercised, this batch of orders would be worth US$252 million in total. The six firm orders will be delivered between 2Q2022 and 1Q2023;</li>
	<li>Further to the new order update in the Group’s financial announcement for the first half of FY2020 on 5 August (click <a href="https://links.sgx.com/1.0.0/corporate-announcements/7ZM2D0CQWVKWLWP1/3b9182ae73649b9ae34314898504292d456d5a001d6d1decf8b1f566565d3a55">here</a>), the Group had also secured orders for two 82,000 DWT dry bulkers; and</li>
	<li>With these latest order wins, year to date in 2020, the Group had secured new orders for 23 vessels worth approximately US$700 million (not considering the value of the option orders).</li>
</ul>
 

From the end of 2019 through to 31 August, YZJ had generated a decline of 14.5% in total return. A subsequent 7.7% gain from 31 August through to 12 October has trimmed the year to date decline in total return to 8.0%. 
With China contributing 57% of the Group‘s FY19 (ended 31 Dec) revenue, the Jiangsu-based shipbuilder maintains a low correlation to the benchmark China A50. However, at the time of the 31 August announcement the price-ratio of YZJ was trading at 11-year highs, and it took just two weeks for the price-ratio of the China A50 and YZJ to revert back to its 3-month mean. Price Ratio Spread of +2 Sep YYZJ/-1 CN Between 1 and 11 September  
The USD denominated China A50 futures have accounted for more than half of the total volume of SGX-listed equity index futures contracts over the first nine months of 2020. On 28 August, two sessions prior to the aforementioned YZJ announcement, the price ratio (17,382) of the China A50 (15,818) to YZJ (0.910) was stretched to an 11-year high. 
Following the 31 August announcement, for experienced that anticipated that the China A50/YZJ price ratio would revert lower, or that the YZJ share price would see some catch-up to the China A50, the investor would have bought YZJ futures (“YYZJ”) on the 1 September close, while selling the China A50 futures (“CN”). This focused the risk-and-reward of this educative trade example to the difference between the two markets, with an added USD/SGD exchange rate risk. On 1 September, YZJ ended at S$0.93 (with YYZJ at 0.929) and the China A50 ended at 15,767 (with CN at 15,725). The price ratio of the two underlying markets was 16,954. 
To broadly match notional values, the investor would buy 2 September YYZJ and Sell 1 Sep CN. Note assuming an SGD/USD exchange rate of 1.36 on 1 September, the relative value trade would have had an excess 7.0% weightage to the CN leg, as the notional value of the CN leg at S$21,386 (after USD/SGD conversion) was higher than the notional value of S$18,580 for the YYZJ leg.
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 <img src='https://api2.sgx.com/sites/default/files/2020-10/Capture%201.PNG' alt='Price Ratio Spread of China' />
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 <div class='content-caption'>Price Ratio Spread of China</div>
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On 11 September, the price ratio (15,829) of the China A50 (15,355) to YZJ (0.97) had moved from near 11 year highs to below the 3-month mean (16,012). 

 

<ul>
<li>The YYZJ leg had generated a 0.04 point return, with the futures moving from 0.929 to 0.969, which represented an S$800 return based on the two contracts and a standard contract multiplier of S$10,000 per contract.  
	 </li>
	<li>The CN leg also generated a return of 452.5 points, based on the selling the contract at 15,725.0 and buying back the contract at 15,272.5. With the one contract and a US$1 multiplier, this represented a US$452.50 return, which was equivalent to S$620 based on the prevailing exchange rate on 11 September of 1.37. 
	 </li>
	<li>Note the USD/SGD exchange rate appreciated from 1.36 to 1.37 over the eight trading sessions, whereas had the exchange rate fallen, this would have adversely impacted the US$452.50 return on this leg when converted back to SGD.</li>
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<figure>
 <img src='https://api2.sgx.com/sites/default/files/2020-10/Capture_5.PNG' alt='Date' />
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 <div class='content-caption'>Date</div>
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<html><body>As detailed above, the indicative return of relative value trade was S$1,420 which does not include transaction fees. The initial margin requirement to establish the trade was S$4,078, comprising S$2,420 for the YYZJ leg (S$1210 x 2) and US$1,210 for the CN leg. Thus the S$1,420 return represented a 35% return on the initial margin requirement. Price Ratio Spread of +7 Sep YYZJ/-3 CN Between 1 and 11 September  
In the above example the relative value trade was established with an excess 7.0% weightage to the CN leg. Altenratively the experienced investor could have established a more balanced pairs trade with just a 0.6% excess weitage to the YYZJ leg, through buying 7 Sep YYZJ and selling 3 Sep CN as tabled below. The indicative return excluding transaction fees on the initial margin requirement was also 35%.</body></html>

