Feed on
Posts
Comments

Archive for July, 2010

Updated Warning: I currently have very high doubt on China and Chinese companies due to recent developments. My advice is not to own any Chinese companies especially those listed offshore, including MSports and XDL that I used to own. The “too good to be true” high inventory turnover that I mentioned below should be a big enough red flag to skip this stock. We should stick back to the defensive rule that one should invest in a company that has been listed for at least 5 years so we can look at 5 years listed historical performance.

Multi Sports is a moatless business, with almost no competitive advantage. They make shoe soles that any businessman can do. Anyone can build a factory, buy some machines and start producing.

multi sports holdings ltd

It is based in China JinJiang city, the “shoe production city” that produce 40% of the shoes in the world. It is said that there are 3,000+ shoe companies in JinJiang alone. 3,000 and increasing! Everyone what a piece of the pie.

We have 4 China companies listed in Malaysia and 4 of them are shoe makers! Why do they want to list in Malaysian instead of Shanghai or Hong Kong? Because they are too small. At first, they wanted to be listed in Singapore but due to some S-Chips issues (fraud, etc) and bad sentiment in Singapore, they changed their course and moved to Malaysia.

Multi Sports is definitely not a wonderful business. As a value investor, we “wish” to buy wonderful business at wonderful price (cheap price). But the problem is, wonderful businesses don’t go on sale very often. Even if we manage to buy, most of the time we are only able to buy them at fair price, not cheap price.

No matter how cheap a business look like, if it is a mediocre business that keep losing money and burning cash, we don’t want to buy it. Because the “look like cheap” price will soon become “expensive”.

Now, there is something in between. What if you can buy a fair business at very cheap price? Kekekeke, that is how the early Warren Buffett and the now Mohnish Pabrai makes a lot of money from.

If you say these shoe makers are suckers, their financial performance don’t look so!
msports financial highlights

Most of the MSports numbers above are pre-listing numbers. That means they can cook the books and fake all the numbers.

We have 4 reporting quarters from MSports post-listing in Bursa which I believe are more reliable numbers (2Q-2009 to 1Q-2010). I also managed to dig up 2 more early quarters from the same reports when they do a comparison with “previous quarters”.

(RMB) 4Q-08 1Q-09 2Q-09 3Q-09 4Q-09 1Q-10
Revenue 100,434 81,577 102,068 130,508 160,033 133,720
Cost of Sales (66,228) (54,420) (68,531) (85,799) (104,552) (90,902)
Gross Profit 34,206 27,157 33,537 44,709 55,481 42,818
Other Income 1,321 50 265 343 183 329
S&D (1,676) (1,379) (1,685) (1,739) (2,789) (2,478)
Admin Expenses (1,755) (1,321) (1,745) (14,101) (4,624) (2,993)
Finance Cost 0 (229) (320) (304) (260) (201)
Profit Before Tax 32,096 24,278 30,052 28,908 47,991 37,475
Tax (3,888) (3,036) (3,763) (5,140) (6,248) (5,056)
Net Profit 28,208 21,242 26,289 23,768 41,743 32,419
EPS (RMB)* 7.84 5.90 7.30 6.60 11.60 9.01
EPS (RM)* 3.92 2.95 3.65 3.30 5.80 4.50

* I have adjusted all EPS by assuming we have 360 million shares for all quarters.

Shoes have seasons (you buy more new shoes on Chinese New Year and more ice skating shoes in the winter). So you can’t simply take the last quarter number and multiply it by 4 to project the full year. Some quarters are meant to be strong, some are meant to be weak. Each quarter must be compared with the same quarter last year, i.e. 2Q 2009 with 2Q 2010.

Looking at the 6 quarters, we can compare 4Q and 1Q and notice the significant growth they have. Revenue grow an amazing 60%! Net profit and EPS grow 50%!

EPS in RM is 17 cents for the trailing 4 quarters. The shares are selling at around 42 cents, giving us a PE of only 2.5! There are only 3 possibilities.

