MSPORTS Arbitrage Play – How to Get FREE Money Risk-Free with a Few Clicks from the Stock Market?
Jul 14th, 2010 by AhYap
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 |
Net % Gain |
Spread |
|
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!
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.
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Hi Yap,
Thank you for your article on MSPORTS Arbitrage Play. Fully agree with you.
Regarding Mr Wood’s choice, it is assumed that he is keeping MSPORTS. That he is positive on the stock after the rights & enlarged capital, the stock has potential, the price of MSPORTS is not too high at the moment, etc
Keep up the wonderful articles.
Cheers.
Ah Yap has again posted some investment education in his blog. Those who have MSport shares should sell and buy the OR and make riskless gain. Think about the percentage gain which is substantial. However please heed Robert’s valuable comments, all of them. I just like to add one experience. More than 10 years ago there was this Country Height (CH) share selling at say RM15, the warrant (W) of CH was selling at RM 6 with a conversion price of RM6. Wasn’t there an excellent arbitrage opportunity? I sold my CH share at RM15 and bought W at RM 6 and straight away sent for conversion. CH kept going up to RM25 just before I got back my conversion about 1 month plus later. I got no share to sell and short selling was not permissible. Before the new CH shares were listed, the price of CH plunged to RM 9. Since then it never recovered. I lost RM in selling CH at RM15 instead of RM 25, and another loss of buying W at RM 6 and convert to CH with another RM 6 conversion price, total RM 12, but it was then worth only RM 9, or another loss of RM3(12-9). My total loss in opportunity cost is RM13 (10+3). I am not saying one cannot benefit from the arbitrage opportunity in MSport but just beware of insiders manipulating. (The above case was a true one except the figures may vary.)
Reaffirming what Robert and KC saying, this strategy works only if you are already a holder of MSports and you are convicted with its performance in the future. That means you must have done your homework on MSports or else you have no business in holding it at all. Instead of saying that you make 2-5% gain, I would say that you just reduce you original cost by 2-5% since you are still holding the same amount of stocks before and after the arbitrage play.
there are many minority holders who will just do not want to take the hassle to exercise the rights.. u will need to buy bank draft, go and make sure u submitted the forms etc.. all this hassle cost time=$$$.. if u do not have many MSports shares, what for? the easiest is sell the rights la..
If it is a direct CDS account, yes you need to buy bank draft and yes it is hassle if you only hold 1,000 MSports. But if it is a nominated CDS account, all you need is an email or a phone call. For those holding sufficient shares and be prepared like Mr Wood, he just pocket at least RM2,000+ with a few clicks. I think it is worth doing for Mr Woods even if he needs to buy bank draft. Everyone can see now this kind of opportunities exist all the time because there will always be uninformed investors and minority holders who want to sell their rights. Yesterday (Thursday), you can even do a 2.5 to 3 cents spread easily which means you can cut your cost by 7%. I believe 7% with a bank draft is better than locking an FD for 2 years at 3.7%/year.
Yes, agree with Yap. Yesterday I managed to sell msports at 0.43 for 10lot and buy back the OR at 2cent. It is really a saving of 7% but hopefully the proceeds sales is on time bank in back to my accounts for me to subscribe the rights. It should ontime but a bit rush i guess if for those who used this opportunity especially on Friday sales.
Just one word: Brilliant!
I have bookmarked your blog and I’m sure I’ll be a frequent visitor from now.
Off the topic, I came to your blog after Googling for reviews on HAIO.
@Eric, happy that you understand how it works! Well done.
@Kelvin, HAIO I sold off liao after the last earning announcement. ^_^” Instead of bookmarking, I suggest you to “subscribe” my blog by email (on the top of the right corner), this way the content will deliver to your email when it is available. Cheers!
If i have bought 100 units of shares of MSPORT-OR at RM0.025 = RM2,500 last week, i didn’t sell them at the end, now can I still top up the money to buy the parent share at RM0.38 or the current parent market share price?
Or I have converted the shares that I bought earlier to parent shares at RM0.38? Like say 10 units,then I have to pay another RM3,800? Total investment is RM6,300(2,500+3800) just to get a 10 units of M-SPORT share?
@Mike, correct. All cash will be used for EPS enhancement investment, the Xibin land factories. Their order book has increase 80% since IPO! Stand by for the “surprises” (up or down).
@znl, what I think is anytime is the right time to buy the shares if u know how much u are getting (my sole opinion). Getting it via the rights is cheaper of course. Pressing down the price is a bit harder because you must do it in 2 days because most nominated account would have subscribed by Tuesday (although the last day is next Monday). People rush to sell on 6th is possible too. Most likely reason for it to go below RM0.38 is the overall market sentimental now, i.e. world market going down.
@alvis, you need to convert your OR to MSPORTS at RM0.38 for total RM3,800. So your averaged cost is RM0.405 per share. If you are in nominated account, your broker should have called you to arrange the conversion. If you are a direct CDS account holder, you have some work to do – buy bank draft, fill in forms, mail it … it must reach their office by next Monday.
Is it meant that I use RM6,300 (2,500+3800) to buy a market share price RM0.38 for 10 units? Any other option for me to mitigate the loses?
Sorry for the confusion, if you mean 100 ‘old’ lots, that would be 100,000 shares! If it is standard lot, it will be 10,000 shares. If you pay RM2,500, I assume you just got yourself 100,000 rights shares, you will need RM38,000 extra cash to convert your right shares. If you don’t have the money or choose not to convert, you will be losing a lot of money (up to RM2,500)!
I also found another risk with the arbitrage play, like Eric has said, it is a bit rush. Nominated account need to debit the money on Tuesday that means latest you should sell is on last Wednesday (T + 3). Not sure if they are willing to do last minute work for us. For direct CDS account holder, you need to cash in your cheque + get bank draft + poslaju and you got to make sure everything hit the office before 5pm next Monday.
A careful planning is important.
Good job , Ah Yap. Good post after a long exodus from posting
Yeah, Mr. Wood’s plan will work if only he is bullish on the prospects of the stock..