<figure>
 <img src='https://api2.sgx.com/sites/default/files/2020-10/Capture%202.PNG' alt='Date' />
 </figure>
 <div class='content-caption'>Date</div>
<!DOCTYPE html PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN" "http://www.w3.org/TR/REC-html40/loose.dtd">
<html><body>Note Individual traders need to be Specified Investment Products (SIP) qualified to trade Futures Contracts - click <a href="http://edm.sgx.com/a/hBfPJ%24KB86%24MfB92l9XAAAAAANm/link11">here</a> for course details. 
SIPs are financial products with structures and features that may be more complex than others and require more knowledge to understand. Futures markets are also are also leveraged products and are hence for investors who are willing to accept the risk of substantial losses exceeding the principal investment amount, possibly within a very short timeframe.</body></html>





Since Yangzijiang Shipbuilding announced an agreement with SITC International Holdings Co Ltd to build and deliver a dozen 1,800 TEU containerships on 31 Aug, the shipbuilder’s share price has gained 8%, with the FTSE ST China Index gaining 7% and the FTSE China A50 Index gaining 3%.  
	 
	
Prior to the announcement of the US$126 million agreement with SITC, the price ratio of the benchmark FTSE China A50 Index to Yangzijiang Shipbuilding was trading at 11-year highs. While the two markets do not maintain a strong correlation, their price ratio reverted to the 3-month mean within two weeks. 
	 
	
Investors that bought Yangzijiang Shipbuilding Share Futures and sold SGX FTSE China A50 Futures on 1 Sept, then closed the position when the price ratio of the two underlying markets reverted to its 3 month mean on 11 Sept, generated a 35% return (excl. trans fees) on initial margin requirements.  
	 

Yangzijiang Shipbuilding (Holdings) (“YZJ”) is Singapore’s twentieth most traded stock in 2020. The stock has generated a decline of 8.0% decline in the year-to-date, with an average daily turnover of S$23 million. Recent years have seen YZJ consistently rank among the Straits Times Index (“STI”) stocks with the highest daily trading ranges in terms of basis points (“bps”). YZJ has averaged 300 bps in daily trading range so far this year. Experienced investors are also now able to trade the stock in the form of Futures Contracts which provided a recent opportunity to trade the relative value of YZJ to the FTSE China A50 Index (“China A50”).  Yangzijiang Announced US$126 New Order on 31 Aug  
Following the market close back on 31 August, YZJ announced it had entered into an agreement with SITC International Holdings Co Ltd (“SITC”) for the building and delivery of twelve 1,800 Twenty-foot Equivalent Unit (“TEU”) containerships (click here for more). The Group noted:

 


Out of the orders for the twelve vessels, six were firm orders worth US$126 million in total, and were accompanied by six option orders for identical vessels, to be exercised in three stages, two options each;
	If all exercised, this batch of orders would be worth US$252 million in total. The six firm orders will be delivered between 2Q2022 and 1Q2023;
	Further to the new order update in the Group’s financial announcement for the first half of FY2020 on 5 August (click here), the Group had also secured orders for two 82,000 DWT dry bulkers; and
	With these latest order wins, year to date in 2020, the Group had secured new orders for 23 vessels worth approximately US$700 million (not considering the value of the option orders).