1. MSports is a total fraud, they cook the books and fake all the numbers.

2. MSports is a lousy business, the numbers won’t last.

3. This is a killing stock, the next AXREIT/HAIO play.

The reverse or PE is the earning yield. At PE 2.5, earning yield is 40%. That means if you are able to buy the whole company at PE2.5, you can get a return of 40%! PE 2.5 also means you can get all your money back in 2.5 years PLUS the cash machine totally free (factories, employees, management, trade marks…).

PE2.5!!!

PE 2.5? PE 2.5? PE 2.5? PE 2.5?!!!?!?! Sorry for the repetition but PE2.5? Even lousy businesses and those who are accused of fraud are not trading at PE2.5?! Is PE2.5 justify for MSports?

Let’s say today you want to own a franchise business, something like Secret Recipe or Big Apples. You have to take up initial cash investment of 2 to 3 times “forecasted” earnings! (means PE 2 to 3). And you have to manage the store yourself, hire your own staffs, do the payrolls, pay the rentals, electric bills, make the donut and put some cream on it … you also need to do the accounting, file the tax return, etc. Not only you need to invest the money, you also need to invest your time and effort. You invest everything in 1 store and if the forecasted earnings cannot be achieved, you are screwed. You can’t sell a money losing business. Even if the business is profitable, you can’t expect high growth. Sooner or later, your landlord will increase you rental to take away more profits from you.

On the other hand, MSports is a listed company! You don’t need RM500k up front to make 1 investment. It’s OK to just buy 5k. And if something goes wrong with the company, say it lost a lot of money and it tanks 50%, you can still sell it with a few clicks for 2.5k. You can’t do that for a private business like Secret Recipe. Worst, you can’t even terminate it half way because you are locked in with your tenancy agreement. You might even lost more then what you have initial invested because you need to keep paying rents!

You also don’t need to manage a listed companies because the CEO, CFO and COCO are already paid to do the job. The most you need to do is your initial research and your subsequent follow up on each quarter results and other occasional  big events. Most of them are significant shareholders holding large stake in the business means they are on the same boat with you.

But we must ask, why MSports is trading at PE2.5 now? Will it remain at PE2.5 three years later? Can it maintain it’s E for the next 3 years? It helps a lot if we know why it is so cheap today and if we are confident that the “cheapness” won’t last, it can be a very good investment.

Hint: Do you know that if the PE double to 5, you get 100% gain? And PE5 is still “below normal” PE!

The Multi Sports IPO and Shareholdings

IPO 100,100,000 Ordinary Shares @ RM0.85. Listing on 19 Aug 2009.

Public Issue Of 57,600,000 New Ordinary Shares

• 18,000,000 Malaysian Public

• 39,600,000 Private Placement To Selected Investors;

Offer For Sale Of 42,500,000 Ordinary Shares – Private Placement To Selected Investors

It is difficult to explain thing this way, you can forget about the numbers above. Let’s explain it another way.

AFTER the IPO, we will have 360 million shares. Of this 360 million shares, 180 million (50%) will still be owned by the original owner (Mr Fire Stick!). 18 million (5%) shares are owned by individual like you and me and your grandma. 82.1 million (22% of the company) will be owned by rich-ass private investors and always-can’t-make-good-money-sucker funds.

Where does the remaining 23% goes? They are on the hands of 5 early investors – Lim Geok Tin, Fortune United Investments Ltd, Supreme Business Investment Ltd, Houton Ltd and Guoline Group Management which is owned by Malaysian billionaire Quek Leng Chan, the owner of Hong Leong Group. Quek alone holds 54million shares (15%)!

quek leng chan

Uncle Quek. Sorry not your father.

Why The Price Free Fall From Day 1?

msports price chart

Investors who get in from the IPO must felt like parachuting or bungee jumping! The price almost free fall from IPO price of RM0.85 to around RM0.42 today, tanking more than 50%!

All thanks to our beloved Mr Quek.

