Initial Public Offerings (IPOs) have a proven history of making people rich.
American IPOs recently have delivered tremendous first-day gains, including
Under Armour (UARM: NASDAQ), up 95%... American Commercial Lines (NASDAQ: ACLI),
up 35%… Chipotle Mexican Grill (NYSE: CMG), up 100%... in a single day. Not bad.
But that’s nothing compared to what’s happening in Asian IPOs, which have become
a breeding ground for stock market millionaires. Of course, there is a crucial
difference between most of the Chinese IPOs going public in Shenzen and Shanghai
and those you may remember from the IPO mania of the 1990s ¾ when companies
pushing into the market were start-ups with no revenues and wafer-thin business
plans. Many Chinese companies issuing shares today are large, solid businesses
that have been trading in Hong Kong (as “H shares”) and even on American markets
(as ADRs) for years, if not decades.
Two factors have been working in their favor: the new Chinese middle class is
flush with cash and eager to gamble, and the Chinese government created an
artificially high demand for IPOs by not permitting new equity offerings until
May 2006.
Now the floodgates are open: in the last three weeks of 2006, investment banks
and companies whipped more than a dozen companies through initial public
offerings on the Shanghai Stock Exchange alone.
We’re currently up 56% on our position in Guangshen Railways (NYSE: GSH).
Another pick, China Life Insurance Co. (NYSE: LFC), also rose considerably in
the immediate aftermath of its rapid IPO... before fears of a bubble in Chinese
stocks pushed the ADR back down over the short term.
But that’s yesterday’s news. The next big IPO is just around the corner. And
again, we will be profiting from it through our IPO backdoor.
In mid-January, two small Chinese aluminum companies approved a buyout by their
parent company. This by itself is an unremarkable event. But the buyouts will
bring one of the largest and most successful metal-production companies in the
world onto the Shanghai Stock Exchange.
Aluminum Corporation of China (NYSE: ACH) (Chalco for short), a Hong
Kong-listed company, plans to absorb two of its subsidiaries, smelter Lanzhou
Aluminum Corporation and producer Shandong Aluminum Industry Corporation.
Lanzhou and Shandong are listed on the Shanghai Stock Exchange (SSE), and to
assimilate the two companies, Chalco plans to replace its shares on the SSE with
its own at the rate of 1.8:1 for Lanzhou and 3.15:1 for Shandong.
To give you an inkling of the magnitude of this event, Chalco is the
second-largest aluminum producer in the world. It provides an important resource
for a growing industry, aluminum and alumina, to China’s factories. The company
registered 105.5 billion yuan ($13.2 billion) in sales last year ¾ 22.5 billion
yuan ($2.8 billion) of that was pure profit.
There’s only one problem… Just like many hot Asian IPOs, this new offering will
likely be heavily oversubscribed. People are going to stand in line to get
shares ¾ and most will be turned away disappointed. Taipan’s “secret backdoor,”
however, will allow you to get shares of this Chinese IPO sensation ¾ before the
new shares go public on the Shanghai Stock Exchange… because Aluminum
Corporation of China has been trading on the New York Stock Exchange as an
American Depositary Receipt (ADR) under the symbol ACH.
The trading volume for ACH already spiked quite nicely when the company
announced its plans. Another spike, and a nice ride up in price, should occur as
soon as news hits Western shores that the transaction has taken place in China.
Buy Aluminum Corporation of China ¾ looking for that short-term price hike with
the impending Shanghai IPO ¾ as a strategic longterm holding strategy (with a
holding horizon of 2-3 years) in one of China’s key growth industries. While we
prefer to buy foreign shares directly on the markets and in the currencies
they’re trading in, ADRs present the easiest option for American investors to
take advantage of foreign opportunities.
J. Christoph Amberger is the founder and president of Taipan Financial News (www.taipanfinancialnews.com)
and the editor of the daily e-letter, Dynamic Market Alert.
