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Sunday, June 16, 2019

(CHOIVO CAPITAL) The Art of Trading (DAYANG) Profitably Around Mr Koon Yew Yin and Mr Ooi Teik Bee.

Author: Choivo Capital | Publish date: Sun, 10 Mar 2019, 4:30 AM

For a copy with better formatting, go here, its alot easier on the eyes.

The Art of Trading DAYANG Profitably Around Mr Koon Yew Yin and Mr Ooi Teik Bee.

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Well, here we go again.

First there was the boom and bust of export stocks. Though to be fair, its not that bad of a bust as the earnings were resilient, due to Malaysia having a decent cost based globally for those items as well as large supply of rubber trees.

Then there was the steel boom and bust.

After that was the construction boom and bust.

And in tandem, the semiconductor and testers boom and bust.

And finally there is the Petroleum Refinery boom and bust. This one was pretty interesting.

And now with the bear market behind us, dead cat bounce or not, we’ll soon find out. We find ourselves welcoming back Mr Koon Yew Yin and Mr Ooi Teik Bee to I3.

Introduction

Well, neither of them need any introductions. When it comes to KLSE small caps, there is no larger market force than these two individuals, and their followers.

Forget EPF, Tabung Haji etc, they are small fry when it comes to these two gods of the small to mid-cap stocks.

For Mr Koon, after his RM64 million loss and the sale of his prized lands in Ipoh (from what I heard), he is back with a vengeance and making full use of the special characteristics of the KLSE markets.

The unique characteristics of the Malaysian Equities Market

Understanding Koon Yew Yin, The real enigma.

As for Mr Ooi who only posted a small loss last year, with the jump in small caps, the animal spirits are back in the KLSE retailers, and the pain of 2018 long forgotten.

With technical breaking SMA20 or 69 or 100 (I honestly have no idea), the recommendations to private followers are back in earnest.

A Conversation With Mr Ooi Teik Bee

When it comes to trading profitably around these two market forces, its important to identify the phases of the, well, frying.

I wish i could think of a better and more polite word, but, if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.

They all have different characteristics, and the shifts are gradual, like the boiling of water, and a “Grand Ah-Whoom!” moment at the end. I’ll explain that phrase later.

You will not see KLSE raising up a sign when things shift into different phase, but i hope this article will you help you identify roughly the phase you’re at.

Depending on which phase you are at, the things you need to do, to notice, and the risk involved is very different.

For the sake of simplicity, we will split them into 3.

“The Beginning” , “The Middle” and “The End”.


The Beginning

They usually start the same way. A company has about 2 good quarters. The company was in the doldrums before this and at a cyclical low, or somewhere near that price.

Coupled with the 2 good quarters, is a story that explains this increase in profit in a believable manner. In this case, its that PETRONAS having higher capital expenditures, which should and did increase maintenance works.

For the case of DAYANG, its also coupled by a very nice, detailed and long report from RHB on the industry, which helped to provide the background for the story presented to the public.

With this story in mind, they extrapolate the now to the future, and thus infer that results will be far better in the future, and therefore an increase in valuation is in order.

Mr Ooi, only announces it to his private subscribers.

However, Mr Koon Yew Yin will announce publicly he is buying as his goal is to help you make money and teach you investing. Obviously! No reason to doubt that.

Now, this is the point where you need to jump in fast, especially if he says Mr Ooi is recommending it as well. Check the forum comments, if Mr Ooi recommended it, you should notice an uptake in the number of comments as well as the level of enthusiasm.

If you’re lucky, it may be sometime before the quarterly results, in which case, you have a nice long wave to ride before the quarter.

Before the quarter hits, you will need to do your own expected value calculation. What kind of profit the market is pricing in?

Better than last year?

Better than the previous quarter as well?

What are the probabilities and outcome for each scenario?

And do your expected value calculation from there. So for example:
20% Chance of Bad Result: Down 20%
50% Chance of Better Than Last Year Result: Up 10%
30% Chance Very Good Result: Up 20%

Expected Value: (0.20*-0.2)+(0.50*0.1)+(0.30*0.2)=7%

This means that all outcomes considered, this has a positive expected value of 7%, in which case you should hold.

If the quarter was bad, there is a good chance that the story ends here. In which case, sell and wait for the next one.


The Middle

If the quarter is good, you can now enter the middle phase.