Mr Quek started to dispose his 15% shares from the first day! He is not getting it at IPO price of RM0.85. He got all his shares on 12 May 2009 for USD $7 million through the “Novation Agreement” which I don’t know what is it. His estimated cost per share is around RM0.43.

In less than a month he has disposed more than 10% of his shares! 1 month! If he is able to unload all his stocks at an average of 50 cents, he will still make a good profit of 16% in 3 months!

It is believed that every other early investors has sell off too in the first few months. That means early investors that hold 23% of the entire company are running for the exit cashing for profits in the first few months!

What do fund managers do when a stock price tank? They sell. They are herds. That’s why mutual funds don’t make money! 23% of early investor sells. 22% of the fund herds follow to sells. What will your grandma do? Sell!

herd - fund manager

Titanic, “You run, I run!”

The price free fall. The good news is, the free fall has nothing to do with the fundamental of the stock. It is very normal for early investor to sell because they got their shares very cheap. It is their investment strategy to invest in a company in the early stage and cash out immediately in the IPO. Quek is not considered an early investor but as a “vendor”. Unfortunately I do not understand what it means so I cannot explain it.

What about the fund managers? Fund manager need to protect their high pay job and to do that they are not interested to beat the market. What they want is to mimic the market. If everyone sells, it is better for them to sell too because they need to be like everyone else, rather then being caught pant off holding the stock and get blame for keeping them.

The IPO is definitely not structured properly. Bursa should not have allowed giant investor like Quek to cash up immediately in the first day. But I am not here to debate right or wrong but to see if we can take advantage of this and make some good money. We might even need to thank Quek because without him, we might not have the opportunity.

Looking at the top 30 shareholders listing of MSports in annual report 2009, NONE of the early investors is still holding the stocks (as of 30 April 2010)! None! 23% of the early investors have fully sold off.

What about the funds and private investors? There are only 2 funds left holding the stock, i.e EPF and Uni Aggressive Fund. Both hold less than 1% shares in total! Almost 22% of the early funds has flee too (assuming no individual private investors)! All who left are the 50% owner Mr Fire Stick and your grandma and grandpa.

The good news, every big guys are out now, there is hardly anyone that can tank the price anymore. (Unless Mr ‘Stick’ sells his ‘stakes’).

I would like to say that for those who see Quek selling as a sign that MSports sucks is an incorrect observation. Quek is making lots of money selling his stake. He is not on the same ‘shoe’ as you, definitely not Multi Sports shoe. Again, his selling has nothing to do with the fundamental of MSports, it is profit taking.

Why Another Rights Issue In Less Than A Year?

They want to issue another 90 million shares in less than a year after the IPO. Many investors again think this sucks because they assume company asking for money a sign of weakness. They are also worried about earning dilution. But if you look at it carefully, it tells another story.

MSports has more than RM78 million net cash after borrowings in their bank account, why the F do they need to raise another RM20 million?! Their operating cashflow is so strong that they can just get the cash from there. So why?

Kekekekekeke. It has to do with Mr Fire Stick.

Lin HuoZhi
What a nice hair style! The most original Hokkien Lang.

Mr Stick has sold 19.8 million shares at RM0.85 in the IPO and cashed in RM16.8 million. He is now holding 50% of the company. Today, his company share is selling at only RM0.42. If he thinks his company is cheap, he can buy it back. Since he sell it at RM0.85 earlier, buying it back at RM0.42 is a very lucrative move (if he is confident with his company).

But buying back from the market will quickly move the price up, reducing the attractiveness at RM0.42. And because he is a significant shareholder holding more than 5% of the company, he needs to publicly disclose his buy and sell. If the public see him buying, herd-funds and individuals will rush in and push the price up very fast, making him difficult to acquire sufficient stocks cheaply.

The best way for him to quickly increase his stakes cheaply is to do a rights issue. With 1 rights for every 4 shares, he can easily increase 25% of his shareholdings effortlessly! What a brilliant idea! He doesn’t need to worry about pushing up the price. The price might even tanks more when uninformed investors start selling just because they hear the word “right issue”. What’s more amazing is that he doesn’t even need to pay for brokerage commissions!

