Arbitraging valuation across exchanges Part 2

Who has more wisdom?

If the same company is listed on two exchanges, they should technically be valued the same?.

More than often than not, the valuation do differ substantially.

The question is why?

  • Possibly currency

  • Possibly the stock exchange

  • Possibly the home market advantage

  • Possibly the savviness of one investor group over the other

It is a thought exercise which will never yield any conclusion.

It is always a possibility.

Another thought pop in.

Could we determine which exchange has a slightly more “accurate” valuation?

To determine if there is wisdom of the crowd, there is a few criteria to fulfil.

  • There must be sufficient participants

  • The participants are independent in their assessment

  • The participants are not influencing each other decision

  • Sufficient period must be given to the participants to understand the odds

If we are to use the criteria above, then maybe we could have a good guess on which exchange is pricing the stocks correctly/wrongly.

just possibly.

Just a recap on our “arbitrage” adventure.

We have finally decided to arbitrage our position. Pentamaster Corp Bhd on Bursa for Pentamaster International on HKEX. Pentamaster Corp Bhd had been the most phenomenal investment for us for the past 5 years or to be exact for our whole investment career. Our average price is MYR 0.27 and we are selling it at MYR 5 giving us a 18x bagger for the past 4 years.

-Jan 3rd 2021 post: Arbitrage across Stock Exchanges - Pentamaster Corporation exchange for Pentamaster International

So this is a follow up since we tried to arbitrage our trade between

  • The Senior vs The Junior

  • Bursa vs Hong Kong

  • MYR vs HKD

We started selling Pentamaster Corporation at MYR 4.99 at around PE of 50x and buying Pentamaster International at HKD 1.72 at around PE of 12x.

Since then Pentamaster Corporation move up to MYR6.20 to a PE of 62x.

And Pentamaster International continue to be around the HKD 1.70 range.

Ohh.. the way the stock market screws your portfolio and your mind…

Investor familiarity with Pentamaster Corporation in Malaysia makes the investors willing to value it at 60x PE, while the unfamiliarity of Pentamaster International in Hong Kong makes it a value share at 13x PE.

A typical hedge fund with the means would have shorted Pentamaster Corporation and bought Pentamaster International to bet that the price would converge. That trade would have been disastrous.

For us, we just need to lament on our lost opportunity of 20%.

If we are to assess the above, most would have come to the conclusion that the investors in Malaysia for Pentamaster Corporation have been overly exuberant. The natural conclusion is that the share price in Hong Kong for Pentamaster International is fairly valued?

If we are to use our criteria to determine if there is indeed wisdom of the crowd, then we may just reach a slightly different conclusion.

  • There must be sufficient participants in the exercise

  • The participants are independent in their assessment

  • The participants are not influencing each other decision.

  • Sufficient period is given to the participants to understand the odds

If we look at the above criteria, we may just reach an understanding that maybe the Bursa market had been more efficient in assessing the prospect of Pentamaster Corporation. They had more people on the trade (the volume of share traded is usually higher) and Pentamaster Corporation had been listed on Bursa much longer than Pentamaster International on HKEX allowing participants to understand the Pentamaster Corporation more deeply.

We are very sure that the participants are definitely not independent in their assessment and are definitely influencing each other, but that could be said of the Bursa market as well as HKEX (while there is more frenzy in Bursa than HKEX for Pentamaster).

If we are trying to gauge the fair value of Pentamaster, there is a good chance that the market valuation given by the Malaysian investing fraternity may just be more reflective (thou more crazy) than the Hong Kong investing fraternity.

p.s. We are doing the same for LHN. Buying LHN on the HKSE as it is cheaper than the LHN on SGX. Somehow, we have a feeling that anything that is not from China is overlook in Hong Kong.

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