Monday, 29 January 2018


Fact : Trading is a messy business. You'd be a world class trader if you can make money 55% of the time. It's the other 45% that people rarely talk about.

Another thing : There are rarely 'clean' profits in this business. What I mean is that when someone says they made RM2k in profits from actual trading, they probably meant this : lost RM1k (Round 1), gain RM4k (Round 2), lost RM3k (Round 3), and gain RM2k (Round 4). This excludes commissions, of course. You can only reduce the losses and the number of rounds with real life trading experience.

DRB-HICOM is something that I've been looking at with great interest over the past two years. But my trading was erratic due to a lack of planning and a failure to have well defined goals. I also learned a valuable lesson early on: don't trade a company's warrants unless it is consistently profitable on a quarter-to-quarter basis. An external catalyst is usually needed to justify further participation.

Below is a list of DRB warrants that I've traded before. The earliest call warrant (C16) was listed in July 2015 while the last one here (C37) is still listed.

All that work for a negative RM122 return !

To re-emphasize my point about the lack of 'clean' profits - here's a more extreme example with FBM KLCI structured warrants (this was during my Wild West contra trading days. It's a very efficient way to lose profits):

The great KLCI collapse of 2015. 'H' are put warrants; you profit when the market falls.

When you make money, it's down to skill, luck, or both. But there is much more to be learned from studying losses. I make it a point to analyze every losing trade I experience, though obviously it doesn't mean I won't incur future losses. Not repeating the same mistake as before (and making new ones) is a small step in the right direction.

Back to DRB. For context, here's the share price performance during several periods:

March 2015 to May 2016         : -55%  (14 months)
June 2016 to February 2017    : +47% (8 months)
March 2017 to May 2017         : +10% (2 months)
June 2017 to December 2017  : 0%     (7 months)
January 2018 up until the 26th : 42%   (19 trading days)

It was a period of volatility for DRB despite a slew of good news, the biggest of which was the planned stake sale in Proton to Zhejiang Geely Holding Group Co Ltd after a long bidding process among several interested parties. This was concluded in May 2017. 

One Timing Belt, One Road

By now we know that long term shareholders were amply rewarded, even though the ride down took DRB's shares to a 7-year low in mid-2016 (if you had held on through all this, you're the real champion). Combined net losses for FY16 and FY17 was RM1.3 billion. But thanks to incremental improvements, the earnings growth of its associate POS Malaysia (and the e-commerce story), and the Proton divestment, since March 2015 the stock has gained 60%.

DRBHCOM-C37, the latest warrant I traded up until last week, gained 781%. Since August 2017.

 This is a beast worth hunting down.

So which one was a better value proposition? The buy and hold approach or the trading approach?

It probably depends on your existing attitudes towards long term investing and short term trading. But attempting to profit from C37 is at least an equally valuable use of your time compared to holding on to DRB stock since 2015. The inherent risk in warrants is not as negative as the opportunity cost; without Geely and POS coming into play last year, the stock would still have languished near a decade low.

So we're going to delve into sentiment based trading, anticipation, timing, and execution.


Here's a problem with trading : sometimes a stock does nothing. It stagnates for half a year and there's no way to trade the call warrant meaningfully. Alternatively, what you can do is accumulate the stock itself for the long term and hope for the best.

But let's face it : DRB-HICOM has been a catalyst-driven stock over the past two years. If you apply fundamental analysis, your projections are most likely wildly inaccurate compared to actual results. Conglomerates are notoriously hard to value, and their different sub-sectors and outside investments operate under completely different business conditions. A consistently loss making conglomerate? Exponentially harder.

We know that DRB's revenue is primarily driven by car sales, right? So why would you buy the worst-performing stock whose revenues are automotive driven (no pun intended) ??

Here's an example demonstrating the futility in applying financial modeling to troubled conglomerates. This was an earnings forecast for DRB-HICOM made by a research house in 2016 (same research house, different analysts).

Note the projected FY16 and FY17 figures. This was during FY16.

And below are the actual FY16 and FY17 figures. Aside from the FY16 revenue, it's no surprise that almost everything is off. It's  unlikely that the the previous projections were in any way helpful in making your investment decisions.

What if you had bought the stock based on sentiment? More specifically, you expect an incremental flow of good news, hence the stock's price will outpace its historical earnings performance - a classic mispricing and catch up in value. You would've done very well since the timing was painfully obvious (just after Geely concluded its stake purchase, of course). It also turned out that Proton did better after the post-GST slump. As far as fundamental analysis goes, that was one good justification for buying the shares.

It is also reasonable to assume that Geely, with its success in transforming Volvo, wouldn't completely ruin Proton once taking it over. Nothing new there.

Trading catalysts become far more important in the absence, or lack of, good fundamentals. But what if you take it a step further? What if you can determine the best possible time to enter a trade? And what if the conditions are just right to go all in?


Now, back to DRB-HICOM call warrants. Over that 2-year period, I have a general understanding of the company's current fundamentals (which were terrible) and its sentiment driven recovery prospects (which were great). It was all down to the Proton stake sale, which was a cornerstone of DRB-HICOM's turnaround efforts. I was ready to trade.

But then this happened : absolutely nothing. Not right after the Geely purchase anyway. DRB-HICOM's stock essentially stagnated for seven months. It was very slowly inching up from previous lows, but the upside was capped at RM1.70.

By September, I slowly realised a major mistake : not thinking of DRB-HICOM in a long term context. I was focusing too much on the capped upside instead of looking at it another way; the stock is consolidating ahead of a major breakout, although at this point the timing was uncertain.

