Market Economics | Americans sell as China set to buy HK stocks

Market Economics | Americans sell as China set to buy HK stocks

Alcoa Inc. and Warren Buffett are selling Chinese stocks listed in Hong Kong as investors on the mainland await government clearance to buy them for the first time.

The timing can’t be a mere coincidence. Alcoa, the world’s second largest maker of aluminium, sold its 7% stake in Aluminum Corp. of China Ltd on Wednesday. The sale took place after shares of the Chinese company, known as Chalco, more than doubled in seven trading days last month.

Buffett’s Berkshire Hathaway Inc. previously cut its holding in PetroChina Co. Ltd by 13%, according to Hong Kong regulatory filings. Berkshire sold shares of Asia’s biggest oil producer by market value in July and August, and maybe earlier. While PetroChina didn’t run up along with Chalco, its shares had a record setting rally before Buffett began selling. They rose 39% between 4 May and 9 July after the company made China’s biggest oil discovery in almost half a century. PetroChina may have been left behind in August only because shares of the Beijing-based company, listed in Hong Kong since 2000, aren’t yet available to Chinese investors. Stockholders voted last month to approve a $5.8 billion (Rs23,838 crore then) mainland share sale. Chalco, based in Beijing, rallied after the state administration of foreign exchange announced on 20 August that Chinese residents would be able to buy Hong Kong stocks. The stock peaked at HK$26.35 (Rs711 then) on 28 August, after falling as low as HK$10.14 earlier in the month.

Reaping profits

Bargain-minded investors have every reason to pour into Hong Kong. The Hang Seng China Enterprises Index of 43 mainland companies is valued at 23 times earnings. That’s less than half the ratio of 51 times for the CSI 300 Index—a gauge of yuan-denominated A shares traded in Shanghai and Shenzhen. The rule change has been delayed, according to three officials at the country’s banking regulator. New York-based Alcoa apparently decided against waiting for the logjam to break. The company sold its Chalco stake for HK$17.34 a share, or 15% less than Wednesday’s Hong Kong close. Even at that price, Alcoa may earn more than 10 times its original investment. The company bought about $147 million of stock in Chalco’s initial public offering (IPO) at HK$1.38 a share. Those shares accounted for all, but 6% of its holding.

Calculating Buffett’s profit on PetroChina requires more guesswork. Under Hong Kong’s regulations, major shareholders only need to disclose trades that send their stakes above or below whole number percentages.

Recouping investment

Berkshire’s latest filing was made because its holding fell to 9.72% of the publicly available stock on 29 August from 10.16% previously. The Omaha, Nebraska-based company sold 92.7 million shares that day for an average of HK$11.47 each. Buffett sold a total of 262.4 million shares between 12 July and 29 August, based on the number of remaining shares listed in that filing and an earlier document.

The previous filing covered a sale of 16.9 million shares on 12 July that sent Berkshire’s stake below 11%. Those shares, unloaded at an average price of HK$12.44, were among the 34.3 million that Buffett had sold by then. Even with this incomplete data, it’s possible to conclude that Buffett recouped almost all of the $488 million that his company invested in PetroChina stock. No wonder he’s pulling away as the mainland investors get ready to come in.

Best performer

EMC Corp.’s sale of a stake in VMware, Inc. is the front runner for the US IPO of the year. The success has barely made a dent on the shares of EMC, the world’s largest maker of data storage computers. Since the IPO was completed a month ago, EMC has risen just 1.9%. The Hopkinton, Massachusetts-based company is trailing the Standard & Poor’s 500 Information Technology Index, which is up 2.1% for the period. VMware, whose annual VMworld industry conference ended on Thursday, has soared 170% since its debut. The Palo Alto, California-based maker of virtualization software, which allows server computers to do the work of multiple machines, on Wednesday became the year’s best performing US IPO. JA Solar Holdings Co. Ltd, a Chinese solar panel maker that went public in February, previously held the lead. EMC still has an 87% stake in VMware, equivalent to 0.16 share for each of its shares outstanding on 30 June. The holding accounted for 64% of its market value on Wednesday.

Rating lowered

Deutsche Lufthansa AG has more “buy" recommendations on its shares than any other publicly traded airline, according to data compiled by Bloomberg. Now there’s a brokerage calling for investors to sell. Morgan Stanley’s Penelope Butcher lowered her rating on Lufthansa, Europe’s second largest carrier, to “underweight" from “overweight" on Wednesday. The analyst’s earlier rating had been in place since 2004, when she started covering airlines for the firm, according to Bloomberg data. “Pressure on the passenger business" may weigh on Lufthansa’s shares next year, Butcher wrote in a report. The analyst also said that the company, based in Cologne, Germany, may suffer more than other carriers in any slump because of its ownership of aircraft maintenance and catering units.

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