An arbitrage is a trade where profits are made due to price differences of identical financial instruments in different markets as a result of market inefficiencies. In the digital world today, an arbitrage is highly unlikely as information travels quick. But market is speculating that there is currently an arbitrage opportunity with the shares of Media Chinese International Ltd. ("MediaC") which is quoted in both Bursa Malaysia ("Bursa) and the Hong Kong Stock Exchange ("HKEX").

Prior to 19 March 2018, the quoted prices of MediaC in both stock exchanges have been rather consistently tracking each other. As example, at the close of 28 February 2018, MediaC was traded at RM0.37 and HK$0.76 respectively (foreign exchange rate was at 0.5003). On 31 December 2017, the share  prices were RM0.395 and HK$0.76 respectively.

But it all changed on 19 March 2018. MediaC's 73.01% owned subsidiary, One Media Group Ltd. ("OMG") (a company listed on HKEX), is currently in the process of listing its associate company, Most Kwai Chung Ltd. ("Most"), on HKEX. OMG currently holds a 10% stake in Most. Post-IPO, OMG's shareholding will be diluted to 7.5%.

The retail investors' portion of Most's IPO has been reported to be over-subscribed by some 2,900 times. This has created an excitement among the HKEX community. A significant interest was seen at OMG where it's share price rose from last Friday's close of HK$1.37 to a high of HK$1.66 this week. More interestingly, MediaC's Hong Kong listed shares have seen a big trading frenzy with it's share price rising from HK$0.72 (last Friday) to a high of HK$3.10 - a whopping 330% increase. At the same time, trading volume of MediaC's shares in Bursa hit it's highest ever daily volume since the company was listed on Bursa Malaysia in 1991. However, the share price in Bursa did not increase proportionately to that of Hong Kong. This week has seen the share price increasing from last Friday's close of RM0.325 to a high of RM0.505 only; nowhere near the HK$3.10 seen in HKEX.

As at lunch close on 22 March 2018, the shares of MediaC were trading at RM0.405 and HK$1.89 (or RM0.925) respectively. This represents a price mismatch amounting to RM0.52. In an efficient market, purchasing 1 unit of MediaC's share in Bursa at 40.5 sen and then converting the said the share (for a small transaction fee) and selling the said 1 unit at HKEX at HK$1.89 will offer an arbitrage gain of 52 sen per stock - a 128% gain.

But the market is not 100% efficient. In practice, you cannot purchase from Bursa now and then convert and sell it at HKEX 5 seconds later. It takes approximately 1-2 weeks to execute the share conversion. Hence, the catch here is - what will the traded price in HKEX be by the time your Bursa shares have been converted and is ready for disposal. If the HKEX price is now HK$1.89, will the share price still be HK1.89 by the time your share is converted.

If upon conversion, the HKEX share price remains at HK$1.89, you have made a handsome gain. If the price has gone higher than that, you have made even more. But if the share price falls to HK$0.81, you earn nothing out of this transaction.

Most's shares will begin to be traded on 28 March 2018. Lets look at MediaC's potential gain arising from the movement of Most's share price. After all, the excitement surrounding MediaC now is that the huge interest in Most's IPO is expected to translate to Most's share price being chased up upon listing.

Once listed, Most will have a share base of 67.5m shares. The IPO offer price is between HK$1.00 to HK$1.20. At 2,800 times over-subscription, I think it is safe to assume that the shares will be priced at the upper end.

Below are scenarios of potential book gains of MediaC from the IPO exercise of Most Kwai Chung Ltd.:

As OMG will have to mark the value of its investment in Most, any gain from this investment will be reflected in its books and reported in the upcoming quarter's financial results. Similiarly, the fair value gain booked by OMG will be seen in MediaC's financial results as at 31 March 2018. The fact that the listing of Most is only 3 days apart from MediaC's book close for Q12018 makes the impact upon IPO very interesting.

Also, Most is a profitable entity of which it's financial performance will be equity accounted for in OMG's books and then consolidated at MediaC. The significance of these gains is further amplified at MediaC's level considering the quantum of past few quarterly results as below:

MediaC's profits for Q1 2018 is likely to see some bumper gain from Most's IPO exercise. The question will be how much? It is therefore important to keep an eye on Most's share price on 28 March 2018 through to 31 March 2018.

What about the share price of MediaC on Bursa? If the share price at HKEX finds a footing and maintains at a newly established price range, then MediaC KL will have to play catch up. The reality of arbitrage will strenghten when investors begin to realise that even after a 2 weeks conversion period, the HKEX share price will still be trading at a price significantly higher than KL. Based on the Efficient Market Hypothesis, market forces will close the share price gap to eliminate any arbitrage opportunity.