Monday, 16 April 2018


I'll start with this handy little diagram:

The 'Rounds' indicate distinct trading phases.

In hindsight, didn't it all look so simple? So obvious? Well, no.

Hindsight bias is inherently a dangerous thing. It reinforces your inflated sense of self belief and prompts you to cherry pick the facts. You may even ignore serious flaws in your thinking process indefinitely. For the record, I did not foresee that such a big shift in GBGAQRS-WA was imminent (I anticipated a much smaller, orderly move) ; in fact for about 80% of the time I was only thinking of the downside.

In trading, making mistakes every day is how you learn. Losing money is how you learn; there's really no way around that.

1) You can be right about your analysis but you're way too early; hence the losses.

2) You can be wrong about your analysis and still make money out of sheer dumb luck.

3) You can be right about your analysis but your trading execution is poor; hence you lose out on the majority of the profitable price shift.

4) Your execution can be at the level of algorithm-driven high frequency trading computers, but your idea sucks; hence you lose a lot of money.

Which one would you rather pick? I'll tell you. It's (1) and (3). Execution is something you can work on slowly and steadily. Having the wrong ideas at the start dooms you to losses. If you like the thought of (2), well, there are casinos for that.

This post is mainly about (3), the only option where you will not lose. Obviously I made some good money by virtue of being early during this move, but that thought process has been expounded in my previous post on GBGAQRS. This time I managed to miss out on a large part of the move due to poor trading execution.

Here is where I will bare all my successes, mistakes and what can be learned from them.


For the record, I'm extremely enthusiastic about the use of technical analysis. Using past price activity to predict future movements is a waste of time for me - but I may also be the worst technical analyst in the world.

 This. From Scott Adams.

What I excel at is analyzing current price and volume activity. This is done by repeated observations and finding market signals; there is really no other choice to do this properly without sacrificing the time and effort.

My niche is in warrants - I'm fairly adept at finding the best warrants to trade (the one with the best profit potential on an absolute return and percentage return basis; here's a guide and checklist) and analyzing the discrepancy between the warrant and the mother share (which was the biggest thematic angle in GBGAQRS-WA).

But I do not completely discount the value of technical analysis. At best, it tells me what others in the market are thinking. Support and resistance points are no theoretical concepts; they are tangible and many traders swear by it.

To me, they are just helpful guides in my trade positioning. I can find price points where I can anticipate a large buy or sell volume; this is very helpful when I'm unloading or accumulating a substantial position (I currently trade in the hundreds of thousands of lots for a single idea).

And with that, let's look at a bunch of charts. The following is how I traded GBGAQRS-WA and how you can trade it better than I did.

Huge dip on 4 April; it turned out to be a great buying opportunity.

I'll spare the technical analysis mumbo jumbo; the last big candle (on 9 April) in this move basically indicates a breakout. It would have been wise to maintain the position, but I sold my entire position at the 35.5 sen mark.

Just going back to the first diagram at the beginning; this is how my trades unfolded in three distinct rounds:

ROUND 1 : 30 March to 2 April (two days). Bought at 23.5 sen, sold at 32.5 sen (x00,000 lots). 38% gain.

--------------  5 April : My first blog post on GBGAQRS.

ROUND 2 : 6 April to 9 April (two days). Bought at the 27.5 sen to 30 sen range. Sold at 35.5 sen (x00,000 lots). 24% gain.

ROUND 3 : 11 April to 12 April (two days). Bought at 39.5 and 40 sen. Sold at 44.5 and 45 sen (100,000 lots). 12.5% gain.

Here are a few useful observations on my trading activity over this two-week period.

1) ROUND 1 and avoiding the 4 April rout : this move demonstrates the value of short term trading. It was a twitchy market during that week and I was a twitchy trader; I was eager to get out of this trade ASAP. I opted for this instead of building a massive position and holding on to it. During the rout on 4 April, when a massive late afternoon selloff sparked a 2% decline in the KLCI, I was already out.