Major Malaysian conglomerates correlate strongly with the FBM KLCI; DRB-HICOM is no exception. At one point or another the stock will underperform/overperform the benchmark but in the event of a breakout (KLCI hitting a new 6-month high, for example), the correlation can be used as a signal to trade DRB-HICOM's stock.

Lean times. July to December 2017. DRB VS KLCI

So I did nothing until the market breaks a new high in a strong way. Including June and July, I practically sat the whole seven months out. I did keep DRB-HICOM in my watchlist over this period, but the time wasn't right, and I traded other warrants.

Then, on January 2, DRB-HICOM staged its largest intraday rally in SIX years (probably more; my charts don't go further back than that). It completely outpaced the FBM KLCI, which wasn't doing too badly either - this is my favorite kind of divergence.

C37, the call warrant, skyrocketed after its six-month hibernation : 4 sen to 24 sen in a day (it's naturally catching up to the mother share). On January 5, I attempted to build a small position in C37, but the volatility was such that I was thrown out of my position, hence the RM672 loss that you see above.


This was me repeating my mistake : not thinking of the big picture. I wasn't in a position where I could build up a sizeable position to make decent profits. The conditions have to be perfect for a worthwhile trade. A game plan is needed.


Just some brief descriptions of my trading approach and temperament : I typically aim for trades that can net me a five figure profit or a 30% return (one trade). I don't have a problem with trading in size (hundreds of thousands of call warrant lots). I can also endure severe short term losses of 15% or more (the downside is that I can be too late in exiting bad trades; a very costly misstep).

After my brief cock-up with C37 (it actually went up all the way to 35 sen before retreating to 24 sen in five days - volatile as hell!) I decided to try again.

Historically, stocks that stage such a strong intraday rally (DRB-HICOM on January 2) have a tendency of rallying further after a brief period of consolidation. I used this indicator to great effect in many, many situations, including IWCITY, PETRON, and HENGYUAN last year. If it doesn't rally at all, in theory there is enough time to exit at a reasonable price.

The catch is that you don't know how volatile things can get, how low the stock can fall, and how long it takes to break out again (rising to a new high). But a trade can be planned around that eventuality; you just have to be prepared (I was on standby for seven months - I thought I could withstand a few more days/weeks).

DRB-HICOM entered a steady consolidation phase after the first round. It declined from RM2.53 to RM2.46 from January 10 to 22. It's a very small move and there was no immediate collapse. It was stable in all the right ways, and you also notice little things, like the one time on January 19 when somebody bought a few million C37 warrants at 30 sen in 30 seconds (you sir, are the real champion).


As a purely sentiment trade, I needed to assess the potential of a breakout. This finally happened at around 4PM on January 23 (I wasn't actively waiting for a sign - I just noticed the spike in my watchlist). DRB suddenly broke RM2.50, and the previous high of RM2.55 was in sight.


 I very quickly needed to determine the likelihood of DRB-HICOM breaking past RM2.55 (very likely, and quickly).

At this point I made some quick mental calculations and came up with a simple plan :

1) Trade with the expectation of a breakout to new highs.
2) Accumulate a major position.
3) If the breakout fails, exit with manageable losses (pre-determined exit points)
4) If the breakout happens, quickly commit the rest of all available capital.

 As you can see, the breakout happened.


Given my familiarity with C37, shouldn't that be the warrant to trade? It can be, but it's not the best one. (As a rule, the call warrant closest to expiration tends to exhibit the most volatility and attracts the majority of volume. As at January, C37 fits both criteria).

I chose another warrant instead : C51, which has only been listed for three days at the time. Why? It's not down to the terms of the warrant, but its volatility characteristics.

1) Limited downside : In its short life, the call warrant hasn't experienced a dip. In the event of a strong rally in the mother share, the upside potential of this warrant is substantial. There is no historical data of previous highs and lows to dilute people's perception towards it (unlike some of the longer-tenured DRB call warrants).

2) Price : Compared to C37 at 34 sen, C51 is a lot cheaper at 18 sen. More bang for your buck. I eventually ended up with 210,000 warrants.

3) Assurance of liquidity : The investment bank that issued this warrant still needs to clear out its inventory (that means selling the entire amount of call warrants to the market) aside from being the market makers. This ensures that there's a lot of liquidity and opportunity to buy in size. At the same time, the bid-ask spread would be fairly tight.

So let's round up everything mentioned so far: the broader market was good (KLCI), the stock itself has good momentum, the surge towards a new breakout was there, the right call warrant (arguably) was chosen, and the risk-reward potential was tipped in my favour.


1) Accumulate the call warrant near or below the 20 sen level.
2) No additional positions once the trade becomes profitable.
3) Exit trade at the 15-30% profit range. The quicker it reaches that point, the more important it is to exit quickly (high volatility is a temporary phenomenon; so are paper profits in such a situation).

The end result? A 30% gain from this trade. In two days (the position was disposed the next morning).

The seven months of waiting was worthwhile.

Wednesday, 24 January 2018


Can a plastic parts manufacturer and components assembler ever be thought of as cool? Sure - provided that they make cool stuff. This Johor company certainly does.

Sin Kwang Plastic is a no-nonsense company with a proven track record. Its annual revenue grew from RM100mil to RM2bil in 10 years. It's a tightly owned family business with little desire for media exposure or stock-related shenanigans.

It struck gold a couple years ago after the Dyson Group contracted them to manufacture sophisticated vacuum cleaners. It also won a RM2bil contract to manufacture Dyson's new hair dryer. Think of Apple's current relationship with FoxConn - that's how bright SKP's prospects are.

The hair dryer is arguably the real driving force behind SKP's aggressive expansion plans. It is Dyson's freshest and most appealing product, it's being sold as a high margin luxury item, and it's selling like crazy. As I'll explain later, SKP is putting itself in a position to leverage on this - simply put, the company is currently on standby to take on billions of ringgit in new Dyson contracts. This can lead to an extra RM500 million in annual revenues for the group, based on its current contractual agreement with Dyson.

