The recent Hong Kong share placement by CATL saw active participation from hedge funds betting on a narrowing of the Hong Kong stock premium. According to sources familiar with the matter, the approximately $5 billion stock offering was primarily purchased by hedge funds, with a significant portion of demand coming from traders seeking to cover short positions. These hedge funds collectively acquired over $3 billion worth of shares, making it the largest placement transaction in Hong Kong this year to date.
The placement was priced at a premium of about 26% compared to CATL's A-shares, while representing a discount of approximately 7% to its Hong Kong H-shares. This pricing provided an opportunity for hedge funds holding short positions in H-shares to cut losses or close out positions. Some hedge funds that established positions only after news of the placement emerged in mid-month are now poised to record double-digit gains.
The record-high premium on H-shares has spurred arbitrage trading. CATL's dual-listing structure has given rise to a relatively uncommon arbitrage opportunity. Typically, A-shares trade at a premium to H-shares, but the situation with CATL is the opposite. Driven by bullish sentiment fueled by soaring energy prices, its H-shares have surged 139% since listing in Hong Kong last year and have consistently traded at prices higher than its A-shares.
On March 20 this year, the premium of CATL's H-shares over its A-shares climbed to a historical peak of 49%. Nick Bird, founder of Hong Kong-based quantitative hedge fund OQ Funds Management, wrote in a report on Monday, "The premium on CATL's H-shares over the past few months has reached unprecedented levels. I am accustomed to seeing significant A-share premiums, but such a substantial H-share premium is indeed rare." Among approximately 160 companies with dual listings, only about five had H-shares trading at a premium to A-shares as of Tuesday's close, with CATL exhibiting the largest premium.
The high H-share premium attracted hedge funds to aggressively establish "long A-short H" pair trades, betting on the eventual convergence of the price gap between the two markets. However, as the premium continued to widen, this strategy placed considerable pressure on funds that had held positions for several months. Sources indicate that demand for borrowing CATL's H-shares for short selling is extremely strong, with annualized stock lending rates at some international banks reaching as high as 35% to 45%. According to data from S3 Partners, as of last Thursday, short interest in CATL's H-shares as a percentage of free float had risen to 26%, more than double the 12% recorded last December. Meanwhile, the utilization rate for stock loans has remained near 100% this month, indicating significant difficulty for traders seeking to establish new short positions.
The share placement objectively created favorable conditions for hedge funds in challenging positions. On one hand, the dilutive effect of the new share issuance helped push down the stock price. On the other hand, the additional shares provided more potential stock available for borrowing to facilitate short selling. Following the announcement of the placement, CATL's H-shares fell as much as 9.2% during the trading session, marking their largest single-day decline since listing.
It is noteworthy that due to the persistently high H-share premium, pure long investors bullish on CATL have generally adopted a wait-and-see approach towards buying Hong Kong shares, opting instead to purchase relatively cheaper A-shares through cross-border channels. This structural divergence meant that hedge funds ultimately became the primary source of demand for the placement. Estimates from various banks regarding the proportion of hedge fund participation in the offering vary, partly due to the ambiguous definition of what constitutes a "hedge fund."
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