kcchongnz blog
What does a value investor do when he sees a big fat frog jumping around? kcchongnz
"When you locate a bargain, you must ask, 'Why me, God? Why am I the only one who could find this bargain?'" - Charlie Munger
The followings are the conversations I have had with an e-friend in i3investor just three weeks ago.
Posted by paperplane2 > Jul 12, 2015 03:12 AM | Report Abuse 
If now I spot an opportunity to arbitrage to gain near 30%return, shall I do so in big scale?
Posted by kcchongnz > Jul 12, 2015 10:38 AM | Report Abuse X
I highly doubt you have any risk free arbitrage opportunity. If you are talking about risk arbitrage which is likely the case, then you have to view each circumstance.
Posted by paperplane2 > Jul 12, 2015 06:13 PM | Report Abuse
Technically it is called risk free when you have warrant in discount. As you can convert and sell the mother soonest. Provided of course you can convert fast.
Posted by kcchongnz > Jul 12, 2015 07:09 PM | Report Abuse X
This is definitely a risk arbitrage, unless you can short sell the underlying stock. I call it execution risk. The advantage of it is your potential gain as you said is high at 30%, quite a wide margin. However anything can happen before the whole conversion exercise is carried out and completed, probably in two to three weeks’ time. I got burned before many years ago when a similar situation happened on a stock and its warrant call Country Height with the cunning and manipulative major shareholder and manager. So watch out who is behind the company, if he is trustworthy. It is hard to find a big fat frog jumping all around nowadays.
This would be what I am going to do after getting the tip from this friend. Let us take an example of a public listed company, Asdion Berhad.
Asdion Berhad (Asdion) is a Malaysia-based investment holding company engaged in software development and information communication technology (ICT) and related activities. The Company, specializes in providing integrated operations software solutions and products, which focuses on service sectors from hospitality, recreational, supply chain logistic to travel related businesses. Operations are carried out in Malaysia, Singapore, Brunei and China.
The thesis
First I would examine the investment case of Asdion warrant. Asdion has 113 m common shares and 52 m warrants outstanding as at 31st March 2015. It has RM3.7 m debts, cash of RM2m and hence a net debt of RM1.7 m. Book value per share is 20.4 sen, way below its share price of RM1.50 then.
The profile of the warrants is as below:
|
Maturity Date: |
Mar 24, 2019 |
|
Issue Size: |
52,191,260 |
|
Exercise Price: |
MYR 0.50 |
|
Ratio: |
1 Warrant : 1 Ordinary Share of RM0.10 each |
The warrants still has a long expiry date of four and a half years, and hence a good time value on top of its intrinsic value. As on the date of conversation three weeks ago, Asdion was trading at about RM1.50 and the warrant at about 70 sen. This means the warrant has an intrinsic value of RM1.00. It was hence traded at a discount of 30 sen, not including the huge time value it is supposed to have. This is what you can do then:
|
Action |
Share |
No of shares |
Price |
Amount |
|
Sell |
Asdion |
100000 |
1.50 |
150000 |
|
Buy |
Asdion W |
100000 |
0.700 |
-70000 |
|
Convert |
Asdion W |
100000 |
0.500 |
-50000 |
|
Profit |
30000 |
You short sell 100000 shares of Asdion at RM1.50 and get RM150000 and use the proceeds to buy 100000 shares of its warrant at 70 sen. You then immediately send the warrants for conversion by paying 50 sen per share, or a total of RM50000. Three weeks have passed now and you can pass the converted share to the buyer of your short sale of Asdion shares. You pocket a clean RM30000 without coming out with a sen, ignoring the minor transaction costs. How nice!
The theory of arbitrage is very powerful in finance and investment. However, there are limitations. The constraint here is you cannot sell Asdion, unless you have already own them, or someone is willing to lend to you. If you do not have any Asdion shares in this case, you have to put out your own money of RM70000 to buy Asdion W at RM0.70 apiece, send them for conversion by paying another RM50000, and now you probably have just received your converted 100000 shares of Asdion.
