Thread by @dwgg33

Okay I don’t usually do threads. Let alone threads advertising specific trades. But I think this one is too good not to share with up to ~100% return potential and a fantastic risk:return profile.

I’m talking about the spread between Haier D and Haier H shares #690D.GY #6690.HK

I keep a screen of share class spreads to see if anything gets well out of whack from historic norms and could offer a nice low risk uncorrelated return stream. Plus the VOW spread used to be really fun to trade.

Haier became interesting once the H shares listed at the end of last year. Before that, trading the onshore Chinese A shares was a no-go for most. But now, pretty much anyone can trade the D shares vs the H shares.

Usually if a spread is incredibly large between 2 share classes it means that they are not equivalent in some meaningful way (dramatically difference in voting rights, for example). In the case of Haier, the A, H and D shares are completely equivalent.

The spread would make you think otherwise. Look at this:

The spread seemed interesting when I found it and it led me to a very rigorous analysis from @puppyeh1 outlining the same trade - he gives a much better backdrop than I am so go read his post on seeking alpha for more context.

He sets out a number of catalysts that could see the spread close. All seemed reasonable. But the biggest needle mover in my opinion, was the parent company’s plan to buy back the D shares. Made total sense, failed listing on Xetra, massive discount, load up.

But this hypothesis looks to be rejected for now with the company completing the buyback and subsequently initiating buybacks on both the H and A shares, leaving poor D in the corner like the red haired stepchild.

That doesn’t mean that they won’t recommence the share buyback programme on the D shares, but my read from some company publications is that they are more committed to making the D shares work. We’ll see.

It’s worth noting that some of the H/A buybacks were to fund stock comp.

So no short term positive flows for the D shares in the form of buybacks. And it shows. The discount has blown past 100% this month!

To me this is a gift and I am making it a top 3 position for my portfolio. I think the spread is the way to play it (even if my PB doesn’t want to cross margin grrr).

I think you are getting a superb risk adjusted return that should be uncorrelated with the market. Dreamy.

But what about if you can’t trade the H shares or also find yourself in a position where the spread is capital intensive. Are the D shares any good as an outright position?

I think so.

Here is Haier’s revenue over the last few years:

They are consistently growing at double digit on sales and taking market share in the upper end of the home appliances market.

Risks? What about inflation? If that rises, are they going to suffer a big increase in cost of goods?

Sure, they might. But they will pass it on to the consumer. They have pricing power and have kept gross margins at 30% consistently, while still growing net profits:

So I actually think they are well insulated from commodities inflation and should see strong sales growth as this secular housing boom roars.

(I also like that they are a manufacturer of air con systems. I think the world is going to have to upgrade here over the coming years).

And you are getting all that at a forward P/E of 7-8 with a div of 3% to boot when you buy the D shares!

Absolute bargain in my eyes and has positive secular tailwinds as a cherry on top.

So say you’re interested. One negative is on the execution front. Liquidity on the D shares. 30 day ADV is around 700k EUR notional and free float market cap of D shares around 325m EUR at current values.

H shares are super liquid.

So unless you are a big boy you will be ok.

In summary, fantastic opportunity as a spread trade or an outright position. I personal prefer the spread and see it fitting my portfolio better. But either option is something I think any small-medium investor should consider.

And h/t once again to @puppyeh1 for throwing the initial breadcrumbs that made me a hungry boy and go off to do my own DD. Thanks mate.