Put Warrants - Knowledge And Tricks

Nowadays, index warrants, either call warrants or put warrants, are getting popular in Malaysia market. FYI, put warrants are only available in Bursa Malaysia since August 2009. Meaning, during 2008 economy crisis, put warrants are not exist in our market. Most investors did not have the opportunity to capture it. However, don’t forget global market is a cycle. When the bear market comes again, it will be the best time for put warrants to fly. In other words, if you are an expert, you can earn money during bull market and also bear market.

What is put warrants? I believe most investors only know that when FBMKLCI index drop, put warrants price will go up and put warrants price are affected by the movement of index. However, it is wrong. To be correct, put warrants price are affected by FBMKLCI futures price, and not FMKLCI index.

The FBMKLCI futures are listed and traded on the Bursa Malaysia, the index warrants price is linked to the movements in the futures price over time and at expiry settlement will be based on the closing level of the relevant futures expiry. This is done because the issuer will use the futures contract to hedge the index warrants.

This is the reason why sometimes you will notice when FBMKLCI index drops, some put warrants will also drop.

Just to share a trick or maybe an earning opportunity about warrants. When the future contracts change, there will be difference between the contracts figure. Hence, the warrants price also will adjust accordingly. Investors can make use of this opportunity to grab a cheaper put or call warrants. However, we don’t have the data of the futures that the issuer hedge.

FBMKLCI Index

27^th August Closing à 1,601.70

28^th August Opening à 1,609.04

Difference à 7.34 points

INDEX WARRANTS	27th August – Closing	28th August – Opening	Difference
FBMKLCI-HW	0.415	0.39	0.025
FBMKLCI-HX	0.775	0.73	0.045
FBMKLCI-HY	0.60	0.55	0.05
FBMKLCI-HZ	0.49	0.445	0.045
FBMKLCI-H1	0.47	0.44	0.03
FBMKLCI-H2	0.82	0.78	0.04
FBMKLCI-H3	1.13	0.995	0.135

1^st September Closing à 1,609.21

2^nd September Opening à 1,602.60

Difference à 6.61 points

INDEX WARRANTS	1st September – Closing	2nd September – Opening	Difference
FBMKLCI-HW	0.51	0.515	0.005
FBMKLCI-HX	0.83	0.855	0.025
FBMKLCI-HY	0.63	0.66	0.03
FBMKLCI-HZ	0.485	0.495	0.01
FBMKLCI-H1	0.515	0.54	0.025
FBMKLCI-H2	0.895	0.905	0.01
FBMKLCI-H3	1.11	1.15	0.04

I believe during 27^th August, the issuer had referred to a new futures contract and hence the price of put warrants is adjusted accordingly. The above comparison is just for illustration.

In terms of market makers, the role of issuers is to provide continuous buy and sell quotes in their warrants. In doing so, the market makers provide liquidity in the warrants so that investors can easily enter and exit their trades. The quality of the issuers is often a big factor for investors choosing a warrant.

Before choosing a put warrants, you need to be confident that the market maker will be there to provide consistent pricing throughout the life of the warrant so that you can enter/exit the trade in a fair and liquid market.

The trading system will enter bid and offer quotes in the index warrants based on the price in the futures. As the price in the futures move, the issuer’s quotes will also adjust. Some making systems will also change their bid and offer volume to follow the volume in the underlying share.

In Malaysia, there are a few exemptions to the continuous quoting requirements, these can be found in the issuers’ listing documents. The most common being, when the warrant value falls below the minimum bid of certain price, in this case the warrant is considered worthless and the issuers are no long required to provide a bid price.

List of issuers of index warrants

1. Macquarie Capital Securities
2. RHB Investment Bank
3. Kenanga Investment Bank
4. CIMB Bank
5. Maybank Investment Bank

For me, I preferred put warrants which issued by Macquarie. It is safer as Macquarie provides high liquidity in warrants. At the end of each trading day, Macquarie will also capture the bid price of the warrant slightly before the close of trading and use this to represent the 'closing price'. I am not sure with other issuers.

Regarding how to pick a put warrants, besides than the common use of discount/premium, gearing ratio and expiry date, there are still few other factors to consider. I will talk about this later.

