Choivo Capital

Author: Choivo Capital   |   Latest post: Sat, 6 Jul 2019, 5:16 PM


(CHOIVO CAPITAL) Lessons from Hengyuan, Petronm and other Oil & Gas related Companies.

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Well, this was a very fun week wasn’t it? Let’s talk about it, reflect and see what we can learn.


Koon Yew Yin and Hengyuan

For one, Koon Yew Yin was finally 100% honest with you. Instead of his usual schtick of telling you half of the story, which is wanting to teach you how to make money. 

After selling a stock to high heavens, he told you he had 20 million shares in Hengyuan, and he said, I quote “You must bear in mind that when I start to sell, I am not obliged to tell you.”

We also found out today, after his last post, that he is not a super investor, at least not in the calibre of Warren Buffet, Seth Klarman, Charlie Munger, Li Lu, Peter Lynch, Walter Schloss or Benjamin Graham.

But rather, an incredibly bold (if he had made losses instead, people would be calling him foolish), and lucky (or brilliant, if the depth of his research is more vigorous) one.

He also happens to be a man of such fantastic wealth, that he could survive pretty much any margin call.

If it was anyone else, who followed his teachings and went on 3X margin (which I think is one of the main factor for the incredible price swings in Hengyuan), they would have lost it all.

Imaging a Kaan Yiw Yan, who did his research, and sailang the stock at roughly RM17 (which is not wholly impossible), he would have felt incredibly brilliant when it shot up to RM19, before losing it all when the price fell to RM12, a mere 30% drop would have margin called his ass so hard, everything force sold at the bottom.

Out there today, I am sure there is at least one person who lost more than 70% of his stock portfolio value, on a stock selling at 4 PE. As Howard Marks always said. “Remember the man 7 feet tall who drowned crossing a river 5 feet deep on average”. In investing and in life, it is not enough to just survive on average, one must be able to survive the absolute lows.

Why do I say, he is not a super investor (super promoter? Most definitely.). In his own words.

“I thought the price would rebound. But instead it continued dropping to frighten the shit out of me. Its trading price range was Rm 13.90 – 12.00. It went up 10 sen from the opening bell which emboldened me; otherwise I would have started selling some of my holdings.”

Despite his own research and super promotion, and having Ooi Teik Bee whispering in his ear every day, he almost sold a stock, that in his own mind, he thinks is worth much more than that, and in his own analysis, can make more money next quarter than the last.

He almost went against his research, and was only saved from it from something he himself cannot control, a mere 10 sen gain on the opening bell. He needed to rely on the sentiment of the market.

Having said that, I too concede that I too may very well have capitulated and sell mine, if I was staring at the screen all day watching it go up and down, and feel my heart go up and down as well.

For the record, I sold all my holdings at RM16.96, feel like an idiot, when it went back up to RM17.2, feel like a genius when it fell to RM15, feel even smarter when it fell to RM14.3, bought some. Feel even stupider, when it fell to RM12, wanted to buy more, but no money and didn’t want to sell any of my other holdings”

In investing, one needs to be able to do 3 things incredibly well, I again paraphrase Howard Marks,

1)    The ability to calculate intrinsic value

2)    The ability to hold and buy more as the price drops

3)    The ability to be right.

I don’t think he met these criteria, specifically number 2. I don’t think I do too. I hope I will one day.

In any event, I may very well be wrong. As Kcchongnz likes to say “Remember Croesus”, the man who was once the richest and most powerful king in the world, who died as a slave, burnt on a stake.

Our record and legacy is not done until we die. Moving on.

Understanding the incredible rise of PetronM, Hengyuan and other Oil and Gas companies.(and trying to find another)

This year (2017 and 2018) HENGYUAN rose from RM2 per share to an incredible high of RM19 or 800% in just 12 months. PETRONM rose from RM4 to RM13, a rise of 330%. HIBISCUS rose and incredible 560% from October 2016.

Were these uncommon or as Koon Yew Yin says, never seen before in the market?

Maybe not, this year, another company HUAAN rose from 0.04 to an incredible high of 0.64 a gain of 1500%. LIONIND rose from RM0.22 to a high of Rm1.67, a rise of 670%. SUMATEC doubled in the first 2 weeks of 2018.

