Pricing Analysis and Investment Strategy of Baosteel Warrants and Changdian Warrants

(Fan Xiangpeng, Tianxiang Investment)

Baosteel warrants will be listed for trading on August 22, and Changdian warrants will also be listed in a few weeks. These are the first two warrants born after the issuance of the Interim Measures for the Administration of Warrants, which are worthy of serious treatment by investors.

　　 Introduction to Two Warrants Scheme

Changjiang Power（ information quotation forum ）The warrant scheme of the Company is: the Company will distribute 1.5 European style warrants for every 10 shares to all shareholders free of charge based on the capital stock after the conversion of shares this time, and the warrants distributed to shareholders of tradable shares other than the initiator shareholders can be listed and circulated; On the exercise date of the warrants, the holders of the listed and circulating warrants have the right to sell them to China Three Gorges Corporation at a price of 1.8 yuan per share; The exercise price of the warrants is 5.5 yuan/share, and the duration is 18 months from the listing date of the warrants.

Baosteel（ information quotation forum ）The warrant scheme of the Company is that for every 10 shares held by the holders of tradable shares, they will receive 2.2 shares and a 378 day warrant with an exercise price of 4.5 yuan. It is worth noting that the warrant holders do not exercise their rights to Baosteel on the exercise date, but to Baosteel Group, the controlling shareholder of the company. That is, they purchase A-shares of Baosteel Group from Baosteel Group at the exercise price and exercise ratio. Baosteel's warrant is not the issuance of the company's shares. It does not increase the company's total share capital, nor does the exercise dilute its performance. This is essentially different from the Yangtze Power Warrant.

　 Two warrant pricing analysis

To calculate the prices of Baosteel Warrants and Changdian Warrants, first of all, we need to determine the stock prices of Baosteel Shares and Changjiang Power before the listing date of the warrants. Considering that Baosteel Shares and Changjiang Power have resumed trading, and the stock prices will not fluctuate significantly, we take the closing price of yesterday to calculate the warrant price. The closing price of Baosteel Shares is 4.58 yuan, The closing price of Yangtze Power is 7.66 yuan (considering that the current Yangtze Power includes rights, assuming that the price of warrants is 2 yuan per share, the ex right per share should be 0.30 yuan, so we take 7.36 yuan to calculate the price of warrants).

At the beginning of the year, Baosteel shares were issued additionally, and the stock showed an abnormal trend. The volatility of 27.39% in the past year was not suitable for calculating the warrant price. We calculated that the volatility of the Tianxiang Iron and Steel Index was 24.24%, so we took an integer value of 25% slightly higher than the index volatility to calculate the price of Baosteel warrants. Changjiang Power calculated the warrant price with the fluctuation rate of 23.45% in the past year. The risk-free interest rate is the one-year after tax interest rate of bank deposits=1.8%. Since the long-term electricity warrant has a minimum guarantee of 1.8 yuan, we can regard it as a warrant with an exercise price of 7.3 yuan plus 1.8/(1 ＋ 0.02) ^ 1.5=1.7473 yuan of cash. The Changdian Warrant is issued by the Yangtze Power Company and is a placement warrant, which will increase the company's total share capital. Therefore, the diluted Black-Sc-holes model is used in the calculation.

According to the calculation module of Tianxiang Warrant, the price of Baosteel Warrant is 0.5467 yuan and that of Changdian Warrant is 0.8266 yuan. Considering that some assumptions in the Black Scholes model are invalid in the Chinese market and the theoretical price calculated by the model is somewhat high, we discount the theoretical price by 10%. Therefore, we believe that the price of Baosteel warrant is 0.4920 yuan, and that of Changdian warrant is 2.4974 yuan.

　　 Comparative analysis of two warrants

In terms of scale, Baosteel issued 387.7 million warrants, with a total circulation market value of 190 million yuan at a price of RMB 4920; The tradable warrants of CSPC are 407.22 million warrants, and the warrants obtained by non tradable shareholders are not listed. Calculated at the price of 24974 yuan, the total circulating market value is 1017 million yuan. In contrast, Baosteel warrants are smaller and have greater liquidity risk. The warrant issuer Baosteel Group's commitment to trigger the purchase of shares within four months after the share reform is actually a way of hedging the risk of warrants, while warrant holders cannot sell short shares to avoid risks, which is one of the reasons for the theoretical price discount.

