There are 6 investment banks in KLSE that can issue structured warrants, including Maybank (MIBB), Ambank (AmInvest), CIMB (CIMB), RHB (RHB), Kenanga (KIBB) and Macquarie (MACQ). 

Currently, there are in total 113 active structured warrants in the market for the Big 4 glove counters.

Today I will be focusing on the relationship between the analyst reports and the structured warrants issuers. 

Just a few days back Macquarie Research released an analyst report on Top Glove which has sparked a huge debate. Their outlook of Top Glove changed from 12-month target price of RM30.40 (RM10 after BI) on 24th Aug to RM5.40 on 9th Sep, which is a huge downgrade. In a space of just 15 days, Macquarie changed its call on the stock from an Outperform to Underperform. 

Their justification for the major downgrade to RM5.40 (45% of the adjusted price post BI) was that while the growth in ASPs of gloves remained strong, the earnings of Top Glove will likely peak by Q2 FY2021. Let's not dive deep into his choice of valuation method but take a look at his "Action and recommendation":

They want us to sell Topglov after the QR on 17th of Sep, this coming Thursday.

Before issuing the structured warrant, the investment banks will buy some shares of the company from the market to ‘hedge’ their positions and attempt to capture a margin whether the share price goes up or down. For example, when an issuer sells a call warrant they will usually go into the underlying market and buy the shares to hedge themselves. Thus, if the share price increases, and investors profit on their call warrants, the issuer will also gain on their shareholding.

However, when the structured warrant is nearing expiry, especially the last 5 trading days before its maturity, the investment bank will tend to sell the underlying share, until the extent it creates jitters. This is to make sure that the structured warrants are out-of-money, meaning the issuers would not have to execute settlement with the subscribers. 

Here I have compiled a table for the upcoming maturity of the structured warrants until the end of 2020 for your perusal. Notice how they are normally expiring on the same day for different underlying's structured warrants by the same issuer and also take note of the last 5 trading days next time if there is a selldown, this might be the reason. 

Why take analyst reports with a pinch of salt? Considering that the investment banks have a vested interest in the share price of the underlyings, should they be allowed to issue research reports on such stocks? Since we have no say in whether they are allowed or not, next time when you see a research report on a counter from a research house whereby they are also the issuer of its sturctured warrants, take it with a pinch of salt, or at least, think about what is their objective behind the price call. Do not let fear and emotions overdrive your investment decisions. 

Thank you. -thewarrantmaster

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