I've been fascinated with the hair dryer for a while. It's gained considerable buzz and remains a highly desirable item. Relative to its famous vacuum cleaners, it's a new product for Dyson ; I'm not hesitant to compare it to the time Apple unlocked a new revenue source and created a globally desirable product with the iPhone (I will stop the Apple-Dyson parallels here as it is admittedly a tired cliché).

So let's do a bit of research on this product.

Part I : Peter Lynch Told Me To Do It

People who aspire to be like Warren Buffett or Peter Lynch end up trying to be like Peter Lynch (it's hard to start reinsurance companies, it turns out). There was a lot of allure in his most famous advice - that you can dissect a company's prospects just by visiting their stores and talking to their customers - or even by asking your friends and family about the company's product.

By using this seemingly dubious logic, I set out to validate my pre-existing assumptions about a product which I already like (the technical term is confirmation bias - I'm sure you understand the futility of walking into a Starbucks and asking customers if they like Starbucks). Using anecdotal evidence is a lightning rod for criticism when you're trying to make investment decisions, yet large corporations do it all the time - they just call it market research.

Sometimes a product can be so appealing that it can be a game changer - so much so that it's a high-margin product, even the most expensive product in its class, and it can still outsell everyone else.

The iPhone no longer does that. You know what does? The Dyson V9 Supersonic hair dryer.

Without further ado, here's my extensive list of Peter Lynch-isms that I gathered during the Christmas break. Note that I'm currently based in Hong Kong, where conspicuous consumption and tech fetish go hand-in-hand ; the most stylish, advanced products will sell quickly.

1) Prominent ad placements in many parts of the city since September. This includes the gigantic electronic billboard in Causeway Bay as well as station exits at Central. They seem to have been put up since September as Dyson wanted to position its hair dryer as the hottest Christmas gift.

2) Prominent product placements at Fortress and Broadway stores since October (they're the equivalent of Harvey Norman in Malaysia). In some places the hair dryer wasn't grouped with others in a tired-looking beauty products aisle, it was right at the store's entrance, as if it was the latest iPhone. This includes repeated sightings of people who were only interested in testing the Dyson hair dryer and left quickly afterwards.

3) I helped organize an event where the lucky draw's main prize was an iPhone 8; the hair dryer was one of the other prizes. Multiple people remarked to me : 'I wouldn't mind winning that hair dryer instead' (Out of  sample size of 4, 3 were using older iPhones). I know that the iPhone 8 was rendered obsolete by the X since launch day, but still.

4) During the same event one person said "I don't want to win that hair dryer. I've already bought two (he has a wife and kids)". Another said that if she wins the hair dryer she will sell it because she already owns one. Two other people are in the same predicament.

5) Increased daily sightings of people carrying big cardboard boxes of the hair dryer, obviously just after a purchase. This was early December.

6) Online assessments of the product revolved around one question : 'Is it worth the ridiculous price'? Shockingly, the goodwill was such that a lot of reviewers said yes, in no uncertain terms. Just like the iPhone used to be, of course.

7) This is the second Christmas cycle for the product itself since its 2016 release; it seems that demand has stayed strong for the second year, possibly even more so thanks to new international launches (it is now available in more than 70 countries). People are calling it the 'Tesla of hair dryers' or 'the iPhone of hair dryers' and other nonsense.

Did I mention the price?

This is not fake news.

Bear in mind that the innovation here is not just from the technology. It's the ability to compel people to pay premium prices for something that was never seen as a luxury must have item before. Most people wouldn't think of buying a professional grade hair dryer previously; now they do. A new market unlocked.

​If you only do one Peter Lynch thing a day, read some possibly partly fake customer reviews.

Analysing 'hype' and 'cool' is predominantly based on anecdotal evidence and imperfect market surveys, just like the one I attempted. Yet I assure you, multi-billion dollar market research firms adopt pretty much the same approach. My point is that all these anecdotal findings should lead somewhere; in this case it's a good investment opportunity.

Part II : The 'S' in SKP Resources is 'Sexy'

SKP is a bread-and-butter manufacturer, so its fundamental prospects are not difficult to analyse - just read all the research reports out there. At risk of oversimplification, the company focuses on manufacturing plastic parts and product assembly. More than three quarters of its revenue now come from Dyson contracts, as will be the case for the next few years. The total lifetime value of the current Dyson jobs are close to RM3bil.

SKP's margins and industry variables are predictable, making its future earnings projections slightly more reliable than, say, an oil and gas tender rig provider with a similar name. As with other manufacturers, its major cost components aside from raw materials (plastic) is labour and electricity costs.

SKP had a couple quarters' worth of earnings hiccups as it experienced a shortage of workers to meet higher production needs, and the stock stagnated for a while. This has since been sorted out. Recent strong earnings coincided with a rally since August last year. In 2017 the stock rose 83%.

This is a somewhat low margin business where the best companies would record margins in the high single digits (5-9%; SKP's inching towards 6% this year). But don't mistake it for low expectations; consistently high strong revenue growth over the next few years means that it can be 6% of whatever and you'll still benefit.

In fact, might even be a sign of consistency and ability to manage costs. If there's a growth in margins, it can also be down to better economies of scale - the holy grail of mass-scale manufacturing.

VS Industry is its sexier, larger, and more profitable cousin. Among others, that company produces the printed circuit assembly boards (PCAB) - the electronic guts of the product - and holds the vaunted vertical integration status - they're an integrated manufacturer with the capability to produce internal and external parts in-house, thus greater efficiency from being able to manage the the supply chain.