Changjiang Power's minimum guarantee commitment of 1.8 yuan has raised the price of warrants, while the absolute price of Baosteel warrants is low, making the leverage effect of Baosteel warrants greater than that of Changdian warrants. Assuming that the share price of Baosteel shares rises by 10%, Baosteel warrants can rise by about 90% simply by the appreciation of the intrinsic value; While the share price of Yangtze Power rose by 10%, the long-term power warrant could only rise by about 30%. Therefore, Baosteel warrants will bring high risks and high returns, and Baosteel warrants are more suitable for high-risk addicts.

From the perspective of the trend of the issuer, the possibility of the exercise of the Changdian warrants is greater. The Changdian Warrant is a placement warrant for all shareholders, and the Three Gorges Corporation also has a minimum guarantee commitment. If the future share price is lower than 7.3 yuan and investors do not exercise their rights, Yangtze Power will not be able to obtain new funds, and the Three Gorges Corporation will also pay a maximum of 733 million yuan in cash to shareholders of tradable shares. Baosteel Warrants are used by Baosteel Group to cash in the exercise of its own shares. Although it can obtain some cash, it is at the cost of reducing its shares and shareholders' equity. In contrast, Baosteel Group does not want investors to exercise their rights. Therefore, Changdian warrants are more suitable for long-term holding, and it is not recommended to hold Baosteel warrants for a long time unless the price is seriously underestimated.

　 Investment strategy on the first day of listing of two warrants

After ten years, will Baosteel Warrants and Changdian Warrants, as the first batch of warrants, be hyped? In a speech at the "China Warrant Development Summit Forum", a person from the Shanghai Stock Exchange once said, "Baosteel warrants are not allowed to fail. We will use all resources to fully cooperate with the smooth listing of Baosteel warrants, including preparing to introduce the market maker system". "Once the transaction price of warrants fluctuates abnormally, the SSE will have the right to follow the Interim Measures for Warrant Management And suspend its transactions at any time ". We can see that the leadership wants the warrants to be stable and excessive.

We believe that opening low and moving high is more conducive to a smooth transition, and an excessively high opening may have a certain impact on the development of the late market.

The opening price of Baosteel warrants should be around 0.45 yuan. If the price on the listing day is lower than 0.35 yuan, you can consider buying, and if it is higher than 0.60 yuan, you should sell. The opening price of the Changdian warrants should be around 2.4974 yuan. Considering that the registration date of the Changdian warrants is the day before the listing date, Changjiang Power may have ex right pressure on the listing date of the warrants, investors are not recommended to buy the Changdian warrants at the opening date. If the price on the day is less than 2.20 yuan, you can consider buying the warrants, and if it is higher than 3.00 yuan, you should sell them.

In view of the lack of liquidity and the participation of speculators, we do not rule out irrational quotes. We recommend investors to invest in warrants rationally, pay attention to avoiding risks, and not easily participate in T+0. Taking Baosteel warrants as an example, if the warrant price is 0.80 yuan, 378 days later, only when the stock price exceeds 5.30 yuan can the holder have a positive return. In this case, it is better to directly buy Baosteel shares at 4.58 yuan. When the stock price reaches 5.30 yuan, 15.72% of the profits have been made.

　　 Future trend of two warrants

Baosteel and Changjiang Power are typical representatives of cyclical and non cyclical industries. Stock prices have the greatest impact on warrant prices. The future trend of warrants depends on the trend of stock prices. Industry analysts from Tianxiang Investment Consulting believe that Baosteel will operate within the range of 4.3-5.3 yuan in the next year, and Yangtze Power will operate within the range of 7.5-9 yuan in the next 18 months. It can be inferred that in the future, the operation range of Baosteel warrant will be 0.35-0.90 yuan, and that of Changdian warrant will be 2.5-3.5 yuan. Investors can grasp the rhythm and band operation. It is worth reminding investors that as the maturity date approaches, the time value of warrants will become smaller and smaller, and the value of warrants will become closer to the intrinsic value.

We have reason to believe that Baosteel warrants and Changdian warrants will surely make a smooth transition and lay a solid foundation for the listing of ETF warrants and other financial derivatives in the future.