China’s Syndrome – ICBC Stock Exposure

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Jul 27 2007
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Of late, there has been great interest in foreign-stock Call Warrants among the Malaysian stocks investors, simply because the local growth stories could be boring or seems to be ending. Couple with the fact that the Composite Index is trading at the range of 1,300+ without the ability to bypass the 1,400 mark, the audience just got inpatient – people wants to see stocks move up so that they can make money.

So, when the Call Warrants which were based on foreign-stocks hit the bourse, people just scrambled into the counter without knowing what it is, resulting in the warrants being pushed up in 2-digit gains within the listing day. Little did these punters know what are the factors affecting the Call Warrants’ stock performance.

To refresh everyone, there’re basically two factors which will enable you to make money if you plan to play with this new Call Warrants. First if the respective foreign share price goes up, then the call-warrants will be in-the-money (a term which I hijacked from option trading). Second, if the foreign currency (of the original foreign-stock) appreciates against Malaysian Ringgit, then you’re in luck because the value of the Call-Warrant will have higher value.

The two investment banks which dominate the foreign-stock Call Warrants locally are CIMB (Commerce International Merchant Bankers, an investment bank of Bumiputra-Commerce Holdings Berhad (KLSE: COMMERZ, stock-code 1023)) and OSK. While CIMB likes to issue the Call Warrants in European-style, OSK prefers the American-style and there’re definitely differences between both styles, mind you.

Tired of CIMB, let’s talk about OSK which had issued some American-style foreign-stock Call Warrants. Among them are:

  • PetroChina Company Limited (PETROCH-C1, stock-code 0500C1)
  • China Mobile Limited (CHMOBIL-C1, stock-code 0501C1)
  • Industrial And Commercial Bank Of China Limited (ICBC-C1, stock-code 0502C1)

Due to the request from one of FinanceTwitter readers, let’s focus only on ICBC Call Warrant at this particular moment. ICBC-C1 was listed in local stock market on 5th June 2007 with approximately 50 million of floating shares. To summarize the important data an investor should know:

  • Expiry-date – 29th February 2008 (9 months)
  • Issue Price – RM0.12 per share
  • Exercise / Conversion Price – HKD 4.38
  • Exercise / Conversion Ration – 2 Call-Warrants for 1 ICBC-share

How Big is ICBC?

Industrial And Commercial Bank Of China Limited (HKG: stock 1398) is the mainland’s largest lender which was founded as a limited company on Jan 1st 1984. As of June 2006, it had assets of over RMB 7,000 billion (US$893 billion) with 18,764 outlets including 106 overseas branches and over 2.5 million corporate customers plus 150 million individual customers. ICBC was listed both in Hong Kong Stock Exchange and Shanghai Stock Exchange on 27th Oct 2006.

Already, ICBC overtook Citigroup as the new world’s biggest bank early of the week when its stocks’ surged to give it a market capitalization of $254 Billion versus Citigroup’s $251 Billion. However in terms of profitability, Citigroup is still the leader with income four times larger than its nearest competitor. But while Citigroup is only trading at 11 times its 2007 EPS (earnings per share), ICBC is trading at the hot and dangerous multiple of 28 times level. ICBC benefits mostly from the appreciation of Yuan against the Dollar.

ICBC recently was reportedly said it might announce more than 50 per cent growth in net profit for the first six months of the year 2007, as compare to a net profit of 25.14 billion yuan in the first half of 2006

Technical and Fundamental Analysis

A glance at the chart of ICBC since it went public will tell you that the immediate resistance is at HK$ 5.00 with the first level support at HK$ 4.40 and second level support at HK$ 4.00. The HK$ 4.40 became the support level after it was breached sometime in the middle of June 2007. So you should know how to trade this stock with this piece of information, if you’re trading the ICBC shares itself in Hong Kong Stock Exchange.

As highlighted above, ICBC is the equivalent of Malaysia’s Malayan Banking Berhad (KLSE: MAYBANK, stock-code 1155) so I’ll skip the portion of the fundamental. Suffice to say ICBC would not become a penny stock unless the whole China’s economy collapsed. Nevertheless, the stock is trading at an alarming high multiple of 28 times and this should be your main risk.

Should You Invest in ICBC Call Warrant?

As of today, 27th July 2007 (2:50pm trading time) ICBC is trading at HK$ 4.70 per share while ICBC-C1 (Call Warrant on KLSE) is trading at RM 0.135 per share. If you decide to convert the Call Warrant to ICBC share (or mother share), it will be:

  • (2 x RM 0.135) + (4.38 / 2) = RM 2.46 (assuming 1 RM = 2 HK$)
  • Translate into 2.46 x 2 = HK$ 4.92 per share
  • Which means you’re paying a premium of 4.68 % over its’ actual value.

But the premium of HK$ 0.22 (RM 0.11) is a small and attractive value to pay for the remaining time-value as the expiration is on 29th Feb 2008. If you compare to most Malaysia’s warrants which are way out of money, ICBC-C1 is indeed very attractive.

Supposing you’re greedy and would like to maximize your profit and you believe HK$ 4.40 will be a strong support and you intend to invest when it hit this level, nothing more and nothing less. So I’m sure you can work the conversion back the same way to see what’s the ICBC-C1 price that you should go in, can’t you?

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