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.