SKP wants to be everything that VS is and more, hence its expansion plans to catch up. But there's a twist : according to analysts, SKP is said to have better manufacturing capabilities. And VS's margins worsened year on year (4.7% in FY17 from 5.3% in FY16) despite growing its annual revenue by a billion ringgit last year.

Think of the following as a trading thesis as opposed to an investment thesis (you can find those by reading all the analysts' reports ; rest assured that their financial modeling skills are far better than yours or mine).

So I'm going to lay down the groundwork for a trade. By looking at several thematic play for this stock over the next 6-18 months, there are reasons for the stock to gain positive buying sentiment at different points in the immediate future.

Sentiment is the extra boost to a fundamentally solid company's shares; it also speeds up the momentum of the stock price. You can buy the stock now or when any of these catalysts play out.

You can also get the call warrants ; right now I prefer SKPRES-CG for its price, tenure (expires in June 2018), and volume. The liquidity's a bit lousy at times though, so that's an added risk.

1) Higher-than-expected demand could mean new contracts on the way. SKP is the sole manufacturer of the Supersonic hairdryer. In the next 12 months, watch out for new Dyson V9 contracts being given to them.

These guys take up a lot of Dyson jobs; the hair dryer and the cordless vacuum cleaners are the two best-selling items for the Dyson group globally. As far back as a year ago, SKP's management has insinuated that current production orders for both items have exceeded the initial volume agreed in the contract agreement .

Let's focus on the hairdryer - I'm going to take a big leap of faith here and assume that in terms of complexity, the number of components, and mass market potential, the V9 commands higher profit margins and will presumably achieve higher sales growth than the vacuum for Dyson. So they (Dyson) are likely to focus on growing brand exposure and new markets for the hair dryer and the increase in customer demand that comes with those.

Note: another reason not to focus on the vacuum is that SKP's peer, VS Industry Bhd, has a similar long term contractual agreement to produce them.

SKP's RM2bil V9 contract in early 2016 by Dyson was based on initial four-year demand projections. This was prior to the US and international launches. The high priced vacuums beat the pants off initial sales expectations - why not the hair dryers? The dubious market research in Part I certainly supports this thought.

Who cares about whether they make vacuums or hair dryers, you ask? I'd look at it like this : SKP has the technical consistency to produce these hair dryers. As far as anyone knows, it reliably manufactures them - any production bottlenecks would have to be due to late delivery of internal components or other parts for the assembly phase. The company has a lot of excess capacity to tap into with higher orders - why won't they be able monopolize the hair dryer production contract?

Oh, and a minor detail : VS Industry is operating near full capacity right now. It has a far larger customer base and more products to make ; good for income diversification, not so good if you want to bag a multibillion Dyson job in the near future.

The possibility of more contracts for SKP is always there. Given the hair dryer's positive reception, it's more likely than a scale down in existing orders. It's most likely the recipient will be SKP; they tick all the right boxes.

2) Dyson's record profits in 2017 suggests that the direct revenue boost were from sales of vacuum cleaners and the new hair dryer product line. Perhaps the business model and subsequent success with the vacuum cleaner can be replicated with the hair dryer. Look out for Dyson's 2017 profit numbers* in March - the hair dryer's business success will be a reflection of this. It is a catalyst that directly impacts SKP, and only SKP.

This is the main reason behind my fixation with the V9. The main reason behind my simple market survey was due to this:

From the Financial Times.

The emerging APAC middle class will keep buying status items and appealing gadgets. Dyson products are both of these, and their day-to-day utility makes them appealing purchases. And if China can drive up demand for BMWs and designer handbags to multi year highs, they can definitely do the same for less expensive status items.

3) SKP's own profit numbers and expansion plans - see if they can deliver on these over the next 6 months. Its second half of the financial year (2HFY18; its Q3 results is out in March) is significant. Its product mix will continue to shift with higher deliveries of hair dryers during this period. SKP is starting to make its own PCABs to finally get that vertical integration status; it would put them on a level playing field with VS. In terms of PE, SKP's stock has historically lagged VS.

The following passage from an analyst report sums up what to look for:

4) The normalized PE is your minimum upside. Any recurring positive sentiment or new contracts will propel it much further.

SKP's stock went through a typical hype cycle - the Dyson contracts (and the expected cash flows from it) propelled the PE to the mid-20s range in 2016. The limited upside and production troubles meant that the stock had nowhere to go for a while, until the Dyson numbers began rolling in last quarter.

Its actual PE in FY17 (year ended March 31) was 14 times, largely within consensus expectations and lower VS's FY17 PE at around 16.5 times. SKP had better margins but worse better year-on-year EPS growth (20%) than VS (30%). Again this seems to have been due to the staff shortage in FY17. SKP had to discontinue a huge contract due to this. The lack in earnings growth meant that from a share price perspective, SKP has been lagging behind VS.

Simply put, the stock is being punished for past problems. Its future earnings potential are not being priced in properly. Hence it is a buying opportunity.

So let's look at possible scenarios by using VS as a benchmark. I'll use a 30% EPS yearly growth assumption (taken from VS) and apply it to SKP to determine a potential price range for the stock over the next 12 months. We use the trailing twelve months EPS for a more accurate analysis. The scenario here is the possibility that SKP can catch up with VS in terms of EPS growth or in terms of sentiment (higher PEs).

Obviously high PEs don't last forever; they will decrease once the EPS component (E) outpaces the share price (P). But with Dyson as a key catalyst, and with more information on the hair dryer business coming in over the next few months, the sentiment alone could boost SKP's valuation significantly.

