CATL’s $5 Billion Placement Completed: Short Covering Dominates, Hedge Funds Exit AH Premium Trade

CATL’s $5 Billion Placement Completed: Short Covering Dominates, Hedge Funds Exit AH Premium Trade

Behind the Ningde Times Hong Kong share placement deal, there is a group of hedge funds actively betting on the narrowing of the Hong Kong stock premium.

Media outlets, citing sources, reported that the roughly $5 billion stock placement by Ningde Times mainly had hedge funds as buyers, with a significant portion of the demand coming from traders seeking to cover their short positions. These hedge funds were allocated over $3 billion worth of shares, making it the largest placement in the Hong Kong market so far this year.

The placement price was about 26% higher than Ningde Times’ A shares and about 7% below its Hong Kong H shares, offering hedge funds with H share short positions a window for stop-loss or closing out their trades. Some hedge funds that only built positions after placement news emerged mid-month now stand to gain double-digit returns.

H Share Premium Hits Record High, Spurs Arbitrage Trades

Ningde Times’ dual listing structure has triggered a highly unusual arbitrage trade. Normally, A shares enjoy a premium over H shares, but Ningde Times is just the opposite—driven by bullish sentiment from soaring energy prices, its H shares have risen 139% since listing in Hong Kong last year, consistently trading at prices above its A shares.

On March 20th this year, the premium of Ningde Times’ H shares over its A shares reached a historic peak of 49%. Nick Bird, founder of Hong Kong-based quantitative hedge fund OQ Funds Management, wrote in a report Monday: “The premium of Ningde Times’ H shares over recent months has been unprecedented. I’m used to seeing larger A share premiums, but such a marked H share premium is remarkably rare.”

Among about 160 companies dually listed in both markets, as of Tuesday’s close, only about 5 companies have H shares trading at a premium over A shares, with Ningde Times topping the list.

Short Positions Accumulate, Borrowing Costs Surge

The elevated H share premium has attracted hedge funds to build “long A shares, short H shares” paired trades, betting on the price gap to eventually converge. However, as the premium expanded, hedge funds holding these positions for months have come under significant pressure.

According to sources, demand for borrowing Ningde Times H shares for short selling is now exceptionally high, with annualized borrowing rates at some international banks reaching 35% to 45%. Based on S3 Partners data, as of last Thursday, short interest in Ningde Times H shares as a percentage of free-floating shares had risen to 26%, more than doubling from 12% last December. Meanwhile, the utilization rate (the proportion of lendable shares already lent out for shorts) has held near 100% this month, indicating traders have great difficulty finding new short positions.

Placement Offers Exit Channel for Hedge Funds

The placement objectively creates favorable conditions for troubled hedge funds. On one hand, the dilution effect from the new share issuance helps depress the stock price; on the other, the newly issued shares provide more borrowable supply for potential short trades. Following the placement announcement, Ningde Times’ H shares plunged as much as 9.2% intraday, marking the biggest single-day drop since listing.

Notably, as the H share premium has stayed high for an extended period, pure long investors bullish on Ningde Times have generally been hesitant to buy Hong Kong shares, instead opting to buy the relatively cheaper A shares via cross-border channels. This structural divergence resulted in hedge funds being the main buyers in the placement. Banks’ estimates of hedge funds’ share in the placement vary due to the ambiguity in the very definition of “hedge fund.”

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