Tuesday, May 8, 2007

A Comparison of 3 Hong Kong listed H-share/Red chip ETFs

In addition to Morgan Stanley China A Share Fund (CAF) and iShares FTSE/Xinhua A50 China Tracker (IFXAF.PK or 2823.HK) I have discussed previously, alternatively we can also capture the Chinese opportunities by investing in HK listed index tracking ETFs.

First of all if you need definitions of A-share, H-share and Red Chips, here you are:

A-Shares
Securities of Chinese incorporated companies that trade on the Shanghai or Shenzhen stock exchanges, quoted in Chinese Renminbi (RMB). Traded by residents of the People’s Republic of China (PRC) or international investors under the China Qualified Foreign Institutional Investors (QFII) regulations.

H-Shares
Securities of companies incorporated in the PRC and nominated by the Chinese Government for listing and trading on the Hong Kong Stock Exchange, quoted and traded in HKD. Those from the PRC are not allowed to trade H shares however there are no restrictions on international investors.

Red Chip Shares
Securities of Hong Kong incorporated companies that trade on the Hong Kong Stock Exchange, quoted in HKD. The constituents are substantially owned directly or indirectly by the Chinese Government. Those from the PRC are not allowed to trade however there are no restrictions on international investors.


Now lets examine 3 such ETFs listed on Hong Kong Stock Exchange, especially on their constituents:


1. iShares MSCI China Tracker (2801.HK)

2. H-Share Index ETF (2828.HK)

3. Hang Seng FTSE/Xinhua China 25 ETF(2838.HK)


iShares MSCI China Tracker (2801.HK)

  • Top 10 holdings = ~61.5% of portfolio
  • Both H share and Red Chips included




H-Share Index ETF (2828.HK)

  • A freefloat-adjusted market capitalisation-weighted methodology. (lock up shares, directors shares, cross holdings and strategic holdings excluded)
  • A 15% cap on individual stock weights applied to address the issue of dominance, if any, of selected stocks in the index following the freefloat adjustment.
  • 37 constituents
  • Top 10 holdings = ~77.2% of portfolio
  • Include H-share ONLY





Hang Seng FTSE/Xinhua China 25 ETF(2838.HK)

  • Includes the largest 25 Chinese companies comprising H Shares and Red Chip Shares, ranked by total market capitalization.
  • Index constituents are capped at 10% of the total index.
  • Includes stocks listed on the Hong Kong stock exchange (only)
  • Free floated weighted
  • Top 10 holdings = ~61.3% of portfolio




a bigger image is here

At first glance 2801 and 2838 are more balanced as they include both H-share and Red Chips, however, when we compare the price performance of the 3 ETFs over last 12 months, it is observed that their performances are similar, so the inclusion of the few Red Chips does not have too much impact to the fund performance.


I do not intend to spend time to study further which one out of the 3 is better, as that would very much be affected by the timeframe you are looking at and I would let the marketing people of those funds to do their jobs.

If we are to invest in any of them, we shall select the one with the highest liquidity, out of the three 2828.HK’s trading volume is comparatively higher, but in absolute sense it is still extremely low. On 7 May the respective turnovers are as follows, I’ve also included 2823 (A-50) and the total turnover of HK Stock Exchange of the same day for comparative purpose:

2801

HK$11M

2828

HK$25M

2838

HK$1M

2823

HK$705M

Total HKSE turnover

HK$67.9B


Finally let's do another comparison with 2823 (A-50) and CAF, it is seen that the A-share ETFs performed significantly better (over 50%) than the H-share counterparts, while 2823 (A-50) further outperformed CAF by about 25%.

CAF manager is having a hard time to beat the index !
[both CAF and 2823 are currently having ~10% discount to NAV, so even if we take away the discount CAF still under-performed A-50 index by ~20-25%]



Purely from historical performance perspective it seems like A-share funds are better choices than H-share funds, the question is whether this is a sustainable trend? Will H-share and A-share price converge (currently A-share is trading at around 30-50% premium over H-share for the same stock)? What's the impact of the changing composition of the H-share and A-share indices down the road? How would the changing QDII policy affect H-share?....

Stay tuned for my next article.

Disclosure: I've no position in any of the above mentioned stocks

5 Comments:

J said...

Possible typo?

Under the Red Chip Shares section.

"not allowed to trade H shares"....
Should it be "not allowed to trade Red Chip shares"?

J said...

Possible typo?

Under the Red Chip Shares section.

"not allowed to trade H shares".
Should it be "not allowed to trade Red Chip shares"?

Anonymous said...

great article .. i found it through seeking alpha .. really appreciate it ..

Zhong Siwei 鍾思維 said...

Hi J,

"Red Chip" technically speaking is not a share class, unlike H and A they are really 2 different classes of shares issued by the company.

"Red Chip" strictly speaking is just like any other shares issued by a Hong Kong registered public company (without looking at its background).

Anyway I have amended the language to avoid confusion and thanks for your comment !

Anonymous said...

Arbitrage the A and H funds assuming the differential narrows and the ETF's contain roughly the same stocks. Buy H, Short A.

Mark