A hot arbitrage trade has propelled Chow Tai Fook Jewellery Group Ltd into the ranks of Hong Kong’s most heavily shorted stocks, with hedge funds piling in after the jeweller’s first major fundraising since its 2011 IPO, according to a report by Bloomberg.
Short interest in Chow Tai Fook has surged to 39% of shares available, up sharply from 14% before the company’s larger-than-expected $1bn convertible bond issuance in June, according to S&P Global data. The bonds, carrying a 0.375% coupon, can be exchanged for equity – a structure that typically drives short-selling as investors hedge the equity exposure of the notes.
Despite the short pressure, Chow Tai Fook shares have more than doubled year-to-date, making it one of the best performers on the Hang Seng Index. Analysts at Mizuho Securities Asia said the rally is likely to prompt additional shorting by convertible bondholders seeking to keep their books market-neutral.
The company, a leading jewellery retailer across Greater China, attempted to counter the dilutive impact of the deal by repurchasing $200m of its own stock, but the short interest still pushed it into the second-most shorted position on the Hang Seng Index.