When trading big lots, you have to factor in two things : opportunity cost and liquidity risk. My gains would have been totally wiped out had I not exited the position on 2 April. And because of the sheer volatility on 4 April, there was no telling whether the stock and warrant would completely collapse on 5 April.

Round 1.

It also demonstrates the value of having a concrete plan and sticking to it. I typically aim for a (lofty) 30% return on investment for a single trade, but having a leveraged position means my profit target is halved at 15% (all things considered, the absolute value of the capital return is essentially unchanged due to a larger position thanks to leverage). In this particular scenario I was still able to exit at a 38% gain, far beyond my expectations.

2) PRICE AND VOLUME TELLS YOU ALL YOU NEED TO KNOW (5 April - 6 April). It became apparent quickly that the 4 April rout was completely overblown. The next day GBGAQRS-WA (which fell 25% on 4 April) quickly stabilized; there was some concrete buying interest and accumulation activity.

The following overlap between GBGAQRS stock and GBGAQRS-WA is a simple indicator that the warrant's valuation is overstretched.

On that day the mother share closed at RM1.62. The warrant however closed at 24 sen. A discount in the spread suddenly opened up; theoretically the warrant should be worth 32 sen (RM1.62 minus the warrant's exercise price of RM1.30).

Obviously this correlation is imperfect - the warrant is never tightly correlated with the mother share in this way - but it became clear quickly that the spread has widened. Prior to this, in recent weeks GBGAQRS-WA was trading at a 3-4 sen discount to what it should theoretically be relative to the mother share. When this discount suddenly widened to 8 sen, a real trading opportunity emerges.

So, let's think in terms of scenarios. Let's say I initiated a position at 24 sen per warrant:

SCENARIO A : The 8 sen spread returns to its historical average of 4 sen. This means I can easily derive a 16% gain from just the narrowing in the spread.

SCENARIO B : The mother share could suddenly break the tight RM1.65 range where it has been trading over the past few days. This means a 16% gain is merely the tip of the iceberg. If the stock moves to RM1.70, assuming a 4 sen discount in the warrant, GBGAQRS would be worth 36 sen. So the profit range is now between 16% and 50%; astounding numbers.

 GBGAQRS shares finding some stability.

SCENARIO C : And then there's the holy grail scenario: a sudden rally in GBGAQRS beyond the RM1.70 mark could  spark an immediate reaction in the warrant. If this happens, there's a real possibility that the warrant could rise and reach 'parity' - in this case at RM1.70 the warrant could be fully valued at 40 sen, thus eliminating the historical discount.

3) ROUND 2: I had enough capital in my trading account to take possession of the warrants (instead of thinking in contra trading terms). I was also impatient to take profits, but this was a reasonable move given that my position was leveraged. The problem with trading huge lots in warrants like these is that liquidity comes and goes. It's mainly present during big rallies, not during a selloff. It is fairly difficult to unload 300,000 warrants into the market given GBGAQRS-WA's typical liquidity.

What was the consequence of not staying in? I missed out on a big move from 36 sen to a peak of 55 sen in two days. That's a 52% gain. And based on my previous position, size I missed out on about RM25,000 in potential profits. This pretty much sums up good ideas but poor execution; don't feel sorry for me though.

But beware of hindsight bias; it did not look clear at the time that such a big rally was imminent. I had a plan and I stuck to it; for ROUND 2 my gains amounted to about 24%, or more than adequate for a couple days' work. The market was still volatile and all I had in mind was capital preservation. Profits typically take care of themselves but losses never do.

Round 2.

4) ROUND 3 : By 11 April, it was clear that the best case scenario has happened - SCENARIO C. Not only was there a huge influx of buying interest by now, GBGAQRS-WA was recording crazy one-day gains (33% on 10 April, 18% on 11 April). I missed out on all this of course.

 The best case scenario totally happened.

But if there was a clear-cut sign that the rally is slowing down, it's this:

a) After three days of consecutive gains there will be a great desire to take profits. Those who entered at the 50 sen mark were clearly late in the game.

b) 'Parity' is reached, contrary to my expectations. At GBGAQRS-WA's price peak of 55 sen on 11 April, it was trading at parity to the mother share (RM1.85, or RM1.30 plus 55 sen). When this happens, it's time to retreat; the warrant has achieved its full potential.

c) The warrant's percentage gains has steadily outpaced the mother share's. This indicates greater enthusiasm in the warrant, but at a high price point, there's nowhere to go but down.