In India, HEG Ltd rose an incredible 1,412% in 2017, Graphite India Ltd rose an incredible 709%. In japan, Tokai Carbon Co rose 356% and Showa Denko KK rose 300%.

There’s many more of these multi-baggers around the world in 2017, but let’s limit it to these few, I believe they have a lot in common.

1)They are all from industries people completely gave up on and considered dead.

Hengyuan and Petronm were from the oil refinery industries. As oil price plummeted, their lack of hedging on their oil held as inventory, resulted in incredible losses on inventory, with Hengyuan actually recording more than RM900mil in losses in just one quarter.

This caused them to be unfairly categorised together with all the other oil and gas companies which had losses on goodwill and intangible assets, which is a mistake of a completely different level.

The first, was an unexpected error, where a common day to day expense was suddenly bloated by a six sigma event. While the second, was a mistake of greed, overpaying for growth and potential earnings.

Hibiscus was in oil exploration, where people chased high all the way to RM2.2, before falling 90% to RM0.2 when oil price fell. The sheer amount of people who got burnt, ensured no one will ever want to look at it again, causing it to be very undervalued.

I’ve spoken about my error when Hengyuan was RM2, but in terms of Hibiscus, I made an error in not even looking at it properly; thinking it is just a former goreng stock with zero fundamentals. I hope to not make this mistake again. SUMATEC also falls in this category, although I must concede, I am still not really able to put a value on it.

As for HUAAN. This one was truly incredible. It got the first whammy of china cutting coal use like nobody business for 2 years, causing earnings and share price to plummet. It also had the ignominy of being a red chip, causing a double whammy of nobody ever looking at it again, thinking it’s like most red chips, truly worthless (it may very well still be).

Those companies in India and Japan, they made graphite electrodes. Which was used a lot in steel manufacturing, which again, had output cut heavily by the Chinese government. When steel outputs was cut, the demand for graphite electrodes dried up, and many companies making those died.

But this also ensured that when China loosened up steel production again, the companies that survived will make incredibly outsized profits, since they now have no competitors. We also saw this in DUFU in 2017, when it had pretty much very little competitors in the making of parts for hard drives.

As Bruce Greenwald always said, the best value is always found in roadkill. The kind of stock no one will even want to think about due to former emotional pain, or thought to be dead industries.

The difficulty in thinking in a way that reverts to the mean, whether from a high or a low, coupled with emotional turmoil making the balace of greed and fear in ourselves impossible, ensures that there will always be stocks that are severely overvalued or undervalued.

2)They were formerly great companies (most at least).

It is also very important to ensure that these companies were actually well managed ones to begin with. SAPNRG is one where I think the management truly fucked up. The severely overpaid for another oil company during the height of the oil prices, and to top it off, they did to using borrowed money, instead of issuing their overvalued shares (I bet it didn’t look overvalued then though).

And, they even had the gall to pay more money to their CEO every year, than they pay their shareholders. The CEO takes more than RM100mil in a year in salary.

Why is it important that they be well managed companies? Well, these are the companies that will be able to take advantage of the lack of competition when mean reversion occurs, bounce back and deliver outsized performance.

3)Absolute return vs relative return

Hengyuan was a good idea since early 2016, or even 2015 (less good then). If one had purchased it even then and averaged down, it would have returned in excess of 300% roughly 75% CAGR.

However, that would also require you to hold it past the drop RM4 to RM2, and at that moment stick to your research and thinking, despite the entire I3 forum going against you, telling you how it is such a risky investment.

Which funnily enough, as prices fall and the investment become increasingly less risky, more people ignore it, or don’t want to buy it. While as prices rise and the investment become more risky, more people want to put their money in.

You need to able to know that in absolute terms, this Is the better investment, and hold on, despite in relative terms, everyone else appear to be making more money than you. Quite a unique kind of mental hell.

I can only really think of 3 people (and a possible surprise 4th one) who did that in I3. The first is ICON8888, he bought Airasia at RM1 all the way near RM3, watch it go down all the way to RM2.1, topping up at RM2.7, RM 2.4 and RM2.1. Constantly being taunted, but he stuck to his guns that it was worth RM3. He then sold 70% at the subsequent rise to RM3.

