A-H mispricing opportunities

One of the mispricing opportunities we target is the spread between A-shares and H-shares.

Chart 1 illustrates the Hang Seng Stock Connect China A-H Premium Index dating back to 2014. We selected 2014 as the starting point because the China Stock Connect program was announced in April of that year and launched seven months later in November. The Stock Connect program links mainland China's stock exchanges with the Hong Kong Stock Exchange, enabling investors from both regions to trade eligible stocks listed on each other's markets.

Chart 1: Hang Seng Stock Connect China A-H Premium Index Source: OQFM, Bloomberg

Fundamentally, it is difficult to justify why an H share would trade at a significant discount to it’s A share counterpart. Both A shares and H shares offer the same voting rights and dividend entitlements. Furthermore, since the launch of Stock Connect in November 2014, mainland investors have had relatively easy access to purchasing H shares. 

The overall A-H Premium Index and spread have been decreasing, but significant variations remain among individual pairs. Table 1 displays the average Z-score of the A-H Premium (with more negative values indicating the A share premium is below its historical average) of selected stock pairs calculated using different data frequencies.

Table 1: A-H Premium Z Scores for Selected Pairs Source: OQFM, Bloomberg

While Chart 1 shows the overall premium index trending back toward its mean, there are still noticeable anomalies in the A-H share premium (or discounts) space. Even within the same sector, there are significant contrasts in premiums and discounts observed across various stock pairs.

For instance, BYD, the largest automobile manufacturer in China by market capitalization, has its H share trading at a 1.54% premium to its A share. In contrast, Great Wall Motor, another top-five automobile manufacturer in China, sees its H share priced at approximately a 51% discount to it’s A share. Another example of a steep H share discount in the automobile space is Guangzhou Automobile Group, whose H shares are currently trading at a 68% discount to it’s A share counterpart.

A less extreme disparity example can be observed in the banking sector. The H shares of China Merchants Bank, one of China’s top five banks by market capitalization, trade at a 2.5% premium to its A shares. Meanwhile, China Construction Bank, another top-five bank, has its H share trading at a 29% discount to it’s A share.

Charts 2 and 3 display the time series of the A-H Premium/Discounts since 2014 for BYD and China Merchants Bank, respectively. Over time, these premiums and discounts tend to mean revert. Currently, both are trading around the bottom end of their range. It’s remarkable to note that BYD’s H-share is now trading at a premium to it’s A-share given it has previously traded at a substantial discount.

 Chart 2: BYD A-H Premium/Discount since 2014 Source: OQFM, Bloomberg

Chart 3: China Merchant Bank A-H Premium/Discount since 2014 Source: OQFM, Bloomberg

Further, an intriguing market phenomenon we have previously discussed occurs in certain extreme cases where, despite the same DPS for both the A share and H share listings, the dividend yield gap between holding the H share and shorting the A share exceeds the borrowing cost of the short position. This creates an opportunity for a positive carry trade which we find particularly compelling.