So guess what happened on the afternoon of 11 April? The warrant lost its liquidity, leaving many latecomers trapped. In the morning session there were tons of enthusiastic buyers of the warrant at the 50 sen and above mark. By 4:30PM it collapsed to 40 sen, or an immediate 20% loss.

Having been a trader for a few years, and having been a part of the panic-selling crowd in the past, I can sense selling desperation when I see it. This was the first component.

The second component is probability assessment. There's little likelihood that the mother share would stage a similar 20% price collapse (its prices are easy to maintain, and the stock tends to trade in a tight range). When GBGAQRS-WA hits 40 sen, the prevailing assumption is that the mother share would fall to RM1.70 (assuming parity is maintained).

The stock did fall to an intraday low of RM1.74, but even at this price the warrant would fetch a valuation of 44 sen. Instead, there was some clear panic selling at the lower range of 39.5-40 sen.

I scooped up 100,000 warrants at that price. At the end of that day, the mother share closed at RM1.77, while the warrant closed at 43 sen. If you didn't notice, I'll tell you; the historical 4 sen discount has returned. The market sees fit to value the warrant at this level again.

On 12 April I sold my positions quietly at 44.5-45 sen for a quick 11% gain.

Always sell against a rallying market.


In my first post, I wrote that the company can be considered a good proxy for the upcoming general election. They still are, and you can reasonably hold a long term position in the stock.

While in recent weeks there has been a general rebound in sentiment towards stocks, as we get closer to the election date things might be less clear from a risk-reward standpoint. If the KLCI keeps rising prior to the election, the post-election upside potential would be far less. In fact, there would be serious downside potential, especially if the GE results swing another way (I'd never rule this out).

This trade was the kind of situation where you can miss out on huge rallies and still make good returns. My total winnings from this?

My point is this : the easy money has been made.

Tuesday, 10 April 2018


Three different fonts???

Clarity of thought is important when devising a trade. Some mental maths and risk assessments have to be made in real time as a trading opportunity emerges; you can be a few minutes late and lose out on the bulk of the profits.

Here's a market signal that I've utilised repeatedly to achieve short term profits within the contra (T+3) period - this essentially means no money down and pure, clean profits. I can share it with you as the signal constitutes just 50% of the trade - the other half is practice, trading execution, and intuition, all of which you'll have to do yourself.


Example 1 : correlation between VS and the KLCI. Source : Bloomberg

Let me explain the concept further. You will need these very specific market conditions for this trade to work:

1) A fundamentally strong company with stable earnings prospects.

2) It should fittingly be a market leader - this means that its valuations are fully priced into its shares. To put another way, it has to be a momentum stock that has outperformed the broader sector or market over a long period (say, a year).

3) A weakening broader market environment. As you may know, a weak market drives down momentum stocks the hardest. It's not rare for these stocks (or the sector) to fall hard first, preceding the entire market's decline.

4) In a peak-to-trough phase, the momentum stock has to lose at least 20% in value over the short term (say, three months). It's better if there was an earlier attempt of bargain buying to prompt the stock into recovery but ultimately fizzled.

5) This loss in momentum should precede the broader market's decline. When the market decline happens, the stock should fall even further, but this is more indicative of fear and loss of liquidity, which is when you should buy the stock.

Example 2 : A crude visualization of how this works.

6) At the trough (defined here as the stock's lowest price point in at least four months or more), the stock has to exhibit sustained buying interest. This means it has to fail to breach new lows, perhaps over a period of several days.

7) As soon as market pessimism abates, the stock is expected to rise faster and further than others in the market. Remember that the stock may be considered overpriced before, but with intact fundamentals, there will always be buyers at the trough. For companies with long term fundamentals, short term volatility is almost always a good opportunity to buy. And if you plan accordingly, you can derive both short term and long term profits from the trade.