The thing you need to know here is this, Mr Koon and Mr Ooi, along with all their immediate followers will now proceed to sailang. However, they or their members will be a little hesitant unless the price were to start going up significantly.

There is no need to fear much here, because Mr Koon usually buys in an extremely aggressive manner which will instantly push up the price.

At this moment, you need to be very decisive and whack all your cash in along with a significant portion of your margin, before the greed infects everyone else and they start to buy as well

You will have until next quarter to ride the wave, assuming nothing unexpected happens.

As Mr Koon and Mr Ooi buy very aggressively, along with their direct followers which are often quite rich as well, you should see an strong inflation in price.

It is around this time, that the average market participant should start to get itchy and join as well.

And as the price rise further, the more conservative ones will not be able to tahan, and join as well.

At the same time, some fund management money will also start flowing in as its a big catalyst event. They too intend to ride the wave and make some money from the more foolish retailers.

They key thing you need to track here is,

"How much money does Mr Koon have left?"

This is the amount that he can use to further push or support the price. This amount is also a decent proxy for how much money Mr Ooi, his followers as well as Mr Koon’s rich friends have left.

Most of the time, you need to do it by feel. However, the rule of thumb is,

“The more articles he writes, the larger the amount of money he has in there.”

When he says he has a lot of shares and don’t need your support, its more than 50%. Every subsequent time he releases an article, add 5%.

Occasionally, he may even tell you the actual figure, by being a 5% member.

However, after his loss of RM64mil, and assuming a margin limit drop of at least RM64mil as well, I don’t think he may appear again unless the company has market capitalization of well below RM1 billion.


The Final Stage

This stage is where both people as well as their direct followers are all pretty much all in. Or at a point, where they just can’t stomach putting more.

I will describe it using two perspectives, “Diversity of Participants” and “Valuation”, as they are quite key to understanding how all the stages tie up, and also conveniently describes how the final stage ends.

Its also here, that i will show you how lohsoh i can be. Hahaha


“Diversity of Participants”

Every market or individual stock is a complex system that is typically filled with a diverse group of participants who are irrational in one way or another.

They consist of people having different ideas and different views of things. Long term, short term etc etc, and all these individuals are a little or very irrational towards one end or the other.

For example,

The long-term investor may decide not to trade even though it may make sense for this quarter, allowing the trader to trade and make that profit.

The trader’s inability to sit still and hold, allows the long-term investor to buy it from them and hold it, making the money from the long-term growth of the company. Etc etc.

Despite the irrationality of their participants, their diversity ensures that they are all irrational in different directions, giving a net effect of zero, allowing the wisdom of crowds to prevail over the long term.

This ensures that the market is efficient and accurate most of the time. This means that over the long term, movements in share prices are usually in line with movement in earnings.

However, this diversity can often undergo phase transition, and thus result in boom or bust in the short term. What is a phase transition? This is where small incremental changes in causes lead to large-scale effects, or the “Grand Ah-Whoom!” moment.

What is this Grand Ah-Whoom! moment?

Imagine this. Put a tray of water into your freezer and the temperature drops to the threshold of freezing. The water remains a liquid until—ah-whoom—it suddenly turns into ice. Just a small incremental change in temperature leads to a change from liquid to solid.

The Grand Ah-Whoom! moment, occurs in many complex systems where collective behavior emerges from the interaction of its constituent parts. And this includes the behavior of the stock market.

In complex systems with human beings like the stock market, diversity is the most likely condition to fail first.

As you slowly remove diversity, nothing happens initially. Additional reductions may also have no effect. But at a certain critical point, a small incremental reduction causes the system to change qualitatively.

Taking DAYANG for example,

At the beginning before the boom, their active (KLSE have a lot of frozen shares where nothing is done) participants consist of mainly,
Cyclical Value Investors (say 20%)
People who were trapped (say 80%)

This results in the shares being quite undervalued, as the people who were trapped don’t want to top up and the cyclical value investors, are there by virtue of their cheapness.