The rights issue is not about raising RM20 million. The right issue is on how Mr Stick can acquire another 45 millions shares at throw away price effortlessly. I like brilliant management. It shows me Mr Fire Stick has brain. :D

Not only Mr Stick has committed to fully convert his rights, he is also committed to take up another 9 million excess shares if available. Brilliant.

I personally believe all 90 millions shares will be fully converted because 54 millions will be supported by Mr Fire Stick and 27.5 million rights changed hand in the last 5 days. These people who buy the rights from the market knows what they are doing and will surely convert all of them. I believe the remaining 8.5 million rights are being hold by original shareholders for conversion as well.

Dividend – The Market Price Catalyst

MSports suggests a dividend payout of 20% for 2010 and 2011. The bad news is that 20% is very little payout. The good news is that because it is very little, it can be done easily and there are also a big room to increase in the future.

Do you know what 20% payout ratio means when it is combined with a PE 2.5 stock? For every 1 ringgit that the company makes, you will receive 20 cents back as dividend. You are paying 2.5 ringgit to buy the company, you can getting a dividend yield of 8%!!!

Even if the stock doesn’t move at all, you will get 8% dividend every year! If the profit keep on increasing, so will your dividend!

MSports is still new (less than 1 year listed). When they start declaring dividends and honoring their dividend policy and when they are able to keep on reporting stronger and stronger earnings, the price has no way to go but UP. Remember my lesson #3 in my AXREIT/HAIO post?

Lesson #3. Some stocks have no other way to go other than UP! These are wonderful stocks selling very very cheap.

More Good News – It is Actually Cheaper Than PE 2.5!

PE2.5 are obtained without looking at the balance sheet, which is unfair to MSports because MSports is having more than RM78 million cash net of borrowings!

The market capitalization of MSports is 360M shares x RM0.42 = RM151 million. That means you can buy the whole company at 151 million. But they have RM78 million cash in their bank account (though most will be capex later), that means you are actually buying the whole company at RM73 million! This company is making RM62 million for the last 12 months and that is after expenses for the IPO! And the profit is expected to keep on growing.

Using the enterprise value (market cap – cash + borrowings), it is selling only at PE 1.x. That means if you run the company for another year with some growth, the company will have 151 million cash, the price you need to buy the whole company today.

Fundamentals, Fundamentals, Fundamentals

In value investing, we need to buy great companies at cheap price. We have done with the valuation and know this company is an extreme bargain selling at throw away price. But is the company great? Or at least good or satisfying? Because if a company is not good, the “cheap” price will soon become “fair” and later become “expensive” when the earnings drops.

2Q-09 3Q-09 4Q-09 1Q-10
ROE 69.4% 35.9% 54.3% 38.2%
ROA 44.2% 26.3% 43.1% 30.5%
Gross Margin 32.9% 34.3% 34.7% 32.0%
Net Margin 25.8% 18.2% 26.1% 24.2%
Tax Rate 12.5% 17.8% 13.0% 13.5%
DSO 36 40 36 40
Net Cash (RMB) 95,835 190,151 142,329 157,645
Inventory Turnover (Days) 15 12 11 12

ROIC (Return on invested capital) is the most important metrics of all. It tells us how well the management is deploying capital. But where is the ROIC in the table? There ain’t ROIC in the table, darling.

Since MSports doesn’t have a lot of borrowings, ROIC will be very similar to ROA (Return on assets). Since investing is not about precise science on how to cut a 0.00005 gram diamond so it can reflect 36 more light photons… ROA will work just fine. We can see MSports can do above 20% all the time, which is very very impressive.

Net margin tell us how much cushioning a business have in case the selling price drops and the expenses increases. With a net margin cushioning of 20%, it needs a harder hit before it can start bleeding (losing money). A competitor that has lower margin, say less than 10% will be slaughtered first in a market downturn which means stronger company can survived even stronger.