8) Last but not least, it is best if the stock has a good proxy to amplify the magnitude of profits. Like a warrant.

A major part of this trade involves the understanding of how momentum stocks relate to the broader market. They're correlated but not efficiently so - this is why you can get market beating returns form momentum stocks in the first place. A generally positive market means that investors are enthusiastic. This enthusiasm provides a foundation for the stock to rise further, thus maintaining its momentum.

The trend of course reverses when the market turns sour. In this scenario, newly formed pessimism (and the increasing urge to take profits) reinforce themselves until the stock stages a precipitous decline. This can lead to a significant selldown even when markets are still okay - the correlation is first broken, then prices begin to move in the opposite direction. Because of this, momentum counters can start collapsing at the first sign of broader market troubles - it now falls harder than the rest of the market.

You can find real value in the presence of extreme pessimism. One of my favorite signals is when the momentum counter stages a quick recovery after a large decline, but then it quickly fizzles out, also known as the 'dead cat bounce'. The subsequent decline in VS shares actually preceded the sudden and vicious fall in the FBM KLCI a few weeks later (the index fell by 1.88% on April 4, its largest one-day decline since the VIX episode in February).

VS price chart, March - April. I'm no fan of technical analysis and its hilarious charting terms, but I can appreciate the shock value of this particular metaphor.

Prior to the KLCI's sudden fall, VS Industry - a long time favorite for its market beating margins and preeminent leader status in the local electronics manufacturing services (EMS) space - staged a far more vicious decline; between March 28 and April 3 it fell by a staggering 23%. If you stretch the timeline a bit further, to early March, the stock has lost a third of its value in a few weeks. There was nothing fundamentally wrong with the company itself; the stock was paying the price for its momentum status.

So the stock lost 33% of its market value when the KLCI only fell by 2%. VS likely fell first amid a wave of profit taking; after a brief recovery, it fell further as market volatility shocks the KLCI into that 2% decline. It was clear that the decline in VS was overstretched relative to the market (need I mention again that it's a fantastic company with solid valuations?). Now is the time to devise a simple trade to profit from this mispricing.


VS seemed to have hit a nadir around the RM2 mark on April 3 as it closes at a nine-month low. Even for a momentum stock, a 33% decline in one month is too fast; it only makes sense amid a stock market collapse scenario, and that clearly wasn't happening. I began anticipating a potential rebound, but this needs to be validated by strong buying support at the RM2 mark.

April 3-4: Support emerges near the RM2 mark.

The average trading volume (turnover) for the two day period between April 3-4 was a much-higher-than-usual 14.5 million shares, which is highly suggestive of an attempt to support the stock price. By April 5 it was time to make a move - this was a calculated risk, though the parameters of the trade became clearer by this point:

Scenario 1:

1) Buy into the stock at around RM2.

2) A stop-loss level at below RM1.95 (which would suggest an immediate failure in price support).

3) A profit target of RM2.15 (7% upside).

The right approach in this situation was to trade VS-WA, a fairly volatile company warrant with a RM1.65 exercise price. It has historically traded at a premium to the mother share (after factoring in the exercise price), but this spread has narrowed considerably as VS continued to fall.

The most appealing thing for me was that VS-WA had been trading at RM1 as recently as March 29; it traded at a low of 51.5 sen just four days later, or a loss in value of nearly 50%. Bear in mind that the warrant only expires in January 2019, so at the moment it still has real intrinsic value.

Scenario 2 (with a more lucrative profit opportunity) :

1) Buy VS-WA when the mother share is around RM2.

2) A staggered stop loss level at 53.3 sen, 52 sen and 51 sen for the warrant (likely to occur when the mother share drops to RM1.95 - see Scenario 1)

3) A 10 sen profit target for VS-WA (18% upside) - the warrant is likely to reach this level when the mother share hits the RM2.15 mark (a 15 sen premium from the RM2 level).

So on April 5, armed with the knowledge of two things : 1) the market signal mentioned above and 2) validation of price support for VS shares, I plunged in decisively with an exposure of 100,000 warrants.

