Lai See

PUBLISHED : Wednesday, 15 June, 2011, 12:00am
UPDATED : Wednesday, 15 June, 2011, 12:00am


RTO stocks are bad news, no matter how you cut it

Analysts have been musing, on behalf of their increasingly anxious clients, over how to deal with Chinese reverse take-over (RTO) stocks listed in the US that have a disconcerting tendency of going from outperformer to non-performer overnight. One solution that was proposed to us - slightly tongue in cheek - was to short as many of the these stocks as possible as an equally weighted diversified basket. Assume that one in 10 of these are real companies and that the stock price rises about fivefold over time, which would take the price-earnings multiple from three to four times up to 15 to 20 times. We also assume that the rest are fake and will lose 80 per cent of their value. However, the overall trade, we are told, could still make a not indecent 30 per cent.

Another way of tackling these stocks, perhaps, is to short a diversified basket of these RTOs that share common fraud characteristics such as mismatches between the Chinese SAIC and the SEC filings, or dilutive stock offerings despite supposed large cash balances, and so on. Either way, the bad news shows no sign of dissipating.

It's Prada, it's expensive

There appears to be a significant divergence of opinion among analysts over the value of Prada's stock. The company says it will price its shares within a range of HK$36.50 to HK$48 a share for its IPO, which is reportedly four times subscribed. Meanwhile, Philip Securities has a target of HK$28.50 over the next 12 months, which is about 22 per cent to 42 per cent lower. Unsurprisingly it does not recommend subscribing to the IPO, calling it 'an aggressively priced luxury brand'. At the indicative trading range, Prada is on a forward price earnings ratio of 26 to 34 times, way higher than the average of 20 times for luxury brands such as Hermes and LVMH. Not only is Prada looking to get a high price for its stock, it's also succeeded in getting investment banks to accept a lower commission.

Its banks, Goldman Sachs and CLSA, will share a base fee of 1.2 per cent, according to Reuters, which is believed to reflect the lower fees in Italy but also the company's clout, as investment banks can extract higher fees in Hong Kong. Samsonite paid 3.25 per cent of its proceeds, while Resourcehouse had apparently agreed to 4.3 per cent.

So why should investors pay such a hefty premium for Prada? It has for years been in the business of persuading people to pay far higher prices than they need to for bags, shoes and dresses, on the pretext these items bestow prestige and status to those that purchase them. So maybe Prada thinks it can do the same with its stock price.

Patten of India fame

He may be known as Lord Patten, he may be the chancellor of Oxford University, and many remember him as the last governor of Hong Kong. But in India Chris Patten is better known as 'Alice Patten's Dad', according to The Telegraph in Calcutta. Alice Patten achieved modest fame as the daughter of Chris Patten when he was in Hong Kong. But her celebrity status hit the stratosphere in India following her leading role alongside Soha Ali Khan in the Bollywood smash hit Rang De Basanti. In one of those curious India-Oxford situations, it so happens that Soha went to Balliol College, Oxford, as did Soha's father, the former Indian cricket captain, the Nawab of Pataudi. Needless to say he was known to Alice Patten's dad, who also went to Balliol.

China helps those who help China

If there's one way to make China angry, it's by questioning the purity of its foreign policy. In the bad old days of the cold war, China and Taiwan both bought diplomatic recognition. Now China is accused of being just another exploitative colonialist taking advantage of the third world as it seeks cheap mineral resources and markets for its goods. The accuser this time? None other than Hillary Clinton, who said at the weekend that China was fostering a 'new colonialism' and offered US help as a partner in development, Reuters reported. 'When people come to Africa to make investments, we want them to do well but also want them to do good,' she said. 'We saw that during colonial times it is easy to come in, take out natural resources, pay off leaders and leave.' Yes, indeed. In America's case, shiploads of Africans were taken to America for new careers in the Deep South.

Beijing has bristled at the suggestion, saying China is far from a coercive and exploitative force in Africa. 'China and the countries of Africa were historically the victims of colonial occupation and oppression, and they all truly know what colonialism was,' a foreign ministry spokesman said yesterday.

Still, it's a little odd that China seems to be more friendly with those countries with the best mineral resources.