Just for sharing.

The Art Of Investing – How To Survive During Market Downturn

There are too many knowledge in investing.  Somehow, I found it quite interesting to learn. For me, investing is considered as an art. It consists of different element and the one of the element is to pick a good counter.

Besides than choosing a good stock, the most important part is the process of handling and monitoring during the holding period. Look at the INARI chart above. If you hold Inari since 2013, you will gain more than 300% return! It is a lot. The chart above is what normally a SIFU will share with you for their successful investment.

However, how many of them will share with you how did they handle the up and down of the whole holding period. Look at the chart below. I had zoomed into the blue circle part which is during a huge correction and removed the candlesticks after the correction. Now, imagine you are facing a major downtrend as the chart below, how will you handle this situation? The stock price dropped from MYR3.00 to nearly MYR2.00! The downtrend last for more than 1 month! Will you sell in fear? Or will you still continue to hold? 

Nowadays, I believe there are very less investor who will hold their stocks for more than a year. They are lack of discipline, either sells in fear or affect by surrounding. On the hand, there are also many investors who are not able to maximize the profit from the huge uptrend.  Some had take profit after the stock drops for few days, some at 20% gain, some at 50% gain and maybe some at 100% gain.  

To become a very skillful investor, it needs a lot of experience and practice. Frankly speaking, even though if I was given a chance now to back to when INARI was only MYR0.60, I am still not sure whether I can hold through the whole period. Ask yourself, can your heart strong enough to handle the downtrend?

However, after you are able to survive through the downturn of the share market, you will see the bright side once again. But, whether you had enough bullets to come back again is another story.

Just to share some knowledge to help you to survive in current market.

1) Capital management

In current volatile market, it is very hard to hold for long term if you bought your stocks since last year. Even a very good fundamental stock was also going down. In order to minimize the risk, you may lower down the cash and shares holding ratio to around 50:50. If you are not confidence, then you may choose to stay aside from the stock market. However, there are still opportunities to earn money in current market, just that the possibility is lower. There are still companies which act very strong, for example Lii Hen, Top Glove, etc.

The first thing you need to do before stepping into shares market is to PROTECT YOUR CAPITAL. It is the most important and essential part!

2) Stock selection

After you had your portion of fund ready, choose stocks wisely.  Think like a business man and try to pick stocks with good catalyst. Focus Lumber is a good example. It is an export oriented company which benefits from weakening of MYR. Even though its price dropped from MYR1.70 to MYR1.20 in July, but now FLB come back to the level of MYR1.65 again.  Currently, there are three sectors which you can consider to look into.

• Gloves
• Furniture
• Semi Conductor

When you pick a stock according to the current economy, you are able to minimize your risk once again.

3) Cut loss

I believe this is the most crucial part where most investors are not able to do it. After you bought in a stock, make sure you monitor it from time to time and ALWAYS set a cut loss point. My preference cut loss point is at around 5-7%. By setting cut loss point, at least you are able to protect your capital and your capital will not be lock!

During 2008 economy crisis, I believe there are many people hold their portfolio from beginning to the ending and then wait for the market to recover. They will wait for their stocks to back to the breakeven price. It might be half year, one year or even two years. Of course, there is no right or wrong. Everyone had their own method of investing.  But for me, you had wasted your time for few years without getting anything. Time is money; I believe if you can choose again, you will put all the money into fixed deposits.

On the other hand, those who manage their portfolio well will have enough funds to collect when market started to recover. They can easily gain more than 100%. FYI, GENTING dropped from MYR9+ to around MYR3 during 2008 and yet it managed to climb to MYR11+ after market recover. The opportunity is just in front of you. It is just depends whether you have fund to catch it or not. I believe those experienced and skillful investors are more excited to wait for the market to crash, rather than in fear. It is a very good opportunity for them.

Indeed, cut loss needs a lot of practice and discipline to execute. Some people not willing to lose even just 0.5 cent. Cut loss is a must in order to survive and protect your capital. FYI, the theory of 8:2 is actually exists, whereby out of 10 investors, 8 are losing and only 2 are earning. One of the reasons behind is they sell all the profitable stocks and keep all the losing one.

