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The A-H Premium: Same Stock, Different Story
Vivek Viswanathan, CFA, Ph.D.
Head of Research
You can buy a share in Fudan-Zhangjiang Biopharmaceutical for 2.26 USD in the Shanghai Stock Exchange’s STAR Market or for 0.49 USD in the Hong Kong Stock Exchange. The share listed in Shanghai is over 4.5 times more expensive. But both shares have the same claim on the firm’s assets, the same dividend rights, and the same voting rights.
In short, these are the same class of common shares dual-listed on different exchanges. While the Shanghai listing (ticker: 688505) has roughly 4 times the volume of the Hong Kong listing (ticker: 1349), it cannot reasonably justify a 4.5x valuation.
This might sound like a rare situation and while it is the most extreme example, there are 136 firms that dual-list in both the mainland China A-share market and offshore Hong Kong H-share market and all of them except China Merchants Bank are currently more expensive in the A-share market than the H-share market. The average dual-listed A-share is twice as expensive as its H-share counterpart on an equal-weighted basis and 45% more expensive on a cap-weighted basis.
How can this possibly be and is there any way to take advantage of it? My colleague, Priscilla Liu, and I published an article about the A-H premium in the Journal of Portfolio Management. The first thing to note is that the shares are not convertible. You cannot turn a dual-listed A-share into its corresponding H-share or vice versa. Moreover, not all investors can invest in both markets. You need a certain account size—500,000 RMB or about 77,000 USD. That is out of reach of most of the many retail China A-share investors. Lastly, it is very expensive to short A-shares, so even if they are more expensive, it is costly to bet on their fall.
The A-H premium differs from stock to stock and this distribution is remarkably stable over time. See the graph below for the A-H premiums of individual stocks. Luoyang Glass (highlighted line near the top) consistently has a high A-H premium while Anhui Conch Cement (highlighted line near the bottom) consistently has a low A-H premium. This discrepancy is predictable.
Stocks that have high beta, are older, have lower prices, earn less profits, are smaller, have poor momentum, have high idiosyncratic volatility, have high price-to-book ratios, and are SOEs tend to have high A-H premia. In short, A-share investors tend to behave more like retail investors, because they are in fact more likely to be retail than investors in Hong Kong. Moreover, as we show in our paper, the A-H premium negatively predicts future profitability and A-share prices tend to move towards H-share prices while H-share prices tend to be less drawn to A-share prices. In other words, the H-share prices appear to be more efficient.
How do we profit from this irrational behavior on the part of A-share investors? The simplest way is to buy firms with low A-H premia and sell firms with high A-H premia. We show the quintile sorts of A-H premia and return below. This strategy is exceedingly profitable with the lowest A-H premium quintile earning a 28% premium over the highest A-H premium quintile.
Will this premium always exist? I can’t imagine it will. Over time, China A-shares will become more institutional, which will generate more efficient prices and the ability to simply buy the cheaper H-share. The price of shorting in A-shares will drop over time, which will allow for the most extreme inefficiencies to be mitigated. But while these inefficiencies exist, we can capture them through effective strategies.
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