Sunday, 9 August 2020


A good friend told me about his trip to the cinema recently.

There were the usual checks, MySejahtera, all the usual stuff. Moviegoers were reminded to keep their masks on during the movie.

And guess what happened? Pretty much everyone removed their masks. How else to eat popcorn?

When your greatest fear is the asymptomatic carrier, this is the equivalent of your worst nightmare, really.

Imagine two hours in a crowded room, everyone breathing the same air, minimal circulation. You almost wish to catch E Coli from that dirty movie theater seat than breathe in a coronavirus droplet.

In confined spaces, it's really hard to have a safe customer experience. At least the way the customer feels it. 

And when your entire business is premised upon having customers bundled up together in confined spaces for hours on end, forgive your customers for feeling just a little bit concerned, and just a little bit ehhhhh no thanks.

In the context of COVID-19-related fears, flying is about the same as moviegoing. It comes with a similar existential challenge : getting people to fly again, and only if there are places to fly to.

I recently flew on a domestic AIRASIA flight - my first during this pandemic - and had some wild thoughts.

Would there be social distancing? Would they do the heroic thing and rip apart the middle seats?

Will I feast my eyes - or burn them - on this???


This flight turned into a field homework of sorts. I was keen on seeing how AIRASIA operates now, from the flight schedules down to the fittings in the aircraft.

Me being me, everything I see, touch, or feel is stock related. And I've thought deep and hard about Tony AIRASIA as a investment trade.

Before I get to the stock-related matters, I'll just describe the experience of taking a flight during these trying times, for the benefit of those who have yet to do so.

AIRASIA has resumed flying local routes with domestic travel reportedly back to 90% capacity. But its fleet of 245 planes is still woefully underutilised due to the lack of international flights.

Below is a list of flights in one afternoon in August at klia2 - it does not even fill up the board. If we include the morning flights, we'd probably get about 60-70 domestic flights daily at the moment.  The airline said it's doing about 600 flights weekly to 16 local destinations. So that sounds about right.

As for AAX? Zero flights, of course.

I ended up on an Airbus A321neo, a sleek new aircraft that was only taken delivery late last year.

It was a long-range plane for a short-haul flight, with the total traveling distance of a mere 400 kilometers. It's not Penang-to-Langkawi kind of short haul, but short enough.

I'm not the nuttiest aviation enthusiast out there, but you've got to appreciate the new Mirus Hawk slimline seats. Better legroom, less bulk, comfier.

Unfortunately, no full-on Hazmat/jester suits for the flight attendants as I had hoped. Just goggles and gloves. Service is normal.

It was a fairly crowded domestic flight, with no gap seating or anything like that. It was a fairly mundane flight with no additional stringent SOPs.

At least the flight lasted less than a length of a movie, so most passengers kept their masks on.

Notice the little things, though. The number of flights that hardly fill up the board. A powerful plane for a short flight.

Resuming domestic flights will not save AIRASIA. Only a cash infusion will.


AAX and AIRASIA are PN17 companies in everything but the label. There are serious concerns about... well, their ability as a going concern.

It's a liabilities issue. It's a cash flow issue. It's the nobody flies during COVID issue.

There's no need to mention all the controversies that have revolved around them like an ominous comulonimbus cloud over the past year. Those are well reported.

If you simply print out the financial statements of both airlines and then some of the analyst research reports, you'd pinpoint the one thing they need the most, really fast.

Of course it can only be this :

Money, and lots of it.

I don't want to be melodramatic and call it a life-and-death situation, but the arithmetic is very simple.

At AIRASIA's current cash burn rate of more than RM500 million a month to cover operating expenses, it will run out of money by the end of the year. That's like.. four months away.

There's another key deadline. By 31st of August 2020, we will find out whether the recovery phase MCO will be extended. With all that's going on domestically and in the world at the moment, this looks very likely, which means one thing : international routes will remain shut.

In this scenario, AAX is almost certainly doomed without its own financial rescue, according to one analyst report that has gone viral... because the numbers don't lie.

See that one phrase in the last paragraph? 'Shareholder support'.

It implies one thing, which is crucial to our understanding of whether these airline stocks are worth a trade.

I only said 'stock' because with a target price of zilch, I'm willing to overlook AAX right now. It's already troubled in pre-COVID times, with supposedly innovative business model that has successfully generated mostly negative returns on equity since inception.