Two scenarios:

ABC is holding 5 stocks and he sells 3 of them when it gains 10% profit. He keeps another 2 and it had accumulated up to 20% losses. Even though his trade is 3 win 2 lose, but overall he is still losing 10%.

CDE is holding the same stocks as ABC but indifferent with ABC, he cut loss when 3 of them drop 5%. He continues to keep another 2 profitable stocks to maximize its return and now it paper profit had up to 25% each.

So, can you see the difference between ABC and CDE now?

As a conclusion, if you are able to apply the above three things, I believe you had minimize your risk to the minimum level. So, start from today let’s learn to become a discipline investor. If you are not satisfied with your portfolio, stop hoping for the market to turn good. It’s time to evaluate and make some changes to your portfolio.

Bear in mind, the opportunity only wait the person who is ready! Hopefully it is useful.

Just for sharing.

Do You Always Buy In A Good Fundamental Company?

Before I get to the main point, just want to ask a question. As an INVESTORS, what will you do before buy in a stock? 

Based on my understanding, most investors will carry out analysis and valuation based on the company financial statement. They will look into the ratio and figure, such as PE, ROE, D/Y, etc. I did the same things too.  But, this is not the only things that I will focus in. There are many others factors which I will look into details before decide. 

1) How to spot unfavourable factors of a company? à AYS Ventures

http://rhinvest.blogspot.my/2015/08/unfavourable-factors-of-company.html

2) How to spot unfavourable factors of a company? (2) à CAM Resources

http://rhinvest.blogspot.my/2015/08/how-to-spot-unfavourable-factors-of.html

3) Consistently Profit Making Company Not Necessarily Is Good à London Biscuit

http://rhinvest.blogspot.my/2015/08/consistently-profit-making-company-not.html

4) Export-Oriented Company Not Necessarily Benefit From Weakening Of MYR à Tong Herr

http://rhinvest.blogspot.my/2015/09/export-oriented-company-not-necessarily.html

So, in this articles I would like to talk about this company, UPA Corporation Berhad.

Principal activities:

• Manufacturing of paper-based products and plastic products
• Selling, reconditioning and servicing of printing and printing related machines

PRICE    = MYR1.57                           D/Y         = 5.10%

PE           = 7.77                                   NTA       = MYR2.51

    ROE        = 8.05%                               NCAV    = MYR1.23

UPA had a very low PE and attractive D/Y. Its net tangible asset per share is MYR2.51 and its net current asset value per share is MYR1.23, which are pretty high! By referring to its ratio, UPA seems like a very good company.

For its business performance, UPA was doing great for the past 3 years. Also, there is nothing much to comment on it. 

CASH FLOW

Year	2011	2012	2013	2014
Net borrowing, RM'000	22,076	22,380	17,712	18,568
Free cash flow, RM'000	41,350	43,425	39,382	43,409
Net cash, RM'000	19,274	21,045	21,670	24,841

In term of cash flow, UPA had a very healthy financial condition and cash flow. 

LIQUIDITY

Year	2010	2011	2012	2013	2014
Current ratio	4.09	3.80	3.68	4.10	4.20
Acid test ratio	2.64	2.48	2.41	2.65	2.71

In term of liquidity, UPA is also very liquid and healthy. It is definitely able to meet its short term obligation. Nothing much to comment on it.

Most of the time, the analyst reports and investors’ recommendation only mentioned about company fundamental and technical. For me, there are many factors to consider besides than fundamental and technical. In no doubt, I will say that UPA have a good fundamental. But, if a stock price of a very good fundamental company doesn’t move, will you still buy in? I believe this is the things that most investors do not aware.

This is the snapshot which taken from my trading platform at Thursday around 3pm. Look at its best buy and best sell column. The difference between the buy and ask price is 23 cent! There is still no trading transaction yet! If you want to buy UPA on the spot, you can only buy at MYR1.80! No matter how good is the company, when there is no player, there is no value. It is not worth to hold a good company when it’s very hard for you to sell it.

VOLUME	June	July	August
W1	155	200	163
W2	109	176	79
W3	90	104
W4	44	95

The above is the average daily trading volume in every week. The trading activity for UPA is very less! Someday, it might have no transaction at all. The highest in the table is 200 lots and the value is only approximately in the range of MYR30k to 40k! I believe there are many investors trade larger amount than this everyday.

