This is another relatively quick post for you, since the email wasn’t exactly clue-laden.
This comes in from J. Christof Amberger, of the Taipan newsletters, and it’s a tease for the secret backdoor into Chinese IPO’s.
And more specifically, it’s a tease for a special report about one company that is poised to go public on the Shanghai Exchange in the near future — with an expected blockbuster result.
The central argument, both for the secret backdoor into Chinese IPO investing and for this particular stock, is that the Shanghai market — which is the only market most individual and institutional investors in China can invest in — is going to continue hitting new highs because of the massive amount of money rolling in from Chinese investors.
And that if you can get shares of a company before it goes public in Shanghai, you’ll be on the road to riches.
Hard to argue with that — the government continues to try to rein in the economy, but so far they’re not slowing the markets much.
So this company?
“Not only is this the third-largest producer or personal computers on earth… it jut received permission from the authorities to launch what looks like a hugely profitable IPO on the burgeoning Shanghai Stock Exchange.”
It only takes a few seconds on “liquefy” for the Thinkolator 4000 to spit out the answer:
Lenovo Group (LNVGY.PK for the 20:1 ADR, 0992 in Hong Kong)
So what’s up with that? They said it was an IPO, right? Well, the “secret” here is that for companies that are listed in NY or Hong Kong but not yet listed in Shanghai, a huge boost is expected if and when they do get listed on the mainland Chinese exchanges — especially for familiar local companies like Lenovo. Lenovo’s primary listing is in Hong Kong.
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So, this is a big company — it is indeed the third largest computer maker in the world, and it has a lot of business both in China and in the US, thanks to their purchase of IBM’s computer business a while back, but it’s not yet listed on the Shanghai exchange.
And Amberger’s argument is that when it is listed there, the pent up demand for these quality local companies will drive Shanghai prices much higher. Which will mean that the prices you can get in Hong Kong and/or NY should also go higher.
Now, I would be a little hesitant about this — the expected boom in Hong Kong shares as more and more Chinese investors get permission to invest overseas has been talked about quite a bit. And the flip side, that shares that list in Shanghai should climb on demand there, has also gotten a bit of attention.
But none of this is guaranteed — as long as China’s exchange is somewhat of a closed system, there’s no reason to think that a share that’s worth $10 in Shanghai will definitely be worth $10 in NY, since the big investors won’t be able to arbitrage between them. I would hesitate to assume that although investors are willing to pay $8 for a Lenovo ADR now, they’ll be willing to pay $20 for it in January just because domestic Chinese investors can suddenly also buy shares of the same company on a different exchange. It’s not a free and unfettered economy we’re talking about, so it makes perfect sense to me that the same security can be worth very different amounts in two different exchanges– as long as those exchanges are functionally closed to each other.
That’s not to say I’m right — this phenomenon could very well work just as Amberger posits, I just would examine it in your mind and understand why you’re buying the stock. There may be other great reasons to buy Lenovo — compared to the Dell’s and HPs of the world their numbers look pretty good … until you get to earnings, which puts Lenovo at something like a 30 PE. It may be worth it as a China play even without a “Shanghai IPO” boost, given the huge demand I expect we’ll continue to see for computers in China … and the head start that Lenovo has in that market.
So … no idea whether this “secret Chinese IPO” strategy will really work, but Lenovo is definitely the stock they’re touting with this strategy right now. If anyone has looked at these shares, please feel free to share your thoughts.