From AAX 2019 Annual Report

I'm not one of those people who only opened their CDS account this year, so I can vividly remember a rosier time when AAX was listed at above RM1 per share. What's the target price seven years later?

OK, let's just look at recent price performances, so I can convince you I'm not nitpicking on the worst parts only. I'm not trying to be an airhole here.

As I was writing this, AIRASIA's stock is down 45% from its June 2020 peak.

As for AAX, their long-term shareholders would probably make guttural sounds similar to the way you'd pronounce the stock code. Their shares are down 57% over the same period.

The persisting shareholders' fears are existential. It's not just the operational viability of leveraged airlines during COVID times, it's also the stocks themselves.

Going back to rights issue. In essence, it's just fundraising via public markets. In other words, raise money via new share issuance.

Existing shareholders need to cough up the money, upon which they will be entitled to new shares for their troubles. But with new shares comes dilution, which fractionalises the worth of your current shares.

This is my most pertinent point :

The likelihood, and proportion, of a rights issue
determines the tradeability/investability of the stock.

Some reports suggest AIRASIA needs RM2 billion at least in fresh cash to survive. A rights issue of this magnitude would cause the stock to lose altitude... really, really fast.

For context, this is what happened to SAPNRG's stock after its ball-busting RM4 billion rights issue that was announced in August 2018 and concluded in January 2019. Read this for a more thorough account on what happened to the stock on the day the rights issue was announced (spoiler alert : we traded it).

SAPNRG weekly chart from August 2018, which was when the rights issue was first announced.

The dilemma here is that no one wants to kill the stock price - least of all the biggest you-know-whos shareholders - so other fundraising avenues are aggressively being pursued.

Another viable alternative is a private placement, but that piece of news has died down and maybe you can say 안녕히 가세요 to that for now.

What about a good old-fashioned bank loan, you say? Malaysian banks won't touch lor... high risk credit. You think this is a time for banks to live dangerously? They've already done that with the oil and gas players. Forget airlines.

But just as I was feeling all smug about the above conclusion, this came out... how wrong was I, much shame on my next seven generations.

So with this positive news, what's next for the stock?

I currently view AIRASIA as a distressed asset, and the stock is distressed equity.

The prevailing market perception is that either there's more downside to the stock, or that it's set to fly sky high if its continued existence is assured.

If there is no rights issue element to raising those much needed funds, and if these funds can be secured elsewhere, the combination of new cash and the assurance of non-dilution will likely cause the stock to shoot up, never mind the possibility of an MCO extension to 31 December 2020.

We are living in times where perception overshoots the runway. The fundamentals are still sipping teh tarik in the Sky Lounge. So expect some serious trading interest in AIRASIA, one way or the other.

But if a rights issue does indeed come up - remember that there's another cool billion to raise somewhere, perhaps a bit more just to get some financial comfort - the impact to the stock may be prolonged. The dilution from a multi-billion ringgit rights issue would almost certainly hit the stock hard.

As a situational/event-driven trade, some hedge funds or massive uncles will probably have put on a trade already, with the view that the airline is far too important to fail. You might even call it a quasi-national strategic asset.

The main risk is of course twofold : prolonged shutdown of international routes, and dilution risk from a rights issue, if that option becomes reality.

And according to that article above, even the financing package comes with huge caveats. Banks can be a lot of things, but the lenders are not dumb.

Drawdown on the loan is contingent upon AIRASIA flying to international destinations? OK, all the best with that.

And of course, that 80% Danajamin guarantee would have to be non-negotiable.

But I am not here to speculate or sway you into a conclusion. I'm just sharing the facts, and you will have to decide which side of the fence you want to be on.

Sunday, 26 July 2020


From the Editor-In-Chief of the Pelham Blue Fund

The short version of the story : we made about RM48,000 in gross profits before lunchtime by buying impossibly priced put warrants with zero intrinsic value.

Was it gutsy? Reckless? Plain stupid? All this and more?

Now for the long version...

Gains from Trading Account 1 : RM31,500

Gains from Trading Account 2 : RM16,250

Gross Profits : RM47,750
Return on Investment : 66%
Duration : 1.5 hours


SUPERMX-HB was a recently issued put warrant. In the simplest terms, it was meant to move in the opposite direction of the mother share. Stock goes down, put warrant goes up, vice versa.