This is clearly a risk arbitrage with the execution risk. The risk is when I get back my converted Asdion shares, will the share price of Asdion still remain the same for me to profit?
Clearly I have my doubts on the above after bitten once many years ago with this Country Height warrants mentioned in my conversations above. I have great reservation of this market place.
Financial performance
I will next look at its past financial performance, at least I know if Asdion is good company and if I get caught and have to hold the shares for long term investment, it is still okay. I know investment is about the future and some savvy investors would scorn me for looking at the rear view mirrors. It is no use reading audited accounts. No use knowing how to read balance sheet, or cash flow, so they say. They are all history. The company is a high tech company. It has great plan for the future and this time is different. But I am just different. I read history and place a lot of weight on it before I start investing.
Figure 1 below shows the past 5 years performance of Asdion. Every year it loses a few million Ringgit, and even more than RM10m in 2012 for a small service company. So what is the story?
Historical share price movement
Next I better look at its recent share price movement to have a clue of what is going on. Figure 2 below shows that Asdion share price has been around 40 sen to 60 sen for a long period of time until a year ago when its share price suddenly jumped from that tight range to RM1.60, a more than 100% jump in share price within a year. Hence there must be some kind of momentum, so I must buy the shares now or else I would miss out this golden opportunity. Buying the warrant with a gearing of more than two times and at a big discount to its intrinsic value, besides its free time value, is even better. One sure would make big money!
But again, it is me. I don’t chase the share after it has gone up so much in such a short time, especially for a company which has been losing money for so many years. I am not a follower of the greater fool theory. So as usual, I passed this golden opportunity.
Moral of the story
Asdion and its warrant closed at RM1.11 and 49 sen respectively on 6th August 2015. If one has bought the warrant at 70 sen three weeks ago and sent for conversion to the underlying shares with 50 sen per share, he is able to sell it now at RM1.11, for a loss of 9 sen, or RM9000 for 100000 warrants bought, not that bad. For those who have bought it but have not sent for conversion, the paper loss is 21 sen, or a whopping loss of 30% in just three weeks, instead of a gain of 30%. They would still wonder whether to hold them and hope its share price would recover, send for conversion with RM50000, or just sell them off to realize the big loss of RM21000. The decision is not an easy one.
The moral of the story is, “there ain’t no tooth fairy in Bursa”. In fact, Bursa is full of traps set up especially for manipulating the retail investors. I would be surprised if anyone hasn’t been deceived before falling into those traps.
There is only one way you can prevent yourself from falling into the traps and becoming the victim; equip yourselves with all the knowledge of finance and investing. Learn the language of the business of which you want to hold part of it. Read widely from the writings of true super investors, and gain experience from them. Do not believe anyone has the altruistic intention to make money for you by giving you share market tips.
There is no free lunch in this world.
K C Chong (7th august 2015)
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Discussions
11 people like this. Showing 50 of 83 comments
HEHE! YA! This is just a sample from my little portfolio, I have others which I dun wanna show
2015-08-07 13:46
As long as I make money, who cares???? KC chong, it is risky, but I can manage! as it is small compared to my total portfolio. So it is calculated risk
2015-08-07 13:48
What u showed were trades that u made money. There is a huge chunk that lost money but u didn't show
Don't repeat the costly mistake again. Market got a lot of traps
2015-08-07 14:28
Lembu no shame.. still talk big when all followers losing money...show you ass...let me kick you in the face
2015-08-07 14:33
Posted by paperplane2 > Aug 7, 2015 01:48 PM | Report Abuse
As long as I make money, who cares???? KC chong, it is risky, but I can manage! as it is small compared to my total portfolio. So it is calculated risk
Don't get me wrong that I am saying that you should never do risk arbitrage. It is a very powerful concept in investing as I have said.