This next chart is very important. It's a five-minute chart for VS-WA in the early hours of April 5.

As you can see here, the payoff was immediate.

The average price upon entry was around the 55 sen mark. During the afternoon session VS came close to the RM2.15 mark. I disposed of everything at the 62-65 sen level; the rapid appreciation of the warrant signaled that it was time to exit. Note that everything goes back to square one for me after the trade is concluded; I have no strong opinions on the future price direction of either VS or VS-WA beyond this particular period.

Thanks to this strategy, I realized a 10% gain on the trade within about six hours. Minus fees, this translated to a profit of RM7,452.57.

 Intraday position. Net profit is the difference between the 'total amount due' for the 'buy' and 'sell' contracts.

So there you have it : no money down and pure, clean profits.

P/S : The market signal I described is obviously not unique to VS ; it's applicable to many stocks that have lost significant value in a short span of time. I pay extra attention if the stock of a fundamentally solid company falls by more than 20% in a month.

The lesson is : value emerges when a good stock falls, but you have to learn to maximize your profit potential within acceptable risk parameters (hence the scenario comparison).

The exact same approach would have applied to PMETAL, which finally staged a comeback on April 9. I did not benefit from this as I was focusing on.... Round 2 with GBGAQRS (more on this in the next post).

Thursday, 5 April 2018


It's just a matter of time now - the 14th General Election is upon us. Coincidentally, the market is reeling from a series of severe shocks. So naturally these questions are getting thrown around a lot now: What to make of the latest market crash? Stay in cash or buy some shares? Should I wait until the election's over to buy shares? Should I buy MYEG?

Here's a ghastly vision of things to come. Image link.

I'll address these questions one by one.


Answer : The trade war rhetoric is intensifying. It does not have immediate economic ramifications yet the selldown on April 4 was bloodcurdling. Just remember one thing; we've had a very good run from September last year to February. Momentum stocks are the first to get destroyed when momentum stops. Stock prices do not move up in a linear, orderly manner. It is likely that if you're still holding a position in momentum stocks, you were the last to join the party.

By understanding this - the fact that the market responds to short term fears, marking the end of momentum strategies - it is time to remind ourselves that real quality counters will survive the wreckage. Their prices will recover sooner than you might think, and they will lead the broader market rebound.

When this will happen is anybody's guess, but you'd do well by disregarding the entirety of the price and volume activity (and the charts) during the momentum period (September to February). Momentum is defined by its finite nature - it eventually stops, so why would you keep your money in stocks that exhibit such a characteristic?


Answer : If you're in a profit taking position, do it and stay in cash. Markets are historically volatile during the following, very specific period; the time between the dissolution of Parliament and the first trading day after the GE results. Hence wild swings are to be expected. Externally things don't look so hot either, so any massive overnight declines in the US will likely tear apart the KLCI in the morning.

But if you're looking for a once-in-five years opportunity to derive gains exceeding 30% from a single short term trade, buy some shares ahead of the GE outcome. Take a calculated risk; if you're a big believer in event driven trading opportunities (as I am), this is possibly the biggest market event in years to capitalize on.


Answer : If you're asking this question, it means you're well aware that the GE period will be dominated by sentiment, not fundamentals. If you find trading distasteful, stay away until the market stabilizes. If you have a value investor's mindset, you'd do one of two things : 1) stay invested regardless of the silliness of the GE period or 2) wait for value stocks to become cheaper in the event of a market crash or downside volatility. At any rate your hand must not be pushed; you dictate your own investment decisions at your own time.


Answer : Sure, go ahead and buy some, though from a valuations perspective things remain fuzzy. You can certainly put a premium on a monopolistic, government controlled business, but it is not known if the premium can be sustained (say, for example, if a global market crash were to happen. Maybe it's happening now). 

As it so happens with such companies, your investment is essentially a bet on the following : 1) for the market to continue pricing the stock at a forward PE of more than 20 times, 2) on new investments/projects to sustain past business growth successes, and 3) your reliance on the stock as the most politically sensitive counter there is. There is little value proposition here, at least in the conventional sense.

