With Imagi's stock down 67.4% in 3 days since our bubble warning, the rights began trading this morning, at a huge discount to the share price, raising obvious questions of whether the market in either counter is false. If you own the shares and believe in the current valuation (which we don't) then why aren't you selling your shares and buying the rights to get free cash?

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:

Imagi arbitrage gap

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.

© Webb-site.com, 2010

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