I myself constantly looking for arbitrage opportunity, I mean risk arbitrage. There ain't any risk-free arbitrage around. I wrote about a few of risk arbitrages in i3investor before. The first one was KHSB which was a very successful arbitrage taken by me as there was no manipulation by anyone in this stock.
http://klse.i3investor.com/servlets/forum/800001149.jsp?ftp=39
The next one was Asupreme LA.
http://klse.i3investor.com/servlets/forum/800001290.jsp?fp=4&ftp=2
This there was manipulation by insiders and syndicates, I think. But I was successful with it and I didn't have to convert to the underlying share.
There is another one which is more of sharing of idea for Kuchai:
http://klse.i3investor.com/blogs/stock_pick_2014_kcchongnz/43763.jsp
This there is the limitation that nobody can do anything about the price-value diversion, at least for now.
So there is high probability that one can make money from risk arbitrage if he understand the diversion of price Vs value. But beware that most of the time, there won't be big fat frog jumping around. So never put all your eggs there.
Asdion is a clear and present example. The share price of the underlying share has dropped from RM1.50 to less than RM1 now, for a loss of 35% in just three weeks. For those thinking of arbitraging the warrant got hurt, badly. This is a clear manipulation of somebody.
2015-08-07 16:22
thanks for sharing KC CHONG...
appreciate ur kind time for analysis always.............
I have feeling another 25 years my English also cant as good as urs. KC CHONG, I love FA so I never miss all your FA write up.
KC CHONG, may I request if possible to re-analyze VS's financial performance on next QR report. I like to learn should they have certain improvement in facts and figures after the expansion. No doubt CIMB presents an attractive TP of RM7.10(almost similar with KYY's) but no harm to do an analysis before & after business growth.
Again, thanks Senior Kc Chong.
2015-08-07 16:34
someone jealous on my 17% return in short time! I take kc view positively. Yes, who dunno tey por yee like manipulate shr price! I managed to take money from his mouth! if you so damn good, show me you can also? Why not?
2015-08-07 16:59
Duit you better be careful with that green suit, paperplane might have you mistake as a frog
2015-08-07 17:00
hahahah Icon8888.....
is ok la.... I tak buat hal in i3 anymore... I say sorry and walk away recently.... I really tak berani buat hal ad..... now go back to my silent world only..... I scared KC CHONG treat me as GREEN FROG PRINCE...
hey KC CHONG, you like to eat Claypot Green Frog? The very very GREEN type? I always see KC CHONG very serious. I dare not to say hello to him also...... but me ada curi curi read his FA analysis la.....
same same ma.. Icon8888 I read n re-read all ur stock write up.. I love the way u contribute also ma... I enjoy in reading ur blog ma...
KC CHONG, Icon8888 and paperplane2...
Happy weekend. Bye for now.
2015-08-07 17:04
U should be the one that learn from Duit
Your abrasive behavior offended many people
I am merely cleaning up on behalf of the forum
2015-08-07 17:28
Posted by duitKWSPkita > Aug 7, 2015 04:34 PM | Report Abuse
I have feeling another 25 years my English also cant as good as urs. KC CHONG, I love FA so I never miss all your FA write up.
DUIT, ARE YOU KIDDING? I ONLY STARTED TO LEARN "HUMPTY DUMBTY SAT ON A WALL" WHEN I WAS 13 YEARS OLD!
KC CHONG, may I request if possible to re-analyze VS's financial performance on next QR report. I like to learn should they have certain improvement in facts and figures after the expansion. No doubt CIMB presents an attractive TP of RM7.10(almost similar with KYY's) but no harm to do an analysis before & after business growth.
DUIT, ARE YOU KIDDING AGAIN? THE PERSON WHO KNOWS V.S IS THE ONE MENTIONED IN YOUR POST HERE. NOT ME. I AM JUST UNINFORMED CRITIC.