But here's a sobering fact; it is possibly the most obvious election/crony counter play in the universe. You're not part of the 'smart money', you're at the tail end of it. The stock's already up 35% this year and you're thinking about buying it now? All the best!

Really, I'm not trying to knock on MYEG here. I'm just saying that from a relative valuation standpoint, there are other, better stocks to pursue right now. 


To start with, here's a relative comparison of how the KLCI fares versus the world in past election cycles. It's not particularly helpful, unless if you're in the business of predicting election dates.

From my notes

The way I look at it, the GE trading period (again, I'd roughly define this as the time between the dissolution of Parliament and the GE itself) is the mother of all event driven trading opportunities. The upside potential is vast enough that you should take a higher risk than normal to derive outsized returns.

KLCI component counters - supposedly the most sane of all counters on Bursa Malaysia - can rally by 15-20% in a span of days. You'd have done very well if you have a gutsy position like say, a margin account exposure in hundreds of thousands of GAMUDA shares in 2013. But it was equally probable that you'd be destroyed if things moved the other way.

Essentially, my approach here is to look for the cheapest, absolute best bargain opportunities with the highest trough-to-peak upside potential.

But first, try and accept these hard truths:

1) Your GLC bet means you have a vested interest in the status quo. You can vote Pakatan but your GLC stock purchase is essentially a BN vote. An opposition victory could potentially bring about political strife, potential social unrest, the unwinding of certain monopolistic conglomerates, and serious economic ramifications. Guess how the stock market will react?

2) Your GLC bet is a proxy on the KLCI itself. There is no new fundamentals angle here. It is not about the expectation of new contracts; these have already been priced in by the analyst reports as well as the stock itself. The cause and effect is not ambiguous; a 50-point increase in the KLCI will move GLCs up, even if they're not part of the 30 main component stocks. 

3) If the KLCI moves up 50, 80, 100 points right after GE results, it is mostly down to sentiment and short covering. Sure, you can attribute the rise to an influx of fresh capital now that the uncertainty's over. It can also be a vote on status quo and economic stability. But nobody talks about short covering.

Prior to pivotal events such as a general election, institutions or aggressive trading firms will make an outright directional bet on the direction of the market itself. The most cost effective way to do this (for a trader) is to use KLCI index futures, or the FKLI. Go here if you want to learn the basics, but the main point is that index futures can directly lead to a shock in the cash (equity) markets if a massive short covering occurs.

Essentially what this means is that those who bet on a decline in the KLCI prior to the GE would take up massive short positions (remember that a futures contract is always a zero sum game; there are two opposing views for each one). Look at what happened in 2013 (GE13) for a clear demonstration of how this works.

From The Star, 6 May, 2013 (the first trading day after GE13 results):

"Malaysia's FBM KLCI surged to an all-time high of 1,826 early Monday, while the ringgit advanced to the highest since 1997 against the US dollar, after the Barisan Nasional won 133 parliamentary seats at the 13th General Elections to continue to rule the country.

The relief rally broke past all technical indicators, surging 131.45 points or 7.75%.... "

That was the actual index. On May 2, the May index futures contract closed at 1,705. On May 6, it hit a peak of 1,834 from a low of 1,720 in the first hour of trading - a mind boggling 6% increase in an hour.

The FBM KLCI - first day after the 2013 elections. Source

The rapid rise was all well and good as new capital comes in. But at the same time the move upwards was exacerbated by short sellers being forced to cover their positions by buying back futures contracts. 

At the time, the index futures market was very illiquid, so desperate traders were forced to cover their position at any price. And if they can't buy back futures, they have to hedge their losses by buying up shares in the cash market - this essentially means the KLCI component stocks that make up the index. This self reinforcing cycle pushes prices to its peak and explains much of the volatility on that fateful day. The PM even tried to take credit for it.

My point in explaining all this is that you have to understand what you're getting into. From here on, the task is in pinpointing a reasonably priced GLC proxy with a very high upside potential. It also helps if the market is largely ignoring the company's potential, and so far that seems to be very much the case. If such a swing is too much for you to stomach - that 6% one-day move can also happen in the opposite direction - stay away from the market at all costs.

