Failed in Hong Kong? Try again in Singapore

PUBLISHED : Thursday, 22 March, 2012, 12:00am
UPDATED : Thursday, 22 March, 2012, 12:00am

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Remember when people used to talk about FILTH?

If you don't, then FILTH was an acronym for 'Failed In London, Try Hong Kong'.

It was used as a handy collective noun for all those British bankers, advertising types and - yes - even journalists, who, having found the competition back home a little too stiff for their meagre talents, decided that their careers might have a better chance of living up to their expectations if they relocated to Hong Kong.

Well, the world has changed since then. These days Hong Kong is more likely to be the first choice, whether for launching a career, or a stock market offering.

And if you can't make a success of things here, then in all probability you'll move on somewhere else.

These days, it's not so much FILTH as SIHTS: 'Sank In Hong Kong, try Singapore'.

And it doesn't just apply to underperforming Brits. Even Li Ka-shing is at it.

This week it emerged that the one-time Superman of Hong Kong's stock market is to have another bash at launching a yuan-denominated initial public offering for a real estate investment trust.

And after last April's offering for his yuan-denominated Hui Xian reit failed abysmally to set the Hong Kong market alight, this time around he's planning to launch his new offering on the Singapore stock exchange.

It will be interesting to see whether Singapore investors are any more gullible than their Hong Kong counterparts, who wisely proved resistant to the nonsense sales pitch put forward for the Hui Xian deal.

Hui Xian was sold as a doubly attractive stock. Investors were told it would not only offer them exposure to the attractive yields generated by the reit's underlying property portfolio, they were also led to believe that because the stock was denominated in yuan, they would benefit additionally from any appreciation in the Chinese currency.

As Monitor explained at the time, this pitch was not only plain wrong, it also displayed a worrying degree of financial ignorance.

That's because, provided there is plenty of liquidity about, the currency in which a stock is denominated has no effect at all on its performance.

That might sound screwy at first, but if you think, it makes good sense.

Stocks, including reits, are valued according to their earnings. So, let's imagine a mainland company with Hong Kong dollar-denominated H shares listed on the Hong Kong stock exchange.

If our company is valued at a price-earnings ratio of 10, and generates earnings of 10 yuan a share, at the current exchange rate its earnings per share will be HK$12.29, which means the stock will be priced at HK$122.90.

Now imagine the yuan appreciates by 5 per cent. The Hong Kong dollar value of its earnings per share will now be HK$12.90. Because the stock is still valued at a price-earnings ratio of 10, its price will promptly rise to HK$129 - a gain of 5 per cent.

In other words, any appreciation of the yuan will automatically be reflected in the stock's price, even if the company's shares are denominated in Hong Kong dollars. As a result, there is absolutely no advantage for investors in buying yuan-denominated stocks.

In fact there could even be a disadvantage, should the yuan's liquidity in Hong Kong drain away.

Hong Kong investors were duly unimpressed by last year's offering for the Hui Xian reit. As the first chart (left) shows, its shares have woefully underperformed its closest counterpart on the Hong Kong exchange, the Hong Kong dollar-denominated Yuexiu reit.

In response to this failure, Li is taking his next yuan-denominated reit offering to Singapore, in the hope that investors there will fall for the supposed currency attractions of its shares and reward him with a premium valuation.

It's doubtful whether they will. In the last few months, investor enthusiasm for holding yuan investments has abated. As the second chart below shows, by the end of January the pool of yuan-denominated bank deposits in Hong Kong had shrunk from its November high by 8 per cent.

With senior mainland officials declaring that the yuan is now fairly valued in the foreign exchange market, it is hard to imagine that investors in Singapore will be queuing up to buy reit shares simply because they are denominated in yuan.

It looks as if this 'sank in Hong Kong, try Singapore' offering is equally likely to sink in Singapore too. As our more anagrammatically-minded readers will already have worked out, SIHTS is about right.