​Current share price as at January 19, 2018
Some context:

1) 14 times is close to the historical average PE for SKP.
2) 16 times is closer to recent analyst estimates. Some even use FY19 figures to determine a target price at 18 times earnings.
3) 21 times is the premium valuation assigned to VS right now. If SKP gets anywhere close, RM2.98 would be the maximum upside if the market prices in a 30% EPS growth.

To me, 30% is a modest growth assumption but a feasible one. SKP's yearly EPS growth was 20% in FY17 (production issues) and 58% in FY16 (coming off a low earnings base; don't expect this to recur). Its improving profit margins in FY18 also suggests better overall net income figure alongside the expected strong revenue growth.

Most importantly : this growth does not include new Dyson contracts being awarded. If that happens, imagine how high the stock can go?

*Dyson's a private company so they don't disclose quarterly numbers.

Tuesday, 23 January 2018


It's good to read up on finance history to get a sense of context on the two things everybody in the finance industry is constantly obsessing over : signs of market booms and busts as well as financial bubbles.

One book in particular that I recommend is Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds - it's not an easy read and some parts were interminably boring, but as a compilation of truly historic mass financial delusions, it can't be beat. Do give it a try : it's available for free here.* Or the one-page summation if you don't have the time.

My favorite chapter in the book is a very detailed, definitive account of the South Sea Bubble. It's a story on how a massive bubble forms following the introduction of a new investment instrument for making money quickly, with promises of triple and quadruple-digit % gains. Banks and regulators were initially apprehensive but then became part of the story and perpetuated the bubble.

As it reaches the mainstream and beyond the niche early adopters, the media took up the mantle and began covering the bubble around the clock. Sensing opportunity, bankers and advisors began marketing their services to members of the masses with more money than sense and those who ought to know better.

Sounds a bit like what's happening right now with cryptocurrencies? You bet.

Here's the thing about bubbles : those who are completely skeptical will stay on the sidelines, yet they will constantly envy peers who seem to be making easy money. Some will crack and become a believer. They will also end up buying into the bubble at its peak.
​The 18th century Satoshi Nakamoto.

At the other end, those who are true evangelists will have the time of their lives. They will tell the skeptics three things : 1) "This time it's different", 2) "I know it's a bubble, I'm just going to get out before it pops,", and 3) "If you're so smart, how come I'm so rich?".

Let's face it, we all belong to one tribe or the other. So what I will do here will either support or contradict your existing beliefs.

I'm going to take passages out of the South Sea Bubble chapter of Mackay's book and recontextualize them for modern times. Some may be totally and irresponsibly out of context but I like the timeless quality of the sentences. Some parts are shockingly real and others are fictionalized for entertainment value. Maybe you'll see parallels, maybe you won't.

1) "Mr. Walpole was almost the only statesman in the House who spoke out boldly against it. He warned them, in eloquent and solemn language, of the evils that would ensue. It countenanced, he said, “the dangerous practice of stock-jobbing, and would divert the genius of the nation from trade and industry. It would hold out a dangerous lure to decoy the unwary to their ruin, by making them part with the earnings of their labour for a prospect of imaginary wealth. The great principle of the project was an evil of first-rate magnitude; it was to raise artificially the value of the stock, by exciting and keeping up a general infatuation."

Paraphrased for modern times : A visibly agitated guest on a CNBC panel on cryptos starts his rant. He says the dangerous practice of Bitcoin-trading, would divert the genius of the nation (former bankers who never went up to C-suite level) from trade and industry (they are now partners in crypto startups). It would hold out a dangerous lure to decoy the unwary to their ruin, by making them part with the earnings of their labour for a prospect of imaginary wealth. The great principle of the project was an evil of first-rate magnitude; it was to raise artificially the value of Bitcoin, by exciting and keeping up a general infatuation that is perpetuated by round-the-clock financial media and industry conferences.

2) "Several peers spoke warmly against the scheme; but their warnings fell upon dull, cold ears. A speculating frenzy had seized them as well as the plebeians. Lord North and Grey said the bill was unjust in its nature, and might prove fatal in its consequences, being calculated to enrich the few and impoverish the many."

Paraphrased for modern times : Several people who know better spoke out against Bitcoin (Jamie Dimon) ; A speculating frenzy had seized JP Morgan's prospective clients as well as the public (prompting Dimon to quickly backtrack). The market bears pointed out the flaws in cryptocurrencies' very nature, and might prove fatal in its consequences, being calculated to enrich the few (early adopters, bitcoin hoarders, and the founders of XRP) and impoverish the many (the Uber driver who's humble bragging about his three-week investment in Ether which has tripled).

In 20 years' time, this will be the defining image of the crypto mania.

3) "The inordinate thirst of gain that had afflicted all ranks of society was not to be slaked even in the South Sea. Other schemes, of the most extravagant kind, were started. The share-lists were speedily filled up, and an enormous traffic carried on in shares, while, of course, every means were resorted to to raise them to an artificial value in the market."

Paraphrased for modern times : The inordinate thirst of gain that had afflicted all ranks of society (crypto mania) was not to be slaked even in Bitcoin alone. Other schemes, of the most extravagant kind, were started (Initial Coin Offerings). These were speedily filled up, and an enormous traffic carried on in ICO trading, while, of course, every means were resorted to to raise them to an artificial value in the market (by peddling ICO-issuing fintech companies backed by zero fundamentals - I mean, it worked during the dotcom bubble, right?).

4) "Contrary to all expectation, South-Sea stock fell when the bill received the royal assent."

Paraphrased for modern times : Contrary to all expectation, Bitcoin prices fell after Wall Street (a royal capitalist class if there ever was one) blessed it with the validation that it apparently commands. Prices have fallen quite a bit since Bitcoin futures were introduced by the CME.

