H-SHARES: Mainlanders Buying - H-Shares Gone Wild, Going Wilder?

As of today April 9, 2015, H-shares have rallied 8.5% in the two days of trading since the close of April 2 2015. 

Some of the move is playing catchup to the move in Shanghai over the holiday (+3.3% for the Shanghai SE 180 Index). Some of it is generalrotation from A-shares which rallied strongly in Q1and the first few days of Q2 vs their under-performing cousins in HK. 

More of it is quite specifically due to a change in regulation in China allowing fund management companies to trade through the Shanghai-HK Connect (SHKC) without a QDII license.

Another set of Mainlanders are new buyers under the Shanghai-HK Connect Programme.

There have been some big moves in 2-days. CSR/CNR were up 50+% on the approval of their merger. The 50 cheapest SHKC-eligible Hs (in terms of H/A-share price ratio) not including CSR and CNR gained an average of 20% the last 2 days.

But... there are still a lot of big discounts.  There are 50 Shanghai-parent-listed H-shares representing US$1.4 trillion of total market cap till trading at a discount of >20%. There are 26 names representing US$288bn of market cap trading at a >40% discount.

It is a no-brainer for many Chinese fund management companies which are obliged to own shares to replace Shanghai-listed A-shares with H-shares. Transaction taxes are low. Dividends are higher (a 2% dividend yield on an A-share is a 3.3% dividend yield on the H-share when it is trading at a 40% discount). If you have to own, buying the same fundamental exposure for 50cts on the dollar makes a lot of sense. 

The same buyers who bought HKD 21bn the last two days will likely buy a fair bit more. 

CONCLUSIONS:

• Mainland Chinese long-only financial investors can now freely trade the H-share/A-share spread without worrying about quota, licenses, or whatnot. All they have to worry about is beating other investors through the door.
• While the $288bn and $1.4trln numbers above indicate huge scale, the door is actually smaller than you think. The HK-listed market-caps of the >20% discounts is $208bn (half of which is 4 stocks - Petrochina, Sinopec, China Life, and China CITIC Bank). The HK-listed market cap of the >40% discount names is US$41bn. 6mo average ADV for the >40% discount names is US$10mm but only 19 of the 26 trade more than US$5mm a day over the last 6 months (when granted, the volumes were low on those deep discount names).
• Discounts on the widest names are likely to narrow further. 
• HSCEI has a lot less to gain than the widest discount names.
• A-shares will be sold to implement this trade.
• Mainland Chinese long-only financial investors can now freely trade the H-share/A-share spread without worrying about quota, licenses, etc.