Play on price gap of A and H shares no easy bet

PUBLISHED : Monday, 04 August, 2014, 3:40am
UPDATED : Monday, 04 August, 2014, 4:43am

The valuation gap between dual-listed mainland companies is one powerful trading concept that for years has held the allure of a quick buck.

Contrary to expectations, it has been a frustrating trade.

All things being equal, share prices should move closer together. The company accounts are, after all, identical and every sign points to the mainland further liberalising its financial services sector, which would make it easier for foreign investors to trade mainland stocks.

Historical data shows a different picture. While the trading bands between dual-listed mainland equities, so-called A and H shares, have narrowed over the past six years, there is no sure guarantee that prices will move in a set direction.

A case in point - one might have expected the band to have narrowed after April's announcement that a planned cross-border trading system would allow investors in Hong Kong and the mainland to transact more freely.

The opposite took place. The Hang Seng China AH Premium Index, a gauge of the price difference between stocks traded in the two markets, generally drifted lower this year, meaning the premium paid for H shares over A shares got larger. The index closed at 92.76 on Friday. A score of 100 means stocks in the two markets are trading at par.

"It is not so easy to say the premium should narrow or expand. It is not straightforward. It is not intuitive," said Patrick Ho, an analyst at UBS Wealth Management.

A standard trade when mainland stocks look cheap is to short the H share and go long on the A share.

An analysis by Credit Suisse advised investors to buy the A shares of property giant China Vanke, Anhui Conch Cement and China Pacific Insurance Group, as their H shares trade at double-digit premiums. The report showed some convergence among small-cap stocks since April, but not the big-caps.

Research by investment bank Jefferies likewise showed no specific trend towards convergence. It likes Jingwei Textile Machinery. With growing profit margins, the H share is undervalued by 45 per cent to the A share.

Analysts warn against seeing convergence as a sure bet.

Mainland money managers would analyse a stock from a different perspective and come to different conclusions about its value, said Value Partners fund manager Philip Li.

Li also said mainland traders tried to second-guess government policies, while in Hong Kong, investors had to be more international in their analysis.

The mainland markets also remain closed to overseas investors apart from several tightly controlled investment quotas.

Even after the October launch of the new trading platform, daily trades would still be subject to a quota system, and the overall impact would be limited, Li said.