5) "Already the directors had tasted the profits of their scheme, and it was not likely that they should quietly allow the stock to find its natural level without an effort to raise it."

Paraphrased for modern times : A cryptocurrency creator sells all of his holdings out of a sense of altruism and civic duty. Freed from his ties to the market (by cashing out - what could be better?), he now aims to promote the underlying tech of his cryptocurrency without any conflicts of interest (how noble).

6) "In the mean time, innumerable joint-stock companies started up every where. They soon received the name of Bubbles, the most appropriate that imagination could devise. The populace are often most happy in the nicknames they employ. None could be more apt than that of Bubbles. Some of them lasted for a week or a fortnight, and were no more heard of, while others could not even live out that short span of existence. Every evening produced new schemes, and every morning new projects."

Paraphrased for modern times : In the mean time, innumerable ICOs started popping up every where - US$3.5bil worth of them last year. They soon received the name of Bubbles, the most appropriate that imagination could devise (You'll find a variation of this 'bubble' story on Bloomberg every day). The populace are often most happy in the nicknames they employ. None could be more apt than that of Bubbles. Some ICO scams fizzled out in weeks, and were no more heard of, while others could not even live out that short span of existence. Every crypto fintech conference saw new startups conceiving  new schemes, and every time the 'consultants' (former investment bankers trying their luck) oblige by advising on new projects .

​Imagine a conference on sardines were you get EXCLUSIVE access to buy 10 carefully selected cans of sardines under the companies' terms. At least they have tangible value (and are yummy).

7) "Dozens of schemes, hardly a whit more reasonable, lived their little day, ruining hundreds ere they fell. One of them was for a wheel for perpetual motion—capital one million; another was “for encouraging the breed of horses in England, and improving of glebe and church lands, and repairing and rebuilding parsonage and vicarage houses.”

Paraphrased for modern times : Dozens of ICO schemes surfaced, hardly a whit more reasonable, testing the confidence of even the most ardent cryptocurrency bulls. The best ones yet were coins where you can monetize likes, sponsor trips to North Korea, and get lifetime access to a Las Vegas strip club run by a mixed martial arts fighter.

8) "The shares of this company were rapidly subscribed for. But the most absurd and preposterous of all, and which shewed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled “A company for carrying on an undertaking of great advantage, but nobody to know what it is.” Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project."

Paraphrased for modern times : Yet another ICO of a promising fintech company (it didn't exist a month ago) was rapidly subscribed for. But the most absurd and preposterous of all, and which sort of demonstrated, more completely than any other, the utter madness of the people, was one started by  an unknown adventurer, entitled “a standard ERC20 token, so you can hold it and transfer it. Other than that… nothing. Absolutely nothing." (it netted $40,000). Were it not been endlessly covered by scores of media outlets, it would be impossible to believe that any person could have been duped by such a project.

9) "Persons of distinction, of both sexes, were deeply engaged in all these bubbles; those of the male sex going to taverns and coffee-houses to meet their brokers, and the ladies resorting for the same purpose to the shops of milliners and haberdashers. But it did not follow that all these people believed in the feasibility of the schemes to which they subscribed; it was enough for their purpose that their shares would, by stock-jobbing arts, be soon raised to a premium, when they got rid of them with all expedition to the really credulous."

Paraphrased for modern times : Persons of distinction, of both sexes, were deeply engaged in crypto trading. Men and women are now attending get-rich-quick crypto trading seminars and began contemplating life as a full time cryptocurrency trader. But it doesn't matter that they know that it's a bubble, all that matters is to buy into Bitcoin quickly, wait until it is raised to a premium, and get rid of them to the really credulous - it's the greater market fool principle, after all.

"I probably burned more money then I made, still this is a thrilling world." - poignant words from  'supermeatboy'.

10) "On the 11th of June, the day the parliament rose, the king published a proclamation, declaring that all these unlawful projects should be deemed public nuisances, and prosecuted accordingly, and forbidding any broker, under a penalty of five hundred pounds, from buying or selling any shares in them"

Paraphrased for modern times : On the 1st of January, Chinese regulatory authorities published a proclamation, declaring that all these bitcoin mining operations be shut down as they are deemed public nuisances (by Xi Jinping himself, no doubt). Other central banking regulators try to forbid people from trading or owning cyptocurrencies, although these are merely advisories with no legal enforcement implications.

11) "
It would be needless and uninteresting to detail the various arts employed by the directors to keep up the price of stock. It will be sufficient to state that it finally rose to one thousand per cent. It was quoted at this price in, the commencement of August. The bubble was then full-blown, and began to quiver and shake preparatory to its bursting."

Paraphrased for modern times : It would be needless and uninteresting to detail the many things that propelled enthusiasm to keep up the price of Bitcoin. It will be sufficient to state that it finally rose to one thousand five hundred per cent. It was quoted at this price in, the commencement of December, 2017. The bubble was then full-blown, and began to quiver and shake preparatory to its bursting. The most recent peak was close to US$20,000 per bitcoin a month ago, but now it's trading at a more sensible (??) US$10,500.

​Growing enthusiasm in a bubble means the buildup phase takes a while. A loss in enthusiasm means the decline is swift, volatile, and brutal.


12) It was now the general opinion that the stock could rise no higher, and many persons took that opportunity of selling out, with a view of realising their profits. Many noblemen and persons in the train of the king, and about to accompany him to Hanover, were also anxious to sell out. So many sellers, and so few buyers, appeared in the Alley on the 3d of June, that the stock fell at once from eight hundred and ninety to six hundred and forty.