2015-08-07 17:28
Asiabio warrant A
The profile of the warrants is as below:
Maturity Date: Mar 19, 2024
Exercise Price: MYR 0.10
The warrants still has a very long expiry date of more than eight and a half years, and hence a good time value on top of its intrinsic value. On 30th January 2015, Asiabio closed at 26 sen and the warrant at 7 sen. This means the warrant has an intrinsic value of 16 sen. It was hence traded at a huge discount of 9 sen,or a whopping 50% discount, not including the huge time value it is supposed to have!!!!
Punters who thought they had found a free lunch scrambled to mope up the warrants at 7 sen and sent for conversion at 10 sen and hoped to make the 35% arbitraged profit. Alas, two weeks later before the converted scripts came back, the underlying share closed at 12 sen. They have to hug on the converted share with a 5 sen loss. Those who did not convert also faced heavy losses with the warrant price traded at just 5 sen, down 30% from the price they bought two weeks ago.
2015-08-07 19:06
Good examples. But the fact is managed to reap 17%! And ppl are jealous!
2015-08-07 19:55
His blog said he pocketed RM700 profit in two weeks time
RM700.... Wahahaha Cokdrisks who would jealous that kind of money ???!!!
This is like little boy play sand
RM700 profit !!!!
2015-08-07 23:25
From the way u all talk, obviously is jealous loh! If not u shld just keep quiet.
2015-08-08 09:18
Coldrisks I am not laughing at you. I am just trying to make fun of paperplane's claim that you are jealous about him
2015-08-08 12:21
Why suddenly today you are talking about ASDION, KCCHONG? Why not few weeks ago?
2015-08-08 14:57
Johnnycake, ppl like to jump into conclusion fast! Next yr Addison back rm2 many keep quiet
2015-08-08 15:02
Posted by johnny cash > Aug 8, 2015 02:57 PM | Report Abuse
Why suddenly today you are talking about ASDION, KCCHONG? Why not few weeks ago?
Posted by Frankiechow > Aug 8, 2015 03:05 PM | Report Abuse
It looks like KCChongnz is taking a cheap shot on Asdion or Paperplane. Why didn't he say anything few weeks back before Asdion took a dip along with the rest of counters in klse? Is he trying to divert from VS which he was completely wrong?
I started my article with my response to paperplane when he asked me something about arbitrage. And that was three weeks ago. And I said my conversation with "my e-friend". What is wrong to discuss any stock in i3investor, whether now or a few weeks ago?
The Chow fellow, what do you mean by a "cheap shot"?
The Chow fellow, can't you read and understand simple English?
The Chow fellow, where was I "completely wrong on V.S?"
The Chow fellow, we can talk about, and discuss intelligently about V.S any time as you wish. Do I need to divert anything from V.S?
2015-08-08 15:56
Wow! I take kcchong comments positively. Indeed Asdion wb a high risk speculation! Thts whyit is arbitrage tht time , but of course I calculated safety with 30% which wide. I have the risk appetite to take it, so I ripe the profit! You see once I convert I sell directly fast! I know you can't hold long also. The only reason is arbitrage loh.
2015-08-08 17:00
I have high respect on kcchong, OTB, calvintan, stockraider, and a few more like ks55 as I remember
2015-08-08 17:01
U see, my blogs full of kcchong article, I have a lot to learn from him!
2015-08-08 17:10
Kcchong, how abt altman z score to invest? Any idea or guide can provide.
2015-08-08 17:10
Bad move bad move
Paperplane now saddled with tonnes of Asdion shares. Huge inventories with no buyers LOL
2015-08-08 17:11
Successful investment is calculated risk control plus a bit luck! Don't look into only EPs, book strength only! Investment is an art! 100% to 300% growth EPs is nothing! Sustainable is key!