Gabungan AQRS is my top pick for the GE season with a potential conservative upside of 30% in the short term (typically defined as a period of three months). It will very likely receive a huge capital boost post-GE as part of the main pool of politically sensitive counters. It is a sentiment proxy as much as it is a construction, political, or KLCI proxy. So any upside volatility will benefit them the most.

But more specifically, this post focuses on GBGAQRS-WA, a company warrant that expires in July this year, but just enough time to serve as a very valuable proxy to the mother share itself.

Note that the warrant pick amplifies the profit (and loss potential). The following analysis is equally applicable to the mother share - just buy them instead if you prefer.

Get to know everything relevant about the company in one minute with this screengrab.


Gabungan AQRS presents an interesting case : a clear government proxy with multiple exposures in infrastructure projects - we're talking about both Peninsular Malaysia as well as East Malaysia. It has had modest success with previous commitments in rail projects, though it's clear that now the company's targeting far bigger game than just building viaducts.

Research houses have already factored in some of these contracts, with current 12-month target prices of as high as RM2.25 - an upside of about 40% from the current stock price. As recently as 11 January, 2018, the stock hit a peak of RM2.15 but since then it quickly fell by a third. Now why is that?

I had a few ongoing theories in my mind; one of them is that the stock is being driven down by the dumping of GBGAQRS-WA, a company issued warrant that expires in July. It carries an exercise price of RM1.30 and a one-to-one conversion ratio. The warrant itself endured a far worse decline as it fell from 77 sen to a low of 18 sen on 26 March - a whopping 76% decline in two months.

This is where the value emerges. GBGAQRS-WA is technically worthless if the mother share dips below RM1.30 - a possibility which could have influenced the selldown recently - but it will always be worth something due to its time value and convertibility, even if it will expire in three months' time.

These are three of my most important principles : 1) having the best value proposition, 2) having the right thematic angle and 3) having the right instrument to trade.


Note : I'll use Affin Hwang's target price for AQRS as a baseline for the following analysis. The full report can be found here.

Always think in relative terms; how did the fall of AQRS stock compare to its peers, the sector, and the broader market? Was the selldown overdone? Is the stock responding the same way as its peers, particularly those who share the same catalysts?

Relative comparison is the easiest way to look at this. Construct a table comprising Bursa's leading lights in the construction sector and companies with direct exposure in the bigger infra projects. To get more breadth, include companies in different construction subsegments - engineering companies, construction materials suppliers, etc - as well as important market benchmarks.

Below is a simplified table of what I usually look at. I'm only including two major indicators here - price activity and historical price-earnings ratio. It can be far more comprehensive and easier to compile if you have a Bloomberg terminal.

YTD Price Performance, April 2 (%)
 Historical PE (times), YTD share price
HSS Engineers
George Kent
Lafarge Cement
 N/A (loss making)
Ahmad Zaki Resources
KL Construction Index
 22 (end-Dec 2017)
 17 (end-Feb 2018)
Gabungan AQRS

Source : Company filings, Bloomberg. Historical PE is based on the latest share price and the latest full financial year earnings per share. I'm fully aware that by April 4 the figures in this table would have shifted drastically but things would still look comparatively favourable for AQRS.

There's a lot of information that can be derived from this. It's clear that AQRS's share price has underperformed its peers and the sector. From a PE standpoint it looks reasonably attractive. It's a company that has some degree of control over its profit margins (around 10% now. For context, AZRB's is 3%). It is unclear if the expectation of future contracts are imputed into the stock price; it would have been when it was above RM2, but not anymore.

It is reasonable to assume that the broad-based selldown was partly due to profit taking activity ahead of the GE; politically sensitive counters will be the most volatile, after all. But how do we measure the sensitivity of AQRS's stock price relative to its financial performance?