Paraphrased for modern times : It was now the general opinion that Bitcoin, Ether, XRP and Dogecoin could rise no higher, and many persons took that opportunity of selling out, with a view of realising their profits. Thousands of Bitcoin millionaires (on paper, anyway) and university dropouts who just became full-time traders looked in horror as commission fees to sell coins on Coinbase skyrocketed, while at the same time transaction times now last for days. Some crypto exchanges experience suspiciously lengthy outages. Everybody was anxious to sell out. So many sellers, and so few buyers, appeared over the next few weeks. During this time, Bitcoin prices fell 50%, or slightly more volatile than usual.

13) "During the progress of this famous bubble, England presented a singular spectacle. The public mind was in a state of unwholesome fermentation. Men were no longer satisfied with the slow but sure profits of cautious industry. The hope of boundless wealth for the morrow made them heedless and extravagant for to-day. A luxury, till then unheard-of, was introduced, bringing in its train a corresponding laxity of morals. The over-bearing insolence of ignorant men, who had arisen to sudden wealth by successful gambling..."

Paraphrased for modern times : During the progress of this famous cryptocurrency bubble, the world presented a singular spectacle. The public mind was in a state of unwholesome fermentation. Men were no longer satisfied with the slow but sure profits of cautious industry (like, buying good stocks for the long term and reinvesting the dividends). The hope of boundless wealth for the morrow made them heedless and extravagant for to-day. A luxury, till then unheard-of, was introduced, bringing in its train a corresponding laxity of morals. The over-bearing insolence of ignorant men, who had arisen to sudden wealth by successful gambling...

Those last three sentences are what happens when you're living in a bubble. Doesn't matter what century it is.

*Two other books you'd like if you're a total finance history nerd : Manias, Panics and Crashes : A History of Financial Crises (Kindleberger & Aliber) and This Time Is Different : Eight Centuries of Financial Folly (Reinhart & Rogoff)


Part I : Who the Hell Fills Up at Petron?

Don't worry, this is not going to be a deep dive into the fundamentals and cash flows of refinery companies. It's just a full, uncensored, transparent account of my experience with two of last year's biggest gems : Petron Malaysia Refining & Marketing Bhd and Hengyuan Refining Company Bhd.

Let me start with a bit of background : At the start of 2017 I was completely biased towards an oil price recovery scenario. I'd love to buy a fundamentally sound oil and gas company, but there didn't seem to be any. For the most part, anybody involved in the upstream segment was still royally screwed. The lag time between crude oil's price recovery and the demand for upstream drilling services is too long (I've read and written many wishful thinking-type stories on this very subject). Or you may count on Petronas as a long term benefactor, but your earnings are constantly sucked into a debt-servicing vacuum.

So who are the oil and gas players who can maintain stable earnings in a benign oil price environment but can quickly report fantastic earnings as soon as oil prices rally? It's the refineries.

As an added bonus : were refineries deeply unloved by investors at the beginning of 2017, as shown by their single-digit PE ratios? Were they being completely ignored by analysts who were averse to being bold?* Yes and yes.

I was enthralled by Petron's potential. Its 4QFY16 results announcement on February 22 caused a spike in the share price the next day : it went from RM4.50 to a peak of RM6.48. The price then stagnated for about a month (the stock prices have been adjusted to reflect dividend payouts during the year).

During this time (of stagnation), I thought long and hard about initiating a position. About half of its FY16 earnings came during 4Q alone, and it was ten times the 4QFY15 earnings. Their respective revenue and gross profit figures suggest that the earnings recovery was real. And this was a single-digit PE company that paid dividends during the bad times!

​March 16, 2017 entry on my trading journal.

1) The sloppier the handwriting, the more excited I am about a stock.
2) My best preliminary layman analysis at the time : 'they refine oil and sell it'.
3) The earnings recovery puzzle : did an extra 10,000 people a day started filling up at Petron stations in 4QFY16? Who knows. One clue was that they reported higher sales during a quarter where the government set petrol pump prices were higher compared to the same quarter the year before.

After a slightly more thorough due diligence process, I was confident that a rally of at least 30% is realistic - this is a prediction that Q1FY17 numbers will reflect a continuation of the 4QFY16 recovery trend. I'm aware of what the 'technical analysts'^ are thinking - they will say that the next 'points of interest' are at RM6.48 (the recent peak) and RM6.70 (the previous peak in 2016). I began accumulating a cheap call warrant, Petron-CC, when the stock was trading at around RM5.70.

Ignore the technical analysis. My parameters for this trade were very simple. It only needs to rally beyond RM6 and stay above that point over the next two months. That's only a 5% increase in the stock. At that 5% gain level my call warrants would already be profitable - from that point on I can stay with the position and rely on the profit buffer. But Petron's stock has to rise over this two-month period, or time decay will start affecting Petron-CC's value.

My deadline for this trade to work was the next quarterly earnings (since this is a one-quarter thematic play). And my conviction was strong enough that I accumulated a massive position gradually; a one sen move in the call warrants translates to a RM2,800 profit/loss. I finished buying by April 1.

By May 15 Petron's stock hit RM8.70 - a 52% increase. I hit the jackpot, but I made a pretty big mistake during this time.


I failed to stick to my own plans - a typical human failing. Instead of selling just before the 1Q earnings (sell on news; trading interest wanes once the anticipated material information becomes public), I decided to stick beyond May. I convinced myself that the warrants can weather any short term decline post-earnings and continue to rally further. Petron's price did recover but I was betting on the wrong horse (warrant) by that point.

​May 26 journal entry. By this point I was trapped in a big position as the warrant plummets.

As expected, there was an immediate decline in the stock after its earnings release (the numbers were excellent). It fell from RM8.67 to RM7 in a month - a staggering 20% decline. I then failed to remember that a volatile stock translates to a much more volatile warrant. My holdings fell enough to cut my profits by a third. Note that the warrants never followed Petron's trajectory thereafter. It stagnated until its September expiration date.