2015-08-08 17:13
Posted by paperplane2 > Aug 8, 2015 05:10 PM | Report Abuse
Kcchong, how abt altman z score to invest? Any idea or guide can provide.
http://klse.i3investor.com/servlets/forum/900243804.jsp
2015-08-08 17:18
Dear Kc Chong,
Good day to you.
I am totally lost.... I googled HUMPTY DUMBTY SAT ON A WALL then only I know it is a song............. So naughty of you........ Actually I have no childhood so really never learn any kid songs.
Regarding to the VS, really no kidding. No harm to review it again(provided that if you think it can bring value to reader). ANyway, sorry for inconvenience caused. I love to read FA analysis in detailed analysis.
Wishing u a productive week ahead.
kcchongnz Posted by duitKWSPkita > Aug 7, 2015 04:34 PM | Report Abuse
I have feeling another 25 years my English also cant as good as urs. KC CHONG, I love FA so I never miss all your FA write up.
DUIT, ARE YOU KIDDING? I ONLY STARTED TO LEARN "HUMPTY DUMBTY SAT ON A WALL" WHEN I WAS 13 YEARS OLD!
KC CHONG, may I request if possible to re-analyze VS's financial performance on next QR report. I like to learn should they have certain improvement in facts and figures after the expansion. No doubt CIMB presents an attractive TP of RM7.10(almost similar with KYY's) but no harm to do an analysis before & after business growth.
DUIT, ARE YOU KIDDING AGAIN? THE PERSON WHO KNOWS V.S IS THE ONE MENTIONED IN YOUR POST HERE. NOT ME. I AM JUST UNINFORMED CRITIC.
07/08/2015 17:28
2015-08-10 12:22
duitKWSPkita Dear Kc Chong,
Good day to you.
I am totally lost.... I googled HUMPTY DUMBTY SAT ON A WALL then only I know it is a song............. So naughty of you........ Actually I have no childhood so really never learn any kid songs.
Regarding to the VS, really no kidding. No harm to review it again(provided that if you think it can bring value to reader). ANyway, sorry for inconvenience caused. I love to read FA analysis in detailed analysis.
Wishing u a productive week ahead.
Duit,
As requested, I have written something about VS. I do wish to bring value to readers and shareholders of VS. Unfortunately every time I write about it, it brings anger among many readers. I can't understand why. Must I only write good thing and in line with their thinking, and not something which is different from they believe?
http://klse.i3investor.com/blogs/kcchongnz/80998.jsp
2015-08-10 13:39
Info noted...
No worries..... As long as we do not perform "bad" thing on any personal interest then should be fine rite? I ever wrote about SELL CALL on stocks before and also kena like hell........ Readers will understand our intention one day. Then they will share our concern too. Everyone has their appetite no matter high fats, calories or energy contents.
I read you deliver sincere sharing always so no matter CAINTEK or KURANG CANTEK(not favorable) analysis also become a great reference for me.
Terima kasih banyak banyak....... I love FA so I wont miss your FA analysis.
Posted by kcchongnz > Aug 10, 2015 01:39 PM | Report Abuse
Duit,
As requested, I have written something about VS. I do wish to bring value to readers and shareholders of VS. Unfortunately every time I write about it, it brings anger among many readers. I can't understand why. Must I only write good thing and in line with their thinking, and not something which is different from they believe?
http://klse.i3investor.com/blogs/kcchongnz/80998.jsp
2015-08-10 14:00
Wow, within one month Asdion has dropped by a whopping 50% from RM1.50 to just 74 sen today. Those who saw Asdion Wb as a big fat frog then would be shocked with its share price dropped by 44% during the same period.
As the frog was so fat and big, I am not surprised there are punters who have borrowed money to buy Asdion Wb and hoped for the big kill.
What if one has borrowed 50% of capital to punt big in this stock? Within one month, he loses all his capital.
Bursa is really one of the most treacherous place to be if you know nothing about the language of the business and the dangerous traps in the market place.
2015-08-11 20:01
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2015-08-07 13:42