1. The Aussie selling appears to have finished
As I noted 2 days ago, it appears that the insto or 2 instos who bought the large lines of stock from the Capital and Tasly selldowns (about 40m shares) have been selling - possibly due to large redemptions of funds which are going on at present, which forces fund managers to sell their underlying shares regardless of whether they think the shares are good value or not. We can speculate on who these instos may be - but it doesn't really make any difference to the situation, as long as we are comfortable that the selling has finished. My analysis of the situation is that they have probably finished. Well over the required number of shares have been sold in the past month. I had also mentioned a couple of other stocks which were showing similar (or worse) falls than MSB in the same period - and they are all bouncing back today by more than 5% and volume selling was less yesterday than the absolute panic of two days ago when 6m MSB were crossed at the bottom at $1.06. In fact, I am watching several other companies in this category, and it appears the forced selling has finished for almost all of them (for the time being at least!). I think this has been a very difficult period for some small cap fund managers and expect to see some closures of funds after this.
2. Why is there such a big gap between MSB in Australia and MESO in the US?
MSB in Australia usually sets the price, as the MESO ADRs are only 7.7% of the total issued capital. However, I think the past month has shown a big supply/demand imbalance in Australia as the insto was forced to sell and force the Aussie price well below sensible price levels. This was particularly bad in the past two days as they apparently came to the end of their selling and just sacrificed the price. It may have been made worse by margin calls on any retail investors who had geared into MSB shares, and that may have been the reason for a bit more selling yesterday - however, the insto who was selling appears to have been the major problem. This is all "reading between the lines" and based on my years of experience. I could be wrong.
While volumes in MESO in the US have been unusually high recently, the demand/supply imbalance seems to have been on the "buy" side. I would guess that the possible positive news flow (FDA for aGvHD at the end of this month, and maybe a trial for ARDS related to COVID-19) has pushed US investors to buy.
Two nights ago, there was a point where the ADRs were trading 75% above the MSB close in Australia. This all evaporated in the Aussie market the next day as forced selling drove the price back down.
I think the rises in the past two nights in the US market are telling us what will happen when the Aussie selling finishes. Last night the US MESO price closed at a 20% premium - and I think that is where the Aussie price will start heading. Of course, if positive news is announced, the price could spike much higher.
2. How to arbitrage the gap
MSB and MESO are "fungible" (ie one can be replaced by or exchanged for the other) with a small amount of trouble. The fact is that less than 3% of the ADRs have actually been converted back into ordinary shares since the programme was set up in November 2015, so not many people do this.
The trouble is having to go through JP Morgan Chase Bank (the ADR depositary bank) to convert between shares and ADRs for a current cost of up to $US5.00 per each 100 ADRs (or any portion thereof). So, if you want to take advantage of the US price being 20% more than the Aussie price, you have to deposit your Aussie shares with JP Morgan and convert them to ADRs for a cost of A1.75c per MSB share (actually, $A8.74 for each 500 MSB shares, or any portion thereof), then sell the ADRs in the US Nasdaq market, then pay US brokerage, then convert the proceeds back to $A and send the money back to Australia. Good stockbrokers will arrange this for clients, but you need to deduct the fees they will charge for currency conversion and brokerage etc.
These fees mean arbitrageurs to be sure that they can still sell the MESO shares on the Nasdaq market at a premium to the Aussie price after the ADRs are registered by JP Morgan, and they obviously need to take the fees off the return they expect to make.
Please check all of this with your stockbroker as I am not qualified to give financial advice - this is just to show you the steps a relatively sophisticated investor/ arbitrageur needs to do to arbitrage the gap between MSB in Australia and MESO in the US. It actually isn't that hard, however, and I have done it myself in the past.
JP Morgan also charge US4c pa per ADR (equivalent to 1.5c pa per MSB share) - usually charged to the MESO ADR account in the last 3 months of the year.
When the MESO ADRs were set up on 19 Nov 2015, they raised $US68.3m (or close to $A96m at the AUDUSD of $0.72). They issued 8,535,059 ADRs (equivalent to 42,675,295 MSB shares - so the issue price was the equivalent to $A2.25 per ordinary share).
The total number of MESO ADRs currently on issue is 8,291,715 - so in that time a net 243,344 ADRS have been "busted" back into 1,216,720 ordinary shares.
So, in summary, arbitrageurs may be buying shares in Australia today, convert them to ADRs and then sell them in the US at a premium tonight, then convert the proceeds to $A and send the money back to Australia. That's how they close the gap between the prices. The risks are firstly the much lower volume that trades in the US, the costs, the buy-sell spreads in both markets, and the risk that something is announced between the close of the Aussie market and the opening of the US many hours later.
Bottom Line
As I observed 2 days ago, the crossing at $1.06 for 6m shares seemed to be the "capitulation" end of the forced selling for MSB shares and I expected the price to go higher from there, just as it did when the Capital overhang was cleared at $1.71 and the shares ran to over $3 fairly quickly.
The price in the US market tells me there is buying demand at significantly higher levels, and in big volumes once the Aussie price is confirmed to have bottomed and the forced selling ends.
MSB Price at posting:
$1.18 Sentiment: Buy Disclosure: Held
(20min delay)