One way is to measure the quarter-to-quarter PE. From this we can determine if the price component has overstretched beyond its earnings trajectory. I apply this method for companies that have demonstrated reasonable earnings growth over the long term; for construction firms, it's clear that the growth is due to revenue increase from new projects being delivered. On a year-on-year basis, AQRS's net profit margins have improved slightly from 7% to 10%.

These are useful info; you can interpret it many ways. I'll use indexing - starting from the same base - to visualize the share price-to-PE ratio relationship over this period, plus the year-to-date data.

YTD is the current state of this linkage : it's the YTD price over the latest FY17 historical PE.

This might look confusing, but it essentially means this : this chart shows that the PE has gone down since its peak despite EPS growth. You're getting higher EPS now but the stock's PE (YTD) is similar to 1Q, when the EPS was 23% lower. So the 'current' PE (14 times) is a reflection of the current share price.

Simply put : the valuation HAS NOT STRETCHED. You can get the stock at last year's valuations despite the huge improvement in net profit and profit margins. Or, put another way, you can buy into a stock with 4Q17's EPS at 3Q17's price levels in 2Q18.

Plus, its valuations are still below peers, profit margins have improved, and right now the share price minimally reflects the company's exposure to new projects(remember that the research house estimate factors in new contract wins of up to RM1.5 billion in FY18, hence the RM2.25 target price). So the stock currently offers an excellent value proposition relative to its peers.


AQRS clearly has a good story behind it - most people already knows this. The company is ambitious in its expansion plans, and with the CEO as a major shareholder, his and the company's financial interests are clearly aligned. Its past price performance likely reflects this.

It is already involved in LRT Line 3, and its links to Sabah is fairly well known. I'm not trying to impute its future stock value if it wins a Pan Borneo Sabah construction package, for example - my point is that the company is an excellent GE proxy and construction proxy stock.

 From Affin Hwang's report.

Again, I'm looking for value here instead of catching the momentum. You can easily buy HSSEB, GKENT, or MYEG for a high-momentum GE proxy play, but I have no idea how high these stocks can go. I can't trade what I can't plan for, even if that means missing out on easy profits. (Note: those three stocks fell between 5% and 11% on April 4 alone. AQRS? A mere 1.22% decline)

The GE thesis assumes that at the upon its conclusion (and you have no choice but to assume a BN win), the earnings potential from the government contracts will be imputed into the stock prices again. This alone represents a 25% upside from the current stock price.


For profit maximisation, it's simple: buy GBGAQRS-WA as a short to medium term trade. Between now and July, the warrant is likely to closely track the mother share IF it does not fall below the RM1.30 mark. Another big IF is the state of the global markets over the next few weeks - there is a real possibility that it can drive the warrant to near worthlessness as investors stay away and liquidity dries up.

It is even trading at a slight discount to the mother share after factoring in the exercise price; in other words the long term shareholders (and particularly the major shareholder) may find it appealing to convert the warrants into actual shares at below prevailing market prices.

This whole post is not merely a thought exercise as I've been targeting GBGAQRS-WA over the past two weeks. At 20 sen per warrant as at last week (March 26 to 30), it was a fantastic opportunity to gain exposure cheaply. The stock was trading at around RM1.50 at the time, but a very conservative assumption of a 10 sen increase (a 6% rise) would result in a 10 sen increase in the warrant itself (a 50% rise).

With this in mind, I built up a fairly large position. A week later this was the immediate payoff (RGL stands for realized gain/loss) :

And this is just the first round. The market has just hit a reset button but this does not threaten the  earnings prospects of companies like GBGAQRS. Once the volatility subsides, what you'll end up with is an incredibly undervalued stock with the fundamentals intact.

I should mention that the warrant was absolutely destroyed on April 4 in part due to the panic selling. It closed at 24 sen, or a steep discount to the underlying (inclusive of the exercise price, the conversion will get you a share at RM1.54, or an eight sen discount to the mother share's April 4 closing price). This can mean two things - either the mother share will fall rapidly or the warrant is artificially mispriced as panic grips the market.

I'm 100% in cash and ready for Round 2. My advice? Ignore the short term noise, forget momentum, focus on value, and buy on panics.

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