“Buy this Chinese electronics giant now, before its Shanghai IPO!”

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.


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Muser
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Muser
May 21, 2007 6:25 pm

should it not transpire that if lnvgy.pk is ipo’d in Shanghai that the attention and presumably money it receives would create incentive and momentum to both buy the product(computer)thus increasing the bottom line(profits)and hence share prices.
from a totally new investor and gumshoe discoverer

buffeteer
Guest
buffeteer
May 22, 2007 1:34 am

SGS-
here’s an article from forbes in 1/07 which supports your theory of a potential disconnect between shares traded on different exchanges.
Enjoy….

Shanghai Stock Mania
Vivian Wai-yin Kwok, 01.10.07, 5:50 PM ET

The buying mania on the Hong Kong stock market at the end of last year seems to have died down, but domestic shares in Shanghai are still ridiculously strong, thanks to limited alternatives for Mainland investors. As a result, there is a widening discrepancy between the H-class shares of companies available to foreigners in Hong Kong and the A-class Shanghai-listed securities of the same firms.

The catalyst for the latest bout of Mainland buying mania was China Life Insurance (nyse: LFC – news – people ). On its second day of trading on the Shanghai Stock Exchange, China Life rose 1.4%, to 39.46 yuan ($5.10), more than twice the listing price and giving the company a market value of $128 billion.

Two and a half hours flying distance from Shanghai, there was a different picture in Hong Kong. The H shares of China Life Insurance closed at $23.85 Hong Kong ($3.10) on Wednesday, an 11% slide in two days. Later in New York, where China Life’s American depositary receipts comprise 15 of the underlying shares, the price fell to $46.50, down 3.9%, or $1.86 on the session. That was the equivalent of the Hong Kong close of $3.10.

Under new rules meant to discourage speculation, the China Life shares will not be included in the Shanghai index for their first 10 trading days. Still, the hoopla surrounding the issue has been lifting sentiment in Shanghai, were about 80% of the listed shares have advanced in the past two days. The total market value of the Shanghai exchange reached 10.1 trillion yuan ($1.3 trillion), which is equivalent to half of China’s annual economic output.

As recently as three months ago, some dual-listed companies had A shares that were less valuable than their H shares, but this is no longer the case. (See “Shanghai Doesn’t Get The ICBC Excitement”) Of the 38 dual-listed enterprises, all are now more valuable in Shanghai, with premiums ranging from 1.2% to 76.8%.

On top of the premium table are Luoyang Glass (other-otc: LUOYF – news – people ), appliance maker Guangdong Kelon (other-otc: GUKEF – news – people ) and electronics manufacturer Nanjing Panda (other-otc: NJGPF – news – people ) whose A shares are trading at 77%, 70% and 66%, respectively, above the prices in Hong Kong.

Kent Yau, deputy research head of Hong Kong based security firm Core Pacific Yamaichi, estimates the gap will continue to last unless the Chinese government takes new measures to suppress demand.

“There are only a few investment opportunities in China; investors do not have many choices especially the property market has turned sluggish recently.” Yau sees the gap between A and H shares averaging 30%. “This reflects investors in the two markets have different valuations and the international investors in Hong Kong are obviously more rational.”

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Anonymous
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Anonymous
May 22, 2007 3:44 am

Gumshoe, I thought you wanted readers to send in ideas, but nowhere can I find your email address.
A gal who writes Diligent Investor sez tonite that there is a hot biotech firm
that is the only company working on an obesity drug. And the stock is under $1.00.
Also boosted a $20/sh health sector company,based in Kentucky, that is growing fast by way of numerous acquisitions.
Don Cier djczzz@msn.com

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One Guy
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One Guy
May 22, 2007 10:01 am

THh solution to the Kentucky one was just sent in by a reader, I’ll post it as soon as I can. The email is ILoveStockSpam@gmail.com , send ’em along.

Thanks,
SG

Anonymous
Guest
Anonymous
May 22, 2007 3:03 pm

Strange On Frankfurt SE it’s

http://finance.yahoo.com/q?s=LHL.F

Trading at 0.30 Euro

Also it’s already listed on HKSE

Price also not even close to $8

http://finance.yahoo.com/q?s=0992.HK

3.20 (local $)

It’s hard to buy stocks like this from USA:

http://finance.yahoo.com/q?s=LNVGY.PK

It has no BID no ASK, when you call you broker, they will tell you something like

7.50-8.70 Indication Only

Those crooks are putting spread for like 20% to put
This into their own pockets.. You trying to make 20-30% and they making it right on the spot.. 🙂

Good luck!

liveline
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liveline
May 22, 2007 4:38 pm

There is other evidence to support your idea that shares of teh same company can diverge in value as long as the exchanges don’t allow for arbitrage. This from a paper on dual listed companies, I read just a few days ago while investigating a trading strategy, “price differences of up to 30 per cent and large swings within one or two years have not been uncommon.” These shares appear on two exchanges as seperate listings that cannot be exchanged for each other even though they represent the same company and proportionally the same dividends …etc.

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Nick M. H.
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Nick M. H.
May 23, 2007 1:43 am

I believe that the $20 Kentuck Health-care stock may be RSCR.

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and loans no cosigner student
Guest
December 6, 2008 5:30 pm

loans cosigner student with no cosigner student federal loans no

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