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Monday, 12 August 2019

TRADE OF THE WEEK #19 : ONLY WORLD GROUP BHD




Outcome
Gross Profits : RM2,245
Return on Investment (ROI) : 5%
Duration : 5 hours


A series of fortuitous developments created a goldmine opportunity for us. But as is the norm, we were the ones with the short shovels.

We had the right angle. We had the right approach. But we arguably had the wrong trade, and the wrong thinking. In spite of the flaws, we were still able to garner a respectable amount in profits. But errors like this one will gnaw at us like a feral hog.

Let this post serve as a lesson so that you can trade *much* better than us.

THE ANGLE

Only World Group Bhd (OWG) was simply a cheap, more attractive proxy to the Genting Malaysia story. To briefly summarise (long version here), we'll cut down the fat and just share the important bits here. It is as mundane as it sounds.

- Once upon a time, Genting was blessed with a license to use FOX assets for its theme park. There is no FOX theme park anywhere in the world. 

- Disney acquires FOX and subsequently ditched the agreement. Wholesome, halal Disney does not like casinos near its Mickey Mouses (Mickey Mice?) and Snow Whites. Not that these had anything to do with the FOX assets, but still.

- Lawsuits around the world. A billy's worth.

- Settlement reached. So we could earn the privilege to enjoy Deadpool-land or Simpsons-world. We personally would love getting devoured at Alien-land, acidic saliva and all.

A typical scene at one of Genting's run-down hotels/motels/hostels

Where does OWG come in? That's right : your stomachs.
For the most part the group has a lucrative concession (assuming there are theme park attractions to go along with it) to run F&B outlets and some rides in Genting. Close to half of its profits are generated from this. The group also runs a mildly interesting attraction in Penang. 

Now the backstory to the backstory : following a successful listing, the group has suffered a bit in terms of earnings and a bit more in its share price. This is expected; tourist attraction-related earnings can be erratic ("God forbid if the Tourism Minister makes another unfortunate remark!").

The broader picture has not been so promising either. We personally blame it on lousy logos and weak marketing from the Tourism Ministry. Even our famously weak Ringgit didn't bring in more tourists at all over the past two years. 




Something to hurt your eyes with. Source

 So, to put a nutshell in a nutshell:
- OWG was affected by the temporary closure of the outdoor Genting theme park, ostensibly to be upgraded with FOX attractions and whatnot.

- OWG was hurt by the licensing dispute. Genting was hurt more, of course.

- The stock languishes for a while on steady but unimpressive earnings, its true potential diminished for as long as the Genting outdoor theme park remains in limbo.

- With the latest development pointing to an earlier-than-expected theme park opening, coupled with the settlement which would put FOX properties in the theme park, GENM would obviously lead the rally. But OWG could very well be the undervalued, cheaper proxy that can be traded at attractive terms.


THE MISTAKE

If the mother share has been languishing, you must always consider the company warrants too.

Although OWG-WA can't be measured in terms of intrinsic value (the warrant is deeply underwater or out-of-money, in financial parlance), an outsized reaction in OWG should trigger an equally strong reaction in the warrant.

To cut a long story short, OWG-WA delivered higher trading returns than our eventual choice of OWG's own stock. The warrant was also cheaper; thus with the same risk profile, overall returns would have been higher than what we achieved. We're talking about RM8,000 profits instead of RM2,000.

But never mind...

THE TRADE

Proxy trading is usually ineffective. When a sector leader jumps (let's say TOPGLOV), you may want to jump into a stock that is considered a laggard (let's say HARTA), thinking that it represents better value.

But 90% of the time, we would stick with the leader, not the laggard that would be presumed to catch up eventually.

What has gone up may go up further. What has stayed down may be staying down for a reason. Hence, we try not to be cute and prefer to keep it simple.

The only time to consider proxy trades is when you have the following conditions. Note that call warrants can be considered as proxies too.

1) Cheapness - OWG at 60-something sen as opposed to GENM at RM3.90.

2) Attractive liquidity - OWG has low but stable liquidity. GENM is overly liquid as it is a blue chip stock.