But not many are aware as to how this warrant works. With more than 50,000 new trading accounts opened in the past four months, to a newbie, a warrant is just a warrant. A cheaper version of the real thing, and it goes where the mother share goes.

In a market saturated with excessive speculation, especially in skyrocketing gloves shares, it's not hard to make an honest mistake and chase a put warrant. It's just one in a long list of available call warrants, isn't it?

The 'H' in SUPERMX-HB is supposed to denote that it's a put warrant, but who the hell would know that if they were not familiar with the stock market?

BLACKPINK is the solution

An overheating market. An exotic trading instrument. A pool of new investors/traders that are keen to push up anything glove-related under the sun. All the ingredients were there for an explosive brew.

In this era of crazy, you'd get a put warrant that jumps a few hundred percent in half a day. By luck or blissful stupidity, we made profits. Others lost their shirts. It could easily have been the reverse.

So, to try and make sense of something like this, the question we should be asking is not "what the fuck?"

The right question is "why the fuck?", and this post is all about exploring possible explanations. Believe me when I say that those profits are the least interesting thing here.

But first, a short diversion into some maths, because I know that's what you're really reading this blog post for.


Only 243% moneyness?? Data as of 24 July 2020. Source: Malaysia Warrants

The put warrant's actual 'fair value' is easily quantifiable. But there's a problem : when you actually do this, there's no way in hell that the price makes sense.

Due to a multitude of factors which we will go into shortly, the put warrant fetched prices based on fantasy-land assumptions.

Source : The Edge

In terms of premiums, the put warrant was trading at between 100-300% at their peaks. Peter Pan himself couldn't have explained it.

In terms of actual fair value, it gets even sketchier. Assuming a 15 sen price for SUPERMX-HB, SUPERMX shares would actually have an implied value of RM2. The mother share would have to completely collapse for the warrant to even be worth that much.

But these are exceptional times that we live in. Instead of collapsing, SUPERMX-HB  hit a peak of 35 sen on 13 July.

Price movement comparison in % terms between SUPERMX (blue) and SUPERMX-HB (red). Notice that once the inverse correlation was broken, the put warrant shot up a few hundred percent. The explanation I can offer you is one word  : Uncles.

To start with, I'll just include a list of questions that will elicit some digital grunts and puzzled emojis.

Why were people buying put warrants when their underlyings were rallying

Don't people know that put warrants are supposed to go down
when their underlyings are up?

Why did these put warrants skyrocket, even though their prices
make absolutely no sense on infinite Earths?

Where on earth were the market makers? Where were the price control mechanisms,
if any?

But the point of this is not to assign blame. I'm not here to find fault.

In fact, as an opportunistic trader, I might be the one at fault. Or you can blame crazy uncles punting like crazy. On some days, I am that uncle.

Or you can blame an investing public that's largely unaware on how a put warrant is supposed to work. Or you can ask the market maker where they have been in all this.

Instead, it's far more useful to consider the factors and catalysts that made this absurd situation possible.


Below is a percentage gains comparison between SUPERMX and SUPERMX-HB on 13 July 2020, from 9:00AM to 3:00PM.

The discrepancy was so huge that even though SUPERMX gained 14% in  half a day, its price chart looks totally flat in comparison to the put warrant.

You read that right - SUPERMX-HB gained 441% by 3:00PM on this day.

I definitely started that day knowing that none of these things made sense. The put warrant had already jumped 38% before we had even put on a position.

But as a trader, I didn't let that stop me.

Some may find it grotesque, or offensive on an intellectual level, that I can trade things that don't make sense. And I know exactly how put warrants are supposed to work, and I was aware of the totally insane pricing.

But I don't care what people think - I trade things that don't make sense all the time. And because I count on these types of quirky market phenomena to make a living, I can trade them well and survive to tell this tale.

When SUPERMX-HB suddenly gained in both price and volume, we deduced that what was happening was an inexplicable breakout. And because our specialty is in price-volume analysis, I can trade with zero context and simply focus on the price and volume activity.

The first position was initiated after SUPERMX-HB had already gained 38%. We built up a not-so-minor position at 9 and 9.5 sen. Initially, we figured that if we get this right, we stood to gain between 11% (at 10 sen) and 17% (at 10.5) in intraday gains. Really solid returns if that happens.

It didn't take long for prices to break 10 sen. We noticed the steady volumes buildup and just held on. During this time, the mother share was still going up.