As the boom starts, the market participants become increasingly diverse as new participants buy the share from the current participants, and the price slowly approaches fair value, the participants now consist of say (figures are just for illustration, they are likely to be different),
Cyclical Value Investors (15%)
People who were trapped (65%)
Koon Yew Yin & Ooi Teik Bee (5%)
Koon Yew Yin’s & Ooi Teik Bee’s immediate followers (15%)

As the boom rushes along, the “Cyclical Value Investors” and “People who become trapped” becomes increasingly smaller portions of the pie, especially as the retailers (foolish and shrewd) and fund money looking to ride the wave come in.
Cyclical Value Investors (10%)
People who were trapped (35%)
Koon Yew Yin & Ooi Teik Bee (7%)
Koon Yew Yin’s & Ooi Teik Bee’s immediate followers (15%)
Growth Investors (8%)
Shrewd Retailers (Usually Momentum Traders) (5%)
Foolish Retailers (10%)
Fund Money (10%)

Soon the price shoots past fair value at which point, it looks more like this,
Cyclical Value Investors (5%)
People who were trapped (20%)
Koon Yew Yin & Ooi Teik Bee (8%)
Koon Yew Yin’s & Ooi Teik Bee’s immediate followers (19%)
Shrewd Retailers (Usually Momentum Traders) (8%)
Foolish Retailers (20%)
Fund Money (20%
Growth Investors (8%)

It is around this point, as the price climbs higher and higher into bubble territory, that the fund managers and shrewd retailers start selling. Growth investors may start selling as well.

Population diversity falls, invisible vulnerabilities and risk start to build despite the price constantly marching upwards.

This is the point at which you should be selling, assuming your are a KOONBEE Trader, never chase the last dollar.

Soon, participants consist mainly of,
Koon Yew Yin & Ooi Teik Bee,
Koon Yew Yin’s & Ooi Teik Bee’s immediate followers
Growth investors
Foolish retailers.
Foolish Fund Money

Except, every single one of these participants use extremely similar trading strategies, and as they keep buying, their common good performance is reinforced.

This makes the population very brittle, and a small reduction in the demand for Dayang shares could have a strong destabilizing impact on their prices. It is at this point that risk is at absolute highest.

Why?

As most of the market participants have the same strategy, in the event the thesis, or in this case, the results are not as strong as they expected, or worse, a loss.

Its not just some of the market participants who want to sell, but, ALL OF THEM. And as prospective buyers are likely to be market participants with similar trading or investment strategies, demand dries up instantly as well.

How do you know you're at this stage,

"When everyone in the stock cannot think of even one bad thing that will happen, or about the company, and the comments all sound the same."

In the meantime, if the result was good, it will not increase by much as everyone who wants to buy the stock already has it, and has exhausted their cash and credit lines, unless it’s a very fantastic result like HengYuan.

In this case the expected value calculation is highly negative, it probably looks something like this.
20% Chance of a loss: Down 60%
50% Chance of not as good as expected result: Down 20%
20% Chance of good enough result: Up 5% up.
5% Chance of better than expected result: Up 10%
5% Chance of very good result: Up 20%

Expected Value: (0.20*-0.6)+(0.50*-0.2)+(0.20*0.05)+(0.05*0.1)+(0.05*0.20)=-19.5%

This means all outcomes considered, this has a negative expected value of 19.5% in the first day. Its likely to fall further as people sell.

Often as Mr Ooi is quite shrewd, he would have sold a large portion of his position as prices go up and inform his followers.

This is where you may see some “consolidation” in terms of chart movements, which is where Mr Ooi, Mr Ooi's direct followers, shrewd traders and fund managers are transferring their shares to the foolish retailers.

Mr Koon on the other hand, often considers himself an investor, and thus will hold on longer, or wait for margin calls to force him to sell.

Having said that, given that he was burnt properly 2018, he is likely to listen and do exactly as Mr Ooi tells him to, at least until his profits make him feel like he is smarter than Mr Ooi again.

Just kidding.

While the foolish retail participant who is in reality, a trader, but foolishly considers himself an investor, makes the fatal mistake of averaging down, often on margin.

Turning a bad trade, into a mediocre and at times fatal investment.

Soon, diversity returns, and the foolish retailer, turns into people who are trapped. And as prices fall further, with the cyclical value investors return.

“Valuation”

So how did the shrewd investors, fund managers and to an extent Mr Ooi or Mr Koon know when to sell?

It’s simple, the valuation.

In the case of Mr Ooi and Mr Koon, its also because they are the first movers and catalyst.

The intrinsic value of an investment is simply all future cashflows discounted back to present value.