The tax rate is too low due to government incentive. But it will end next year and the tax rate will be 25% beginning 2011. This will reduce margin by almost 4%. Not significant but will affect the profits.

DSO (Days sales outstanding) is a measure of how many days they need to collect the money after a sale. At 40 days, this is a very very very fast collection period.

Cash is the most important cushion a business can have in bad times and the most important weapon for growth. At the end, it takes money to make more money. A company that can have high ROA can keep as much cash as they want as long as they can continue to deploy the cash at such high ROA.

Inventory turnover is the most impressive metrics of all. Inventory only need to sit on the MSports factories for 2 weeks and will be sold and turn into cash! That means not much money will be locked into inventory. Although I am quite skeptical about this performance but after comparing it with other companies and look at MSports business model, I think it is achievable. Shoe soles are commodity and they are all pre-ordered. Once you get the material and manufacture it, you can immediately ship it to your customers (which is almost all are in JinJiang city too).

Referring to the income statement table earlier, the drop in profit on Q2 and Q3 are due to the IPO listing expenses.

Although there are 3,000 shoe makers in JinJiang that makes 40% of shoes in the world. There are only 100+ that makes shoe soles (the most important part of the shoe) and MSports is “said” to be one of the biggest 5. And since it is the first sole maker that get listed and expanding fast, we hope it can attain first mover benefit and increase market share.

MSports factories are running at over 90% utilization rate. If they need to take in more orders, they will need more production capacity. That’s why they are very aggressive in expansion so they can increase their production capacity.

image

MSports growth will be explosive (hopefully). Our beloved Mr Fire Stick wants to triple the annual production from 24.6 million pairs to 74.6 million pairs in three years.

In 2008, Multi Sports had a 1% market share of China’s 2.1 billion pairs of rubber/plastic shoe soles production and 0.2% market share of the 10 billion pairs in the footwear soles sector in China, based on its output of 22 million pairs of sports shoe soles.

They also have an order book of 3 times it’s current production capacity. I don’t understand how come they dare to take up 3 times more order that they can produce but I believe they are confident that their new production line will be online very soon.

The money raised from the IPO has been put into use on increasing the production capacity by building more factories. A new land at Xibin has been bought that come with two 6-storey factories.

There are certainly a lot of room to grow and a lot or market share to take up.

What If The Price Remain Cheap For a Long Time? It Can Be Acquired!

The #1 shoe sellers in the world is Nike. The second? Adidas. But in China, Adidas is not #2! Li Ning, a China home grown sports brand has overtaken Adidas this year. It won’t take long before it beats Nike in China.

What/Who is Li Ning? Li Ning is a well known China gymnast who stunned the world by winning 6 medals in the 1984 summer Olympics. He is the man who “walk on air” around the “bird nest” in Beijing Olympic to torch the Olympic fire! And now he is managing a company that just beats Adidas in China.

li ning

Imagine if MSports remains cheap for the next few years while the fundamental never deteriorate. They continue to churn out cash and pay out dividends but it just remain at PE2.5. What can happen?

Big shoe companies like Nike, Adidas or Li Ning can just buy over the entire company! These stocks are traded at PE over 10 all the time. If they can buy a company at PE3 and merge their E into their parent company, they will increase their profit and market price a lot!

If a company makes 1 million and sell at PE10, it is worth 10 million. If this company buys another company with 100k profit at PE3, it only needs to pay 300k but his new combined company will now make 1.1 million and so worth 11 million (PE10) in the market! It “creates” extra 700k of “value”. This is how big companies like to “grow”.  It would be even fancier if this big companies can just issue shares to acquire the company, issuing a PE10 stock certificate to buy a PE3 stocks.

Multi Sports business and production can easily fit as a subsidiary for the big shoe companies, we have many such big companies out there that are competing with each other, Nike, Adidas, Asics, Li Ning, Anta, DongXiang, XStep, etc. This is not a company that build space ships, we can easily find a buyer for the whole company.

What Else Is Depressing The Price Right Now?

The early investors (QUEKKKKK!) dumped the stock earlier. The fund managers followed like herds. The rights issue scares away even more investors. What else is depressing the stock?

China Hong Xing, another shoe company listed in Singapore saw their profit drops by 90% in a quarter. They have so many cash that their stock is traded below net cash! Surprise! But it is very weird that the company still doesn’t want to pay out dividend. Management is giving a lot of lame excuses. Investor are now questioning if the cash is really there! China Hong Xing does look like a fraud to me.

There are many other China listed stocks in Singapore (known as S-Chips) that is having problem right now. You can easily Google for more information. Even Chinese companies listed in the US are being accused of fraud, i.e. NEP, CSKI, ONP, CMFO, LIWA and FUQI just to name a ‘few’.

Sentiments on these China stocks are very bad all over the world.

What If It Is Really a Fraud? Another Hong Xing?

Yes, it is possible. That’s why you need to do your homework and have your own conviction. If it is selling at a normal PE of 8 or 10, then it is really not worth looking at. But at PE2.5 it deserves a look because by just doubling the PE to 5, we will double our money. And PE5 is still a very conservative PE because most of those fraud companies in US still trade higher than this based on the “fake” E!

So if it is really a fraud and it fake its numbers by 50%, we end up owning a PE5 stock with a 4% dividend yield. Still look great! The PE2.5 itself is already pricing it as a fraud-lousy-dirty-bitch company. So if it is really one, how much more can it drop? BUT, what if it is not a fraud? Use your imagination. :D

A look at the financial numbers doesn’t show any concern. A comparison with other companies in the same industry shows that they are in the same trend. The problem is more on the competition and maybe over supply in the future instead of fraud. But I am not betting on it for 5 or 10 years. A 3 year holding period is sufficient. If after 3 years we get a PE of 6 with some reasonable growth plus the 20% dividend payout ratio, we will be very very fat.

There are 3,000 shoe companies in JinJiang alone. Many of them will be slaughtered. But some will survive and become stronger. Because we will always need shoes! The question is, which one will survive and which one will be slaughtered? How long more can MSports maintain its margin and utilized its production capacity? How will the increase of China labor cost affect the business? These are more serious concerns. But at PE2.5, I am willing to take all the risk and bet big on it.

Padini makes almost the same amount of money as Multi Sports. Padini is selling at PE10. Is Padini 4 times safer and better than Multi Sports? Petronas Dagangan (PetDag) is a stable business that operates all Petronas stations in Malaysia. It is safe but at PE12.5, is the risk and reward 5 times better than MSports? MSports risk is insured by the very low valuation and high dividend yield, but the upside is massive and explosive. Big shoe companies can take it over by a snap of fingers.

Head I win, tail I lose a little.

Credit: A post on China Apeks in Bursa that sparks my interest. A great blog.

Disclosure: No Positions.

Disclaimer: This is not a recommendation to buy or sell. Information may be wrong. Invest at your own risk.

Related:
- Multi Sports Homepage
- Multi Sports Annual Report 2009 (PDF)
- Multi Sports IPO Prospectus (Recompiled Searchable PDF)
- Multi Sports Rights Issue Prospectus (Recompiled Searchable PDF)
- Multi Sports News Tracking at PG8.net
-
Multi Sports Arbitrage Play

Similar to SINOTOP that I wrote in previous post, MSPORTS is also having a rights issue. The symbol is MSPORTS-OR and it will be traded this week from Monday to Friday. [Today is Wednesday]

Initially MSPORTS has 360 million shares. They issue 1 rights shares for every 4 ordinary shares, so you get 1 right share for every 4 shares you have. They are issuing a total of 90 millions rights shares (360 divided by 4).

The 50% owner of MSPORTS (whose Chinese name translated to Mr Fire Stick!) are committed to convert all of their rights shares, so 50% of the rights shares will not be sold in the market. We are left with 45 millions.

Monday we saw 2.5 million right shares traded.
Tuesday 2 million.
Wednesday (today) 7 million!

We think people are logical, but most of them are not. We have 12.5 million rights shares traded in 3 days. Who are the sellers? What is in their mind? Do they know they are throwing money away?

Are there really people who is stupid enough to throw away money? Yes, in the stock market, they do it all the time! That’s why, sometimes money really fall from the sky and you can pick them up in the stock market.

Only people who initially own MSPORTS shares will get MSPORTS-OR (the rights). That means the main sellers of MSPORTS-OR must be the initial shareholders of MSPORTS.

Let’s make some numbers. Please get your calculator ready and keep punching the numbers.

Assume Mr Ice Wood (brother of Mr Fire Stick) has 300,000 shares of MSPORTS, he will receive 75,000 MSPORTS-OR rights shares (300,000 divided by 4).

Each MSPORTS-OR can be converted to MSPORTS by paying RM0.38 per share at the end of the month. The converted MSPORTS is exactly the same as the MSPORTS you can buy in the market today.

Normally, we will think Mr Wood has only 3 choices. He can

#1. Take out additional RM114,000 (75,000 x RM0.38) and convert all rights shares to ordinary shares. He will end up having 375,000 MSPORTS shares. Note that he needs to take out extra cash.

#2. Sell MSPORTS-OR in the market and get some money back. He will still have 300,000 shares. People thought that they should choose this when they don’t have the money to convert. But that’s not correct, we will see why.

#3. Do nothing and let MSPORTS-OR expired. He will convince himself that he has not lost anything because he is still having 300,000 shares.

Choice #3 is obviously a sohai choice because it is the same as throwing money into the sea. But don’t laugh! There are many sohai like this because they don’t know what to do with them and before they figure it out, they are already expired! The only valid reason to choose #3 is that you have too little rights shares that selling them cost you more brokerage fee than what you can get back.

What we are seeing now in the market for the last 3 days is that people picking choice #2. Since it is worth only a few cents, they decided to sell it because they thought it is insignificant. As I said earlier, this is not a smart choice.

Choosing #1 make the most sense because you initially own MSPORTS and now you are allowed to buy more of it at a discount to the market price, it is very logical to top up as long as you have the cash. Because if you don’t like it, you shouldn’t have bought it in the first place. You won’t have MSPORTS and you won’t have MSPORTS-OR and you have nothing to worry about.

Now, even if you don’t have the cash to convert your right shares, you shouldn’t choose #2! You have a 4th choice that most people will miss. Let’s learn from Mr Wood.

Mr Wood is an intelligent investor. Not only he will keep all his MSPORTS-OR, he is also going to take advantage of the people who are selling MSPORTS-OR (i.e. choosing #2) by playing what Warren Buffett calls – the arbitrage.

The volume is very high today for both MSPORTS and MSPORTS-OR. MSPORTS-OR can be converted to MSPORTS for RM0.38. Since a converted MSPORTS is exactly the same as the MSPORTS that you can buy from the market today, they should be worth the same.

MSPORTS-OR “should be” selling as MSPORTS market price minus RM0.38. But as I say, stock market is a monkey forest where sohai will do a lot of monkey stunts and still think they are funny.

For the last 3 days, you can easily get MSPORTS-OR at a discount to MSPORTS in the range of 1 to 2 cents. Please be reminded that 1 to 2 cents for a 40 cents stocks is equaled to 2.5% to 5%!!!

Mr Wood can easily make a profit of 2.5% risk free with a few clicks if he accepts the fact that there are really many people who enjoy throwing money away in the market.

Mr Wood doesn’t even need any cash! All Mr Wood needs to do is to sell all his MSPORTS shares and purchase an equivalent amount of MSPORTS-OR! It doesn’t matter how much he bought his initial MSPORTS (doesn’t matter if it is RM0.20, RM0.40 or RM0.60). He just needs to sell them and immediately pocket some free money.

[Note: I really did what Mr Wood did]

If Mr Wood sell all his 300,000 MSPORTS at RM0.42. Assume he does it with HleBroking.com, his brokerage rate will be 0.21% (0.42% if the traded amount is below RM100,000). The net price received will be RM0.4186 after ALL brokerage fees, stamp duty and clearing fees.

Since MSPORTS-OR is always selling at a discount, Mr Wood can easily buy in 300,000 MSPORTS-OR at RM0.02 to RM0.03. Of course the cheaper he can get, the more free money he can get.

The good news about converting a right share to ordinary shares is that you don’t need to pay any brokerage fee, clearing fee or stamp duty!!! These fees will easily add up to 0.5% in normal trading.

The fee you need to pay to convert right shares to ordinary shares is only RM12 at Maybank2u and RM26 at HleBroking, which is really insignificant.

The following chart shows the % gain Mr Wood can get based on 3 different purchase prices of MSPORTS-OR.

MSPORTS-OR

Cost
(OR + RM0.38)

Net % Gain
(based on RM0.4186)

Spread
(RM0.42 – Cost)

0.020

0.400

4.7%

2 cents

0.025

0.405

3.4%

1.5 cents

0.030

0.410

2.1%

1 cent

Did you see it now? Even if he is buying the right shares at 3 cents and selling the mother share at 42 cents, he can still pocket a 2.1% gain after fee.

It doesn’t matter what exact price Mr Wood is selling his mother shares and what price he is buying the rights shares. What matter is the spread between the selling price and the final conversion price (rights price + RM0.38). To get a 1 cent spread, he can sell mother shares at RM0.43 and buy right shares at RM0.04, or he can sell mother shares at RM0.40 and buy right shares at RM0.01.

There are 68 million MSPORTS shares and 71.5 million MSPORTS-OR shares traded today. Volume are very high on the evening session. Looking at the day charts below, any MSPORTS holder can easily use Mr Wood’s strategy to pocket some free money. And they can even get a 1.5 cents or even 2 cents spread easily!

msports

 

 msports-or  

Now you can see why people who choose #2 earlier, i.e. selling the rights shares to get a few cents back is not intelligent. Because even if he doesn’t have the cash to convert the right shares, he should have sell the mother shares and not the right shares and later buy back sufficient amount of rights shares that he can afford to convert. By doing this he can get free money from the market. It doesn’t make sense to sell the right shares because doing so means you are the one giving out the money (to people like Mr Wood)!

Now, if people who are selling MSPORTS-OR are sohai, did you notice that those who buy MSPORTS in the market are also sohai? Why on earth should you do that?!! That is totally insane.

If you buy at market, you need to pay 43 cents. If you buy the rights shares at 3 cents and convert it into ordinary shares, you only need to pay 38 + 3 = 41 cents! Why on earth you want to pay more for the the same thing?! Some more, converting right shares cost only RM26 but buying at the market is subjected to full brokerage fees!

There are RM2.9million traded on MSPORTS just today. Are you shock with the amount of sohai we have in the stock market?

Back to Mr Wood, he will receive RM125,571.60 selling his 300,000 MSPORTS at RM0.42. He needs to pay RM9,030.60 for buying back 300,000 rights shares at RM0.03. Then he will need RM114,000 to convert them back to MSPORTS. His conversion fee is only RM26.

He just pocket RM2,515 net of all fees with just a few clicks online with no cash required! All he needs is a little understanding. (RM125,571.60 – RM9,030.60 – RM114,000 – RM26) He can easily get more than that by selling MSPORTS at higher price and buying MSPORTS-OR at lower price, i.e. getting a bigger spread.

What is happening this week won’t happen everyday. And even when it happens, you are still not making big money. But the whole point is that, this money is given to you FREE without much effort. If you already own MSPORTS, understand it and want to continue holding it, it is basically FREE MONEY from the market. It needs just a few clicks with no extra cash required. You are taking advantage of market discrepancies, you are doing arbitrage. 

Why choose to do nothing when doing almost nothing give you some FREE money? :)

Disclosure: Long MSPORTS-OR that will be fully converted. Why hold MSPORTS? :)

Related: Multi Sports Holdings Ltd Company Review.

Page 1 of 11