Imagi rights v shares gap
21 April 2010
Since our bubble warning on 14-Apr-2010, shares of Imagi International Holdings Ltd have dropped 67.4% in 3 trading days from $2.42 to close yesterday (20-Apr-2010) at $0.79. So they are heading in the right direction. Normally known as stock number 585, they are currently trading on a temporary counter of 2902, thanks to Hong Kong's archaic system of parallel trading whenever they have a stock split or consolidation. Incidentally, 2 years ago tomorrow, HKEx announced that it would abolish parallel trading, but it delayed it on 23-Jul-2008 and still has not come up with a new timetable. For more on this, see the "policy issue" box in our article of 11-Dec-2009.
This morning, Imagi's nil-paid rights (counter 2903) started trading. These are in essence short-dated warrants to subscribe shares at $0.07 each, expiring at 4pm on 5-May-2010. So regardless of the absolute price levels, they should be trading at about 7 cents less than the share price, or conversely, the shares should be trading at 7 cents more than the rights. There are 4 rights for every existing share.
Now here's the weird thing - a snapshot at the 12:30 lunchtime close today:
What do you see? If you own the shares and believe in the current valuation (which we don't) then you could sell the shares at $0.89 (at the bid price) and buy the rights at $0.43, then exercise them at $0.07, and you will have a total cost of $0.50, which is a 43.8% discount. You'll have free cash of $0.39 (before expenses) and still end up owning 1 share, which should be dispatched on 11-May-2010, according to the timetable.
So why is anyone buying the shares when they could buy and exercise the rights at a net 43.8% discount? This is an enormous anomaly which has existed all morning, and raises obvious questions about whether there is a false market in either or both counters. Trading volume remains extremely heavy - there are currently 360.1m shares in issue, and this morning's share volume was 35.5% of that. There are 4 times as many rights (about 1,441m), so volume of those was 28.7%.
We reiterate our bubble warning and remind investors that the pro forma net tangible asset value, after all options are exercised, is $0.073 per share.
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