 

From the end of 2019 through to 31 August, YZJ had generated a decline of 14.5% in total return. A subsequent 7.7% gain from 31 August through to 12 October has trimmed the year to date decline in total return to 8.0%.  
With China contributing 57% of the Group‘s FY19 (ended 31 Dec) revenue, the Jiangsu-based shipbuilder maintains a low correlation to the benchmark China A50. However, at the time of the 31 August announcement the price-ratio of YZJ was trading at 11-year highs, and it took just two weeks for the price-ratio of the China A50 and YZJ to revert back to its 3-month mean.   Price Ratio Spread of +2 Sep YYZJ/-1 CN Between 1 and 11 September   
The USD denominated China A50 futures have accounted for more than half of the total volume of SGX-listed equity index futures contracts over the first nine months of 2020. On 28 August, two sessions prior to the aforementioned YZJ announcement, the price ratio (17,382) of the China A50 (15,818) to YZJ (0.910) was stretched to an 11-year high.  
Following the 31 August announcement, for experienced that anticipated that the China A50/YZJ price ratio would revert lower, or that the YZJ share price would see some catch-up to the China A50, the investor would have bought YZJ futures (“YYZJ”) on the 1 September close, while selling the China A50 futures (“CN”). This focused the risk-and-reward of this educative trade example to the difference between the two markets, with an added USD/SGD exchange rate risk. On 1 September, YZJ ended at S$0.93 (with YYZJ at 0.929) and the China A50 ended at 15,767 (with CN at 15,725). The price ratio of the two underlying markets was 16,954.  
To broadly match notional values, the investor would buy 2 September YYZJ and Sell 1 Sep CN. Note assuming an SGD/USD exchange rate of 1.36 on 1 September, the relative value trade would have had an excess 7.0% weightage to the CN leg, as the notional value of the CN leg at S$21,386 (after USD/SGD conversion) was higher than the notional value of S$18,580 for the YYZJ leg.



      
    
    Price Ratio Spread of China


On 11 September, the price ratio (15,829) of the China A50 (15,355) to YZJ (0.97) had moved from near 11 year highs to below the 3-month mean (16,012). 

 


The YYZJ leg had generated a 0.04 point return, with the futures moving from 0.929 to 0.969, which represented an S$800 return based on the two contracts and a standard contract multiplier of S$10,000 per contract.  
	 
	The CN leg also generated a return of 452.5 points, based on the selling the contract at 15,725.0 and buying back the contract at 15,272.5. With the one contract and a US$1 multiplier, this represented a US$452.50 return, which was equivalent to S$620 based on the prevailing exchange rate on 11 September of 1.37. 
	 
	Note the USD/SGD exchange rate appreciated from 1.36 to 1.37 over the eight trading sessions, whereas had the exchange rate fallen, this would have adversely impacted the US$452.50 return on this leg when converted back to SGD.




      
    
    Date

As detailed above, the indicative return of relative value trade was S$1,420 which does not include transaction fees. The initial margin requirement to establish the trade was S$4,078, comprising S$2,420 for the YYZJ leg (S$1210 x 2) and US$1,210 for the CN leg. Thus the S$1,420 return represented a 35% return on the initial margin requirement.  Price Ratio Spread of +7 Sep YYZJ/-3 CN Between 1 and 11 September   
In the above example the relative value trade was established with an excess 7.0% weightage to the CN leg. Altenratively the experienced investor could have established a more balanced pairs trade with just a 0.6% excess weitage to the YYZJ leg, through buying 7 Sep YYZJ and selling 3 Sep CN as tabled below. The indicative return excluding transaction fees on the initial margin requirement was also 35%.


      
    
    Date

Note Individual traders need to be Specified Investment Products (SIP) qualified to trade Futures Contracts - click here for course details.  
SIPs are financial products with structures and features that may be more complex than others and require more knowledge to understand. Futures markets are also are also leveraged products and are hence for investors who are willing to accept the risk of substantial losses exceeding the principal investment amount, possibly within a very short timeframe.


Recent Relative Value Trade with Yangzijiang & the FTSE China A50 Index 

Hong Kong

SITC International Holdings Company Ltd. offers marine shipping services.  The Company offers container liner shipping, freight forwarding, customs clearance, shipping agency, and ship brokerage services.  SITC operates in Asia.

SITC International (1308 HK)

Tactical Trade Idea – Shipping Sector : Shipping Rates Remained Under Pressure

Dry bulk rates fell even more with the Baltic Dry Bulk Index falling 15.4% w/w and the latest level of 1082 basically normalized to pre-pandemic...

Quam Securities

Recent Relative Value Trade with Yangzijiang & the FTSE China A50 Index

Since Yangzijiang Shipbuilding announced an agreement with SITC International Holdings Co Ltd to build and deliver a dozen 1,800 TEU...

Singapore Exchange Ltd (SGX)