Let’s look at its 30 largest shareholders. The 30 largest shareholders hold 75.22% of the company whereby the largest shareholder is UPA Holdings Sdn Bhd with 52.73% share interests. The second largest shareholder is Mastercraft Products with only 2.78%! With today closing price of MYR1.57, investor only needs MYR3.4m to become second largest shareholder in UPA! In addition, UPA doesn’t have any institutions or foreign investors inside the list. Besides than Mastercraft Products and KL Union Trading, the rests are individual investor. I believe it is the main reason why UPA is not able to raise investor’s awareness.

Besides that, have a look at UPA’s commentary about its future outlook. The below is the part which I extract from its quarter report.

                                                                                                                                                                   

FY15Q1 à The directors expect the business environment to be remain challenging. The Group will proactively undertake a strategic review of its operations, to mitigate any possible adverse effects arising from the volatility of the external environment.

FY15Q2 à The outlook for the next six months appears to be not promising given the global and domestic slowdown. The directors expect the business environment to be extremely challenging.

                                                                                                                                                                   

From Q1 to Q2, the director had changed the words using, from “remain challenging” to “extremely challenging” and add on with “not promising”! It reflects that the management had become pessimistic and they are not confidence with UPA upcoming quarter result and performance.

You might think that I am too sensitive with the used words. But for me, I take it as the true words and hints from management. Else, why do they add in the word “extremely”?   

As a conclusion, always remember, a good company doesn’t mean its price definitely will move. Everyone had their own method of stock selection. It is just part of mine. Feel free to comment if you disagree J

Just for sharing.

Export-Oriented Company Not Necessarily Benefit From Weakening Of MYR

Most people tend to say that export-oriented company will benefit from weakening of MYR. But it is not necessarily!

TONG HERR RESOURCES BERHAD is principally involved in

• Manufacture and sale of stainless steel fasteners (75%)
• Manufacture of aluminum extrusions and related products (25%)

Tong Herr is doing well in the past 3 years. Each year its revenue and net profit are better than previous year. However, since last year the global and Malaysia economy started to have some changes. Crude oil price dropped, commodity price dropped, MYR depreciate. How will it impact Tong Herr? 

Based on the revenue segment, only 23% of its revenue is from Malaysia and the rest 77% are exported out to other countries. So, it can consider as export-oriented company and will benefit from weakening of MYR against other currency.

Previously, I had read some posts and comments. Some people mentioned that Tong Herr is one of the beneficiaries from weakening of MYR. I want to emphasize that, by just looking at its revenue segment is not enough! 

Based on annual report 2014, Tong Herr had loans and borrowings of RM195m where RM190m is USD loan! In other words, strengthen of USDMYR will increase the amount of interest it needs to pay from time to time!

In every annual report, there is a currency sensitivity analysis segment. It can be found at the Financial Risk Management section. Usually, this section is located at the last two points of Notes to Financial Statement. It stated that appreciation of USD against MYR by 10% will decrease the net profit by MYR6.91m!

In year 2015, USD had strengthened against MYR by more than 15% (3.60 to 4.20). Let’s just take into account of decrease in MYR10m, divide into each quarter and each quarter it will have reduction of net profit up to MYR2.5m! That’s a lot!

Let’s have a look at the historical price graph for steel.

Decrease in steel price is good for Tong Herr as the raw material for manufacturing of fastener is stainless steel.

However, we need to take note that its associate, Fuco International is involved in manufacturing of steel billets. Look back to the steel price graph, steel price dropped from UDS400/tonne to around USD100+, a reduction of more than 50%! Even though Tong Herr has only 30+% share interest, it will still have some impacts.

As a conclusion, even though Tong Herr is an export-oriented company, but it has few unfavorable factors that might cause huge impact to its earnings. Hence, it is not a good time to consider it.

Before I end this, have a look at the below news.

This is one of the news which extract from Business News. It mentioned that Tong Herr will benefit from strengthening of USD as well. So, I am hereby to urge everyone not to fully believe in either newspaper or analyst research institution’s statement! There are always some misleading parts! This is just one of the examples.

Just for sharing.