SINOTOP – Significant Market Mispricing Between Rights Issue! 100% Jump In 4 Days. Opportunity or Trap?!
Jun 29th, 2010 by AhYap
Saw SINOTOP and SINOTOP-OR (the rights share) trading as most active stocks today and wonder what they are. Did a search and realized it is the previous John Master (now a empty shell company). Be Top, a textile company in China is taking up the shell company to get listed in Bursa [geek call this ‘reversed merger’]. Then they try to raise $$$ by issuing 10 rights shares for every 1 share. Exactly like stock options, holder of the rights shares can buy 1 new share at ‘only’ RM0.20.
What is so confusing and interesting is this -
SINOTOP is actually selling for RM0.65 while the right is sold at RM0.12. It means, if you want to own SINOTOP shares, you can either buy directly at the market now at RM0.65, or you can buy the right share (SINOTOP-OR) at RM0.12 and exercise it to get new shares at RM0.20 with a total cost of only RM0.32!!! A discrepancy of RM0.65 to RM0.32, 100% differences!!!
What went wrong? I don’t know yet. But at least what we know is, if you are a holder of SINOTOP shares, the only sane thing to do is to sell every SINOTOP you have and bought an equivalent amount of SINOTOP-OR and fully exercise them. By doing that you will reduce your cost by 50% immediately!
Again, I know nothing about this business. And I don’t like textile company either (Berkshire Hathaway used to be a textile company that failed, a Warren Buffett investment ‘mistake’).
Calculating the pricing or market share price and the right price is not simple mathematics (at least to me). It reminds me of the time where I needed to calculate the amount of electrons in a silicon and the dy/dx… I hate those and doing this right issue calculation now make my head spin again like old time. But still, let me try my best on it and we learn together.
Every time there is a right issue, you need to make 2 formulas (actually 3). The 2 formulas allows you to link the market price BEFORE the right issue with the market price AFTER the right issue. Because after a right issue, the market price will immediately drop. You can only compare the BEFORE and AFTER price if you can either convert the AFTER price to BEFORE equivalent or convert the BEFORE price to AFTER equivalent.
It is like changing from kilograms to pound or kilometers to miles … you can only compare the market price either using the AFTER metrics or BEFORE metrics. Say today the AFTER rights price is RM0.65, what is the equivalent price BEFORE the rights issue? And 1 month ago, the BEFORE rights price is RM0.85, what is the equivalent AFTER rights price today?
The 3rd formula is actually the SINