This is a brief write-up for what I believe is a straight forward and compelling pair trade. Man Sang Holdings (MHJ) is a US listed company whose only real asset is shares in Man Sang International (938 HK). Each share of MHJ effectively owns 77.5 shares of 938 HK. I suggest shorting MHJ and buying long 938 HK in this 1:77.5 proportion. MHJ is currently trading at US$7.60/share, 938HK is trading at HK$0.56/share. At these prices, MHJ is trading at $2.04 or a 37% premium to the equivalent shares of 938 HK.
Supporting math:
As of the most recent 10K (3/31/07), MHJ owned 49.26% of 938HK. At that time there were ~1bn shares of 938HK, implying that MHJ owned 494.4MM shares. The diluted share count of MHJ is 6.38MM, so each share of MHJ controls 77.5 share of 938HK. The current HKD-USD FX rate is 0.128, so each share of 938HK is worth US$0.0718. 0.0718*77.5 = US$5.56, which is $2.04 less than the current price of MHJ
Note: 938HK did a 200MM share secondary in July at HK$1.48/share. So MHJ’s current ownership of 938HK has fallen to 41.1%.
Other points:
Wide spreads between these two listings have emerged from time to time. Over the last year MHJ has traded from as much as a 53% discount to as much as a 56% premium to 938 HK. I can’t offer a sufficient explanation for this. In addition to its ownership of 938HK, MHJ does own a small on-line venture, but the company says this has essentially zero value. MHJ spiked this past October after it was recommended in an investment newsletter. At that time I was able to speak with management who confirmed that there is no reason why MHJ should trade at a premium.
In lieu of the above pair trade, at $0.56/share an outright purchase of 938 HK could be interesting. In addition to the core pearl processing business, the company is building China Pearls & Jewelry City (CP&J) – a huge jewelry market center in Zhuji, China. Run rate earnings on the core business are about HK$0.06/share and there is cash of about HK$0.46/share. The company should recognize its first income from its initial sales in CP&J towards the end of FY2008.
Risks:
· This trade requires putting on positions in both the US and Hong Kong markets, so there is some timing risk.
· At times MHJ has been a difficult stock to borrow with a negative rate, so there is some holding cost risk
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