However, when a “Target Price” is set in these scenarios, Mr Koon for example, just takes the forward earnings, which is often at an all time cyclical high, and multiplies it by 10, for a TP of RM2.24 or something.

This does not consider the resilience of the earnings, or the capital structure of the company.

In this case, The Enterprise Value (Market Capitalization + Debt – Cash) of DAYANG is roughly RM2.4 billion.

Even when the current all time high earnings (which includes a ton of write backs of impairments/allowances as well as forex gains) is used, roughly 14 years is needed to see a return on investment, or roughly 7.14% yield.

Do you honestly think that, only a mere 2.49% premium from the risk-free rate of 4.65%, is needed for these kind of highly cyclical business, on the high end of the cycle and with write-back boosted earnings?

Have you ever wondered, why Mr Koon when presenting his track record at investment forums, only shows the first half of the chart?

Hint, the share does not stay at that price, a sea of fools paid for it. For those people, it would have been better if the price had not risen at all.

Reading the comments here, people here like to quote the RHB report verbatim, stating that PETRONAS will have higher capital expenditure, and therefore have a greater need for an MCM provider, which DAYANG can provide.

Well, do note that back when oil prices was USD100 or so per barrel in 2014, when Petronas pays for MCM, their goal is to produce as much as possible. MCM companies could basically quote any price they want, especially if they were good.

So what if it cost PETRONAS an extra USD2- USD3 per barrel? They were making at least USD40 per barrel. Forget about it, let you make a bit lah!

However, today the situation is vastly different, oil prices are about half at USD50-USD60 and highly volatile, with future outputs from US shale constantly increasing.

PETRONAS will fight with you like dogs over the price. From talking to my friends in PETRONAS and petroleum consultants, if you can even get a 10% net margin, you’d be breaking out the champagne.

In addition, do note current revenues and “earnings” are higher (or close to) than 2014 and 2015, when PETRONAS had their highest capex ever, and paid golden mountain prices for good MCM works.

A few slightly more, i hesitate to use to the word “insightful”, people, may then point towards the RM3 billion order book and say earnings for future years is guaranteed.

May I also point out that just before they started losing money in 2017, the order book was also around RM3 billion? And that the order book was around that figure every quarter they made a loss?

Which also goes for the tenders and their quantum.

I doubt Mr Koon or Mr Ooi genuinely thinks its worth RM2.24 per share. That if they actually had the money, they would privatize it at that price.

And neither would the shrewd traders, or any investment manager in a fund worth half their salt.

The foolish retailer on the other hand, really do think identifying the intrinsic value of a company, is as simple as taking the forward/ current earnings, which is currently at an all time high, and multiplying it by 10.


Conclusion

So, the million-dollar question. Talk so much, got buy anot?

Not a single cent! Hahaha!

The only one where, i might have considered an error on my part was CARIMIN, and to an extent NAIM. I saw it at RM0.2X and RM0.4x or so. And as they had a pretty good balance sheet and pretty damn cheap, I figured it would be worth a cyclical/net asset play and was thinking of a 2-3% position.

Do note that for companies not in my circle of competence, or have close to no moat, which include MCM’s, my investment checklist, consist solely of,
Is the management decent?
Does the balance sheet have low leverage?
Is it cheap enough?
Is the downturn cyclical or permanent?

However, I decided against it in the end, as they were better opportunities then that were within my circle of competence. Still wish i bought like 1- 2% at least though!.

To be fair, I did not even really read the prospective statements as I wasn’t that keen on it. If i had, i may have made that 1-2% buy.

And this was despite having friends in Petroleum Divisions of Consulting Firms, as well as PETRONAS, who told me capex works are picking up in 2018. Oh well.

What about my 500% trader friend? For more info on this fellow, read below.

Conversation with a top tier trader, and lessons learnt.

He bought and made a ton of money. Hahaha.

If it was another value investor who was friends with him, the fellow may have lost alot of money, being tempted into doing things he has no skill nor business doing.

I must admit, from my previous observations of the same scenarios, and as i looked at the meteoric rise of DAYANG, as an un-involved third party. I was quite tempted.

However, I don’t think this is my money to earn.

So, which phase are we in?

Well, my 500% trader friend, who trades like a young George Soros, has sold off most of his position.

Do what you may.

走好,不送.



PS: By the way, in the event Mr Koon and Mr Ooi reads this and decide to change the way the do their trading, what you need to do is likely to change somewhat.



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

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