Failed in Hong Kong? Try again in Singapore

Remember when people used to talk about FILTH?

If you haven’t heard about it then, let me inform you that FILTH was an acronym for “Failed in London, Try Hong Kong”.

It was used as a handy collective noun for all British bankers, advertising types and – yes – even journalists, who, having found the competition back home a little too rigid for their inadequate talents, have come to a decision that their careers might have a better chance if they moved to Hong Kong.

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

 And in the event that you failed to  make a success of things here, then in all likelihood you’ll have transfere somewhere else.

At this time, it’s not so much FILTH as SIHTS: “Sank In Hong Kong, try Singapore”.

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

This week it appears 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 subsequent to last April’s offering for his yuan-denominated Hui Xian reit failed awfully to put the Hong Kong property market burning, this time around he’s planning to start on his new offering on the Singapore stock exchange.

 It will be fascinating to see whether Singapore investors are any more naive than their Hong Kong counterparts, who shrewdly showed defiance to the nonsense sales pitch put forward for the Hui Xian deal.

Hui Xian was sold as a doubly attractive stock. Investors were notified it would not only offer them exposure to the attractive yields produced by the reit’s underlying property portfolio, they were also led to think that for the reason that the stock was denominated in yuan, they would profit additionally from any appreciation in the Chinese currency.

As Monitor explained at the time, this pitch was not only plain and simple wrong; it also showed a disturbing 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 may sound strange at first, but if you think it carefully, it makes good sense.

Stocks, including REITs, are valued in accordance with their earnings. So, let’s picture 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 produce earnings of 10 yuan a share, at the present 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. Since the stock is still valued at a price-earnings ratio of 10, its price will swiftly increase 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 totally no advantage for investors in buying yuan-denominated stocks.

In fact there may possibly be a disadvantage, should the yuan’s liquidity in Hong Kong drain away.

Hong Kong investors were duly unconvinced by last year’s offering for the Hui Xian reit. As the first chart shows, its shares have unhappily underperformed its closest counterpart on the Hong Kong exchange, the Hong Kong dollar-denominated Yuexiu reit.

In reply 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 at present fairly valued in the foreign exchange market, it is tough to imagine that investors in Singapore will be lining up to buy reit shares just because they are denominated in yuan.

It looks as if this “sank in Hong Kong, try Singapore” offering is equally likely to go under in Singapore too. As our more anagrammatically-minded readers will by now have worked out, SIHTS is about right.