Law of One Price




I discovered a market mispricing of a company named Tianjin Zhongxin while scouring through the internet and blogger posts. One seemingly promising pharmaceutical company dual listed in China and Singapore, apparently has arbitrage opportunity between 2 markets.

I am not sophisticated enough to buy a share in Singapore, do a cross border to Hong Kong and trade it via Hong Kong stock connect to earn arbitrage profit from TJZX Shares. (Not sure if is it even allowed) Nor am I brave enough to do a proper arbitrage position by longing in Singapore and SHORTING in China Stock connect. (I believe china does not allow shorting of most shares).  Shorting is a no go for me as you incur limited profits and potential unlimited liability!!! I will not be able to execute a convergence trade strategy explained by Benjamin Graham, but there is definitely upside potential for longing TJZX SG.
https://en.wikipedia.org/wiki/Convergence_trade

I am going to do some research regarding arbitrage profit of shares between different stock exchanges. But my preliminary screening is as follows.

1) The law of one price should hold across securities traded across different markets after accounting for forex differences. Either Singapore is heavily undervalued or China is overvalued. From Singapore's perspective, the average p/e of healthcare stocks is from 26-32, and Singapore's one is undervalued. This may be due to the illiquid China market whereby they disallow short selling, restrictions of capital outflow / inflow in china, or people simply missing out this particular unknown share out.

http://quotes.wsj.com/SG/XSES/T14/financials
http://quotes.wsj.com/CN/XSHG/600329/financials

2) Arbitrage Strategy
In academic use, an arbitrage involves taking advantage of differences in price of a single asset or identical cash-flows; in common use, it is also used to refer to differences between similar assets (relative value or convergence trades), as in merger arbitrage. Merrill Lynch also has an interesting article explaining their methodology
www.stern.nyu.edu/~msiegel/merrill.doc

Arbitrage is not simply the act of buying a product in one market and selling it in another for a higher price at some later time. The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before both transactions are complete

Arbitrage has the effect of causing prices in different markets to converge. As a result of arbitrage, the currency exchange rates, the price of commodities, and the price of securities in different markets tend to converge. The speed[4] at which they do so is a measure of market efficiency.

The irony is that Singapore and China exchange rate systems are managed float systems. I am too novice to predict the fluctuations in exchange rates and the monetary policy both central banks will make in the future. But if the fundamentals of TJZX are right, I can buy this company on the premise that is has potential arbitrage upside potential, undervalued from a relative valuation and P/E perspective, as well as if there is a compelling story backed by the numbers, that will encourage me to be vested in it.

3) risks in arbitrage
1) fluctuation of prices resulting in decreasing profit margins
2) devaluation of a currency or derivative

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