The second is FELICITY with the holding of WCEBHD, I myself think this is a fairly good one, and am studying more. But you must really wait, and tahan everyone else making more money than you.

The third, is the infamous CALVINTANENG, the king of finding undervalued “rubbish” stocks, and as a former car sales man, a consummate promoter (this is not a compliment). I still think it is very unethical to promote stocks like he does, but to be fair, we are all grown up, and if you lose money it’s on you. When it comes to promoters who are not charging subscriptions fees, remember, if its free, you're the product. Its your money he wants.

Who is the fourth? Well. This one is a long shot, but Koon Yew Yin and his XINQUAN does qualify for it. If the accounts of XINQUAN is actually reliable as he says it is, that is one of the last bastions of truly severely undervalued stocks. A 30X is very much a possibility.

Some fun information about red chip companies. I am based in the audit industry, although I have never audited the red chips before, I know friends who have. This concern among investors on the reliability of their audited financial statements is very much shared by the auditors as well.

In audit, you always request many supporting documents during the audit, and often, many clients will take some time to prepare them, or the information given is imperfect, or fail to give them.

However, when it comes red-chip companies, they are always able to give you whatever document you need without fail at top speed. And this in its own is very suspicious, and makes one wonder if the documents even if the company says is from a third party, is even real.

It is at a point now, where the auditors don’t even trust the bank statements, they do other audit procedures like having a small amount banked into their account at a certain date/time. And checking the banks statements, which is directly obtained from the bank for this amount.


Why such volatility in Hengyuan (and PetronM)?

My guess, margin finance, and a lot of it. After the last quarter result, Hengyuan went on a record stretch of 15 days of non-stop increase.

How did it start? Well the first is after the result during the first few days of small increase and sideways price movement, people used their spare cash.

When it started to go up, people started selling other stocks to buy Hengyuan. After 5 days of continuous increase, they sell even more.

When it reached something ludicrous like 8 days continuous increase, people started to really pour in, FOMO “Fear of missing out” kicks in, even people who don’t like Hengyuan, or don’t have it, start to really buy in.

After more than 10 days, greed now far outweighs fear. People say the PE is just 5, but now they no money. They start to go on margin, resulting in that RM19.1.

Then profit taking starts, one person profit takes. Price drop RM0.1, not much for a investor who have several holdings, but if Hengyuan is your largest (I’m sure it’s the largest for many of the investors), it will be unbearable, if you’re on margin, doubly so.

Drop in price cause other people to sell or get margin calls, which feed a negative feedback loop of margin call after margin call. Except,  we have incredible foreign inflows the last few days that really helped eat up the selling.


The inversion of Hengyuan and PetronM

I too hold Hengyuan and PetronM, although my PetronM holdings is 3 times bigger. One thing I always do when I invest, is to find out how my investment or the company will fail, and see what the companies are doing to avoid that.

  1. Did they hedge this time? The large losses last time was due to drastic fall in oil prices. Well, Hengyuan and PetronM have derivative assets and liabilities, so im guessing they have. But we won’t know the notional amount until we see the annual report.
  2. Rising oil prices. Weirdly, rising oil prices despite giving a revaluation gain on inventory, also compress crack spread as the passing through of the cost is not instant, one needs to take note of this.
  3. Capacity and run rates at US refineries is at an all-time high. Due to the hurricane that occurred, unaffected refineries decided to delay maintenance, and instead run at full capacity. They are still doing so, despite the first quarter of the year generally being a traditionally weaker one due to it being after winter.
  4. Oil does not live in a vacuum, they are many types of crack spread and they are all inter-related. The spread in the US and Asia may be different, but remember, oil can be easily shipped to meet demand anywhere else. So these should ensure some parity and that outsized profits do not continually occur.
  5. Chinese oil imports are dropping. It is at a year low. They have implemented consumption tax on oils and are raising retail prices. In addition, they are also slowing down sale for gasoline cars and even contemplating a complete ban.