3) Chart appeal - not in the K-Pop sense, but more on the state of the stock prior to this market moving news. OWG's shares have languished for a while, as we mentioned earlier. The transition from boring stock to a positive momentum one would no doubt be represented in the stock chart, making it an attractive trading opportunity for buyers in the market.

Remember that there were two pieces of news released on different dates. GENM and OWG had reacted strongly to the earlier theme park opening news. OWG itself jumped from 48 to 56 sen on 24 July 2019. Indeed, if there were insiders, you can bet your Genting casino chips that they have jumped in.

OWG daily chart, 13 May to 25 July 2019.

The second news, announced after market hours on 25 July, came as a surprise to us. But we decided early on that it was enough to send OWG's share price higher. The settlement arguably carries a greater monetary value for theme park operators involved in Genting.

It's better to regain some semblance of status quo, with some FOX properties that can be appropriated as an attraction. Nobody here wants a cetak rompak Disneyland.

We did not have to belabour on that prediction of OWG rising, as prices on the morning of 26 July quickly indicated a major rise. Of course, GENM would enjoy the bulk of the positive sentiment, but OWG arguably stands to benefit as well.

GENM opened the day's trade up 8%. OWG? Up 10%.

By comparing the respective stocks' liquidity profiles, we deduced that:

1) GENM would probably see its shares sold down, simply due to profit taking activity.

2) OWG would not be as badly affected as it has not been liquid enough to force a major fall. Notice that since late May, shareholders would have been able to get the shares at just 52 sen. There would be no rush to take profits.

(1) and (2) had to be right for us to even stand a chance to make money.

Remember, these are all assumptions. We were most definitely biased in thinking of OWG this way, because we are trying to come up with a scenario to build a position on the stock.

Only the stocks' subsequent movements would validate our thinking or completely reject it. But there is an added element of risk here.

It is normal to assume that because OWG closely follows GENM, any negative move in GENM would also bring down OWG's shares. This view can be called 'close association' - since both stocks react to the same news, they should go up and down in tandem, more or less all the time.

As traders, we foresaw profit opportunities only if the above is incorrect. We would build a position in OWG in the event of 'loose association' - that is, if GENM and OWG subsequently start to move independently of one another as the market begins scrutinising OWG's prospects alone. Like former lovers that have now went their separate ways.

Another supporting factor is OWG's weak share price before these developments were announced, indicating potentially larger upside.

As for GENM, whose stock hit a high of RM4 around the open on 26 July, there was a gaping 34 sen hole to fill. We had to wait for the favourable scenario to play out.

 Boom in GENM. Daily chart, 23-26 July.


KICKED OUT, GOT BACK IN

Initially, we set up a small position in OWG to test the waters. Hence we got in at 63.5 sen; a large 13% premium from the previous day's closing. At this time the stock was moving up; it opened at a very good point of 62 sen.

However, we were kicked out by the early volatility. Having set aside a stop loss point of 61.5 sen, we had no choice but to exit. Our sell orders was automated, so it wasn't an issue. The drop from 63 sen to 60.5 sen within minutes points to an unfavourable outcome; a rapid collapse below 60 sen. We took losses of about RM700 from this initial approach.

But then a rebound happened and we re-entered with slightly more confidence. Our position then was eventually catapulted to 70 sen.

Our entry, exit, re-entry and profitable exit points are shown below, clearly denoted with exclamations to demonstrate our enthusiasm about being proven right.

5-minute charts for OWG on the morning of 26 July 2019.

While OWG got stronger as the day progressed, GENM was steadily absorbing the selldown and remained quite weak. We felt that the main difference is the liquidity of the two stocks. Same news, different liquidity profiles, different directions. But OWG's stock had to move for our thinking to be validated.

We got out comfortably at 69.5 sen by following two rules:

1) Exit when our 10% target is reached.

2) Exit when the obvious resistance point is breached, but biased towards a selldown.

For (2), it was simply this: the stock did well enough to hit the 71 sen mark, but the prevailing bias in the market is for the shares to be sold down: it did go up from 56 sen, after all. There was a greater likelihood for a selldown than a bigger move upwards.

Hence we sold at 69.5 sen and did not look back....











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