Within an hour and a half, it got to 15 sen. So we did the responsible (??) thing by selling off this speculative position at around the 15-15.5 sen levels. 66% profits before lunchtime? Crazy.

But right after that... all hell broke loose. The put warrant did not stop going up. By 11:40AM it hit 20 sen. And by 2:50PM, it would break the 30 sen mark.

SUPERMX-HB, 5 minute chart on 13 July 2020

It was just full-on market mania. The market for this thing was completely unhinged, and I can't say that I've seen anything quite like it over nearly a decade of observing the stock market.

As it turned out, this period of insanity didn't last long. This ridiculous rally sputtered over the next few days as some people came to their senses, and a few more realised the absurdity of the whole thing and had to dump their positions at massive losses.

In the tradition of history's greatest manias, the price movement becomes parabolic. The daily chart here for SUPERMX-HB pretty much sums it up.

So there you have it. Put warrant goes up. Logic goes out of the window. Some uncles go bust. Others hit the jackpot. And soon after this, people went on to speculate in other things.

Did anyone learn any valuable lesson from this? I doubt it. The lure of a booming market is like a siren song : you can fall off a cliff, and still keep walking. To most punters out there, old or new, this was just another 'hot' move.

But that shouldn't be the whole story. This put warrant's boom and bust encapsulates exactly the kind of mania that is going on in the stock market right now, for better or worse, and it should never be forgotten.


I'm not saying that I can offer a satisfactory explanation to all this, but we can try and analyse the situation a bit, to explore why and how the put warrant can conceivably rise when the underlying was also rising.

First, consider the market backdrop. We are in the midst of a short selling ban until the end of the year.

The mere existence of the put warrant - a unique instrument, especially those of the single-stock variety - ironically makes it an appealing instrument for investors who have a negative view on glove stocks. It's a version of the scarcity premium - buying the put warrant is the only way to express this view.

The fact that glove stocks were breaching all-time highs did create a perverse incentive : the higher the stock goes, the more trading interest the put warrant will attract. Remember that this is currently the only way for people to express a bearish view on the stock.

It was plausible that a large swath of the market kept buying into the put warrant because people were simply expecting a massive, precipitous collapse in the glove stocks. Imagine expressing a sensible view by buying into an insensibly priced warrant : did I mention that we are living in crazy times?

But then again, to be conservative was the sensible view at the time.

Just three days before this momentous rally in SUPERMX-HB, the stock exchange and regulator signaled their cautiousness about how loopy this market was becoming. They introduced lower daily limits for KLCI component stocks, which would directly affect the likes of TOPGLOV and HARTA, the two major sector superstars in the year's hottest rally.

Full article here.

Remember that bearish view people had on glove stocks? SUPERMX-HB rallied like stupid on 13 July, and the mother share kept going up. Guess what happened on the 14th?

Big 4 Gloves Stocks, 5 minute chart on 14 July 2020. That valley was a flash crash.

What happened was... you know, just bubble market-type things.

SUPERMX itself had quite the dive. Its one-day range on 14 July looked like this:

So can we conclude that the put warrant did exactly as it was intended? That it was pricing this huge collapse the day before, thus explaining the entire crazy move?

The answer is : we don't know.

It didn't change the fact that the put warrant price made no sense at any price.

It didn't change the fact that the put warrant did not move inversely to the mother share as it ought to have done. But then again, it couldn't have: it was trading at levels where this could not logically happen.

What actually occurred was far messier: on 13 July, the put warrant moved up while the mother share moved up. And when the mother moved down on the 14th, the put warrant spiked upwards briefly and then went down when the mother share recovered.

This sounds confusing simply because the price distortion was absolute, and the put warrant simply lost all meaning as a hedging tool. As a speculative tool, it worked out fine for some people, less so for those caught at the top.

It was a new put warrant issuance, so shouldn't the market maker have made some sort of price control or intervention to ensure orderly trading, keep prices from getting out of whack, things like that? We don't have an answer to that either.

If I was to sum up this whole weird episode, it's simply this : this put warrant went wild in a wild market. No one exercised restraint, and no one took control. And when a warrant doesn't do what it's supposed to do, or priced where it's supposed to be priced, what you get is a speculative frenzy gone bonkers.

No blame game here. If there's a shitshow in the markets, we are all responsible.

More Tales By The Pelham Blue Fund