Trading the China market with American depository receipts : how to play greater China with a winning edge

191 Pages·2012·9.965 MB·English

by  Voon, Alan

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Trading the
China Market
with American
Depository
Receipts
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Trading the
China Market
with American
Depository
Receipts
How to Play Greater
China with a Winning
Edge
ALAN VOON
John Wiley & Sons Singapore Pte. Ltd.
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Copyright © 2012 by John Wiley & Sons Singapore Pte. Ltd.
Published by John Wiley & Sons Singapore Pte. Ltd.,
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Contents
Preface vii
Acknowledgments ix
PART I An Introduction to
American Depository Receipts 1
CHAPTER 1 How I Discovered Making Money in China
with American Depository Receipts (ADRs) 3
CHAPTER 2 What Are ADRs? 13
CHAPTER 3 Finding and Interpreting News to Enter
the Market 39
CHAPTER 4 Trading ADRs 59
CHAPTER 5 Using Leverage Instruments to
Enhance Return 77
CHAPTER 6 What Could Go Wrong? 89
PART II ADR Case Studies 99
CHAPTER 7 Case Study 1: An Earnings Surprise 101
CHAPTER 8 Case Study 2: Earnings Disappointments 111
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vi CONTENTS
CHAPTER 9 Case Study 3: Government Policy Changes 121
CHAPTER 10 Case Study 4: Material
Company-Specific News 129
APPENDIX T he Art of Decoding the Earnings
Announcement 141
By Paul Lau, Certified Public Accountant
About the Author 167
Index 169
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Preface
W
hen I was at university, my fi nance professor kept saying that
there was no free lunch in the stock market. Indeed, it is very dif-
fi cult to fi nd free lunches or risk-free profi ts, especially in today ’s
well-connected global market place, where any new piece of information is
immediately digested and refl ected in market prices.
While the above statement is true to a large extent, there must be some
way to get a free lunch, as I do not believe the market is completely effi -
cient. Residing in a country where the capital market is not suffi ciently well
developed, I do fi nd risk-free opportunities in the stock market and have
been able to take advantage of such opportunities as they arose in the past.
As someone who treats the stock market as the love of his life, I strive
to gain an edge in investing by exploring many non-mainstream investment
approaches and utilizing various instruments to enhance return. I have
since written two books on warrants and how to achieve better returns
using such derivatives catering to the local market. But, I always wanted to
write a book that had mass international appeal.
Through many months of research and real-life experience, I managed
to discover a relatively risk-free trading strategy utilizing price-moving,
after-market news in Asia to build a position in ADRs and/or their deriva-
tives (where available) in the U.S. markets. When the news indeed moved
the share price the next trading day in Asia, profi ts could then be realized
when the U.S. market opened and the open position was closed. I truly
believe this strategy can help investors and traders from all over the world
to acquire some free lunches in the stock market.
P art One of this book begins with a case study of a company associ-
ated with the richest man of Chinese origin, and how I utilized after-hours
market earnings announcements to trade the company ’s ADR listed in the
United States, making money before the ADR prices refl ected the earnings
news.
I then go on to introduce ADRs in Chapter 2. Different types of ADRs are
explained and also the mechanism of creating and canceling ADRs. To make
it easier for you to start utilizing this strategy, I also present ten companies
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viii PREFACE
that you should keep an eye on to take advantage of possible price-moving
news.
I n Chapter 3, I offer where to look for possible price-moving news
released in the after-hours Asia market. I also give a brief guide to how
such news can be interpreted.
C hapter 4 is more about practical knowledge to start implementing the
strategy. I also talk about what facilities the stockbroker must provide in
order for traders to better implement such strategies.
After equipping you with information to give you a trading edge, I indi-
cate that you must maximize such opportunities when available to enhance
gain. Chapter 5 discusses when to introduce various derivatives to magnify
trading gains.
C hapter 6 deals with the possible pitfalls of using this strategy and pro-
vides examples of when such a seemingly sure thing can sometimes go
wrong.
P art Two comprises Chapters 7 to 10. In it, case studies illustrate how
the strategies in Part One can be implemented when companies announce
earnings surprises and shocks. I also point out that changes in government
policies can have an impact on share price. Finally, some examples dealing
with company specifi c news are illustrated.
I have been using the strategies in this book to make money with ADRs
when opportunities arise following signifi cant price-moving news released
after Asian markets close. After reading this book, I am sure many traders
will be able to join me in making some easy money from the stock market.
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