This was the end result. I wasn't complaining, but it's normal to feel like an idiot when you threw away thousands of ringgit in profits. In other words, good planning, but terrible execution.

Some RM9,000 in losses were subtracted from this final net gain figure.

By this time (June), the market has begun paying attention towards refineries. Petron continues to rally towards RM9 by August. By then I knew there will be further opportunities to trade.

Part II : Hengyuan Emerges.. and FOMO Strikes!

If you're still reading at this point, I'll reward your tenacity with a brief fundamental background on Petron. It currently has the third biggest market share in the country (from zero brand recognition in 2012), it opened more stations than any other brand in 2015 and 2016 AND 2017, it counts on its big Filipino parent group for support, and it's an integrated downstream player (they refine, sell, and distribute the oil to their Petron stations).

The company owns the bulk of the stations after taking over Mobil's sites, but they also have a franchisee program that offers better rates for vendors than Petronas. Their improved sales numbers seem to come just from having more stations and having better brand recognition among customers - aside from improved selling prices. Geographical focus must have helped too - they focus on underserved locations in states like Johor, Pahang, and Kelantan, not the Klang Valley.

You get the idea.

However, having retail and distribution activities as well as new station openings involve substantial and ongoing non-refinery related capex commitments (it's easier to calculate a 5-year capex when you're just building/upgrading a refinery). Lower gross profits from these other operations can eat up into the fantastic margins reported by Petron's refining and sales activity. So you'll likely get lower gross profit margins at the group level.

So if you really only care about the refinery angle,  the solution is to buy Hengyuan shares. They just do refining and sales, and the Shell Group buys their stuff under a long term agreement. It's owned by a Chinese company who bought a 51% stake for the low, low price of RM1.92 a share. On paper the Chinese are currently sitting on a 750% gain in less than two years.

This is all Hengyuan needs to keep doing : take care of the 'products' and the 'pipe'.

'Pure play' (focus on one thing only) companies like Hengyuan promises higher profit margins than integrated players like Petron because its commitments are more concentrated (build refinery, maintain refinery, increase production capacity). They don't have to spend ever-increasing amounts of money on building and operating petrol stations.

I've had a cursory look at Petron's and Hengyuan's respective refining operations and their average production capacities; assuming they're selling the same type of refined products, their gross margins from refining during a typical quarter should be similar.

It's the other stuff that eats you up - old capex, new capex, forex hedging, anything. Petron also does not disclose an earnings breakdown of their refining, retail, and other operations. In each of the past three financial quarters, Hengyuan's profit margins have been consistently better than Petron's.

I just wanted to mention the oil price recovery theme in all of this, but beware of how boring the following sentences are : Improving oil prices are generally good for refiners up to a point ; it depends on their crack spreads. Another variable for these companies is stockholding gains ; higher oil prices translate to higher inventory values on all the stuff they store in their tanks. To reflect improving oil prices, they can recognise the quarterly increase in inventory value as part of their profits. Their selling prices are based on global benchmarks, so a short term supply disruption globally can be good for these guys, even if they predominantly sell oil in the domestic market.

Anyway, Hengyuan has rallied alongside Petron since March, but it didn't have a call warrant. Only in August did one investment bank issue Hengyuan-CA and a few other call warrants, and the market went nuts. External factors didn't seem to have led to this - Brent crude prices were still languishing in the 50s.

Whether by luck or design, the stage was set for speculators to demonstrate their FOMO - they simply can't afford to miss out on another Petron. Hengyuan was hit with a market query just a couple days before Hengyuan-CA was listed. It ensures that the first day of trading on August 2 will be crazy, and so it was. Hengyuan-CA went from 38 sen to 74 sen in two days, or a 138% gain. Speculators, syndicates, crooks, and investment bankers rejoiced (I'm not saying you can't be one but not the other...).

I had a bout of FOMO too - a typical human failing. So I bought some Hengyuan-CA for short term trading. Plus, I had Hengyuan in my watchlist since March - I was preparing myself to trade this thing for about five months, or so I thought.

It turned out to be a very good investment indeed! By now you may have noticed that Hengyuan-CA is worth around RM1.25. That's a 300% increase in about four months.

This was the outcome of my trade in September:

​It's like owning bitcoin in 2013 and selling it in 2013.

So what happened? The simplest explanation is that I bought it and sold it at the wrong time. I did not have the confidence to stay invested and my timeline for the trade was all wrong. The warrant remained flat at 30 sen for about two months with no recovery in sight - until November when it skyrocketed. I understood the fundamentals and the sentiment behind Petron, but I failed to do the same kind of due diligence on Hengyuan. It's just hubris - you think you know so much, but you don't. The lesson here is : do your homework.

The whole experience taught me the value of having real convictions and sticking to what I know. In this case, it was Petron.

Back to August 2017 : the mania in Hengyuan warrants (Hengyuan-CA was just one; CB, CC, CD equally went nuts) sparked a resurgence in Petron call warrants. The stock has well and truly recovered from its post-earnings lows and the upsurge in sentiment toward Hengyuan is benefiting Petron. I should note that in this situation this is a sentiment trade, it is strictly not a fundamentals-backed trade - I'll explain this strategy another day.

I anticipated this and quickly bought some new Petron warrants (Petron-CC was too close to expiry). The end result from a trade lasting 20 trading days:

The second lesson is : stick to what you know and understand. Also, there are few clean outcomes in investing or trading. But you'll come out ahead if your gains (correct analysis and optimal execution) outweigh the losses (sheer foolishness).

^ I don't think there's anything remotely technical or analytical about technical analysis. But it's useful for anticipating what the herd is thinking.