Advertisement
Advertisement

Small players miss Chalco rally

Retail investors find little time to buy shares below the pre-placement price

Aluminum Corp of China (Chalco)'s share price rose as much as 8.94 per cent yesterday from its pre-share placement price despite an 8 per cent discount to institutional investors at its Tuesday share sale.

Many retail investors were disappointed with the rise, which left them with less than 25 minutes after the market's opening to pick up shares below the HK$6.15 pre-placement price.

After opening at HK$5.85 - 3.39 per cent higher than the placement price of $5.658 - the counter traded as high as $6.70 before ending the day at $6.35.

One reason for the strong performance is that institutional investors cannot sell their share allocations before January 16, giving punters an excuse to drive the price above the pre-placement level.

Unlike share placements by overseas-registered red chips and local firms, which allow investors to trade shares the next day, it takes six to 14 days for newly issued H shares to start trading, due to regulatory procedures.

But why did Chalco's share price overshoot its record closing high on Monday when H shares in general suffered profit taking yesterday?

Could it be the hype created by the HK$3.11 billion placement, which is the largest H-share secondary placement ever?

Analysts recently raised their target prices to HK$7 or above, citing a continued rosy outlook for the price of alumina and an 'undemanding' price-earnings valuation of about 13 times for this year's estimated earnings. The removal of the share placement overhang became the latest sales pitch yesterday.

However, the risk for investors who bought into the industry without understanding the fundamentals is that the surging price of alumina cannot be sustained - metal prices are cyclical.

Just over a year ago, alumina traded for half the present price of US$350 a tonne and while some analysts have predicted it will surpass the $420 seen in 2000 and break through the $450 level this year, chances are high it will come down just as quickly when global supply tightness eases.

While Chalco is a big beneficiary of high alumina prices, the risks it faces need to be considered.

After the placement yesterday, Chalco chief financial officer Chen Jihua admitted the company would 'certainly' be affected by the central government's decision to raise wholesale power prices by 0.7 fen per kilowatt-hour.

However, he added that the degree of impact was still under internal assessment because the company enjoyed preferential tariffs granted by the government based on 2001 prices.

Meanwhile, high alumina prices have also squeezed profit margins.

While one can be positive over possible rises in alumina prices in the future, Chalco's costs and potential constraints on production amid an expected worsening of power shortages this year need careful examination.

Market response - B7

Post