    I don’t think this is feasible, as one, lithium has more than quadrupled in price in the last 2 years, and this is mainly due to our increased use of batteries in electronics. Cars use about 300X more batteries than a phone. If demand goes up that high, the price of lithium will reach stratospheric levels and make electric cars very expensive and not economically feasible for the general public.

    Secondly, there is no better of more efficient store of energy in the world than gasoline. This is a big factor as well. Electrical cars will be a part of the geography, but it will not completely dominate the field as how many now feel it will.

  6. Lastly, I am unable to actually properly determine,

    - What is the pro for the type of refinery hengyuan runs, what is the tradeoff compared to other types?

    - How much better is Hengyuan refinery compared to others? At the end of the day, it’s a cost based business.

    - What is the real earnings if crack spreads go back to normal, how much of the current earnings is due to forex      gain and inventory gains?

As always, do let me know what you think, espeacially if its contrary to mine. Here, we use the BlackRock rule. In BlackRock (one of the largest asset management companies in the world),  when you present an idea at a meeting, everyone in the room is required to comment.

Except, they are only allowed to criticise or point out what the other person have missed or wrongly analysed, no ass kissing there. As they always say, leave your ego at the door. There are very few things more humbling that having you idea's roundly crticised and deconstructed by incredibly brilliant people.

The most important thing in investing, is if you're research is actually right. And the right way to do this, is to find out if you're wrong.

As taleb said, If you want to prove all swans are white, go and find a black swan. Finding another white one means nothing.



Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

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  5 people like this.
John Lu LOL

CALVINTANENG, the king of finding undervalued “rubbish” stocks, and as a former car sales man, a consummate promoter (this is not a compliment). I still think it is very unethical to promote stocks like he does
20/01/2018 8:11 PM
Icon8818 Wasted 10 minutes reading rubbish! Jon choivo = Ricky yo brother?
20/01/2018 8:13 PM
Icon8818 people like David spoon feed also you want to close your eyes, nose and mouth?
20/01/2018 8:16 PM
lizi why analyse so much? to earn money in stock market, i focus more on logical wisdom, risk management and emotion control.
20/01/2018 8:35 PM
godhand Emotion control is the most important one. How many ppl can see their stock drop 50%. Less than 1%
20/01/2018 8:38 PM
cheoky Is not emotion control. Is deliberate ignorance while drunk one on the value of your company. Hahaha. But still unsure whether I will be rewarded or not. Anyway I start to like reading author blogs.
20/01/2018 8:46 PM
cheoky I believe if I stare at the hrc ticker full time. I would have sold out.
20/01/2018 8:48 PM
godhand He’s writing style is very honest his very own perspective. Feel relax reading his writings
20/01/2018 8:49 PM
myongcc5 There r 3 IBs wth 313 mils CW expiring fm 22 Feb to 19 Mar!!!!

I thrown all the second day when suddenly realised the abv stated
20/01/2018 8:50 PM
More2It Posted by John Lu 《 HIBISCUS 》 TP RM2 > Jan 20, 2018 08:11 PM | Report Abuse


CALVINTANENG, the king of finding undervalued “rubbish” stocks, and as a former car sales man, a consummate promoter (this is not a compliment). I still think it is very unethical to promote stocks like he does

totally agree, can get better returns , to just follow the blue chip stks or other hot favourites not in his list.

found that, some forums got tag team (3-6 ids), that recommend the stk typically below 40 cents share, as good buy, have to listen to them for sometime to detect, but not nice to name names , please take note
20/01/2018 8:52 PM
myongcc5 HRC is definitely not bad fundamentally but too much CWs wth 5 mkt maker!
One can expect the stock to b wildly VOLATILE
20/01/2018 8:53 PM
myongcc5 ..too many SWs wth 5 market makers. CO just issued on Friday by CIMB
20/01/2018 9:31 PM
Choivo Capital Ricky Yeo is one of the few people in the forum who i will read when he writes. His depth in thinking and research is truly very very hard to find in the KLSE.

I do not agree with some of his picks, but i will listen and ask clarifying questions.

Icon8818 Wasted 10 minutes reading rubbish! Jon choivo = Ricky yo brother?
20/01/2018 20:13
20/01/2018 9:49 PM
pjseow Jon , I have the same puzzle as you on what is the difference between Hengyuan and Petron in terms of refinery upgrades . Based on a few i3 sifus , Hengyuan management and technical teams are the smartest in the world . They just need to spend RM 700 million to upgrade to the latest state of the art refinery whereas others ( Petronas , Petron, Aramco and other top notch refineries ) need to spend more than 10 times the amount to get similar upgrades . Why cant others copy what Hengyuan did and save the billions ? The equipment and instrument companies which do the upgrade can surely recommend the same methods to others unless only Hengyuan knows the cheapest ways . I hope it doesnt turn out that the RM 700 million upgrade will not work at all . Hengyuan may end up the need to do the same ways as others and spend billions . THis is the risks which Davidts lim did mentioned in his number 8 write up.
20/01/2018 11:38 PM
More2It benefited from your perspectives of events, except on the issue of

Why such volatility in Hengyuan (and PetronM)?

in my opinion, cannot be explained accurately, without understanding the roles played by super investor KYY, the stock broking investments funds, local funds n china funds, which must have been here since the beginning.
not possible to boost price from @rm8.50 in nov.2017 to peak of rm19.20 in dec.29, solely driven by retail players margin funds
20/01/2018 11:39 PM
Choivo Capital pjseow, i try not to think too deeply. I use this method. I dont need to know the weight of a woman to know if she is fat, nor the age of a man to know if he is old.

If i need to know it with precision, its probably not that good of an investment if expected value is taken into account. They are many other investments that are easy to understand and still undervalued.

More2It, you would be surprised. How did bitcoin go up to USD20k at one point? One small group of people can push up a price, if no one wants to sell at all. As prices go higher, people get greedier, and want to keep the stock even more. This lack of supply ensures panic buying and price shoots up.

And as we can see the last few days, when one person wants to sell, everyone wants to sell. So we get panic selling and the price drops like no tomorrow. And as humans, we think it will really go to no tomorrow and sell.

I dont deny foreign funds are in, but that is never the big difference. Im writing 2 more post on the operators and why KLSE under perform other indices.
21/01/2018 1:25 AM
Choivo Capital I don't really bother trying to predict earnings. I focus on understanding the business and the moat.

If i need a fantastic quarter for my investment thesis to work out, i think im fucking up. Because it is not my edge or forte.

The funny thing about predicting earnings, is that a lot can go wrong. And what can go wrong, often the predictor does not even know.

However, because they believe in their prediction, they take a less than adequate margin of safety. Which means when they die, they really die.

All i know is that Hengyuan is now still cheap. But i always keep in mind that record earnings have a way to make things look cheap. And that the crack spread will compress. And that a significant proportion of earnings this year is due to inventory gain, forex gain as well as extenuating circumstances that result in record high spreads.

Which is why its only 3% of portfolio, while PetronM is 9%. Petronm is 9% because it can 100% sell its own product. Hengyuan must rely on china.

So question now is. What is the real operating earnings and how resilient is it. This is really really hard to answer, unless you have worked in refineries for decades and know the conditions worldwide.

When HY goes to 20, i think i'm out. I wont be sure if the woman is fat or not then.
21/01/2018 1:32 AM
Choivo Capital @purebull

How to you know the right timing? In a bull market, any timing is the right timing, and in a bear market, any timing is the wrong timing.

Stocks become cornered (also know as liquidity crunch) where either, no one wants to sell, and the price shoots up like mad.

Or when no one wants to buy, and the price free fall for you to see.

Haha, feel free to explain your education theory a bit more.
21/01/2018 5:02 AM
PureBULL . http://purebull-bursatrader.blogspot.ca/2013/02/how-to-goreng-or-fly-stock-successfully.html
21/01/2018 6:46 AM
vvcb Jon Choivo. Thanks for a well written clear headed article which is a joy to read. Keep writing. If there is a follow tag, I would have tagged it.
22/01/2018 11:09 AM
Op3rs Very good article! Learnt alot from it. THX
22/01/2018 3:14 PM
limch When the music will stop? CWs' expiring next mth. Before no such scenario so goreng on good QR possible.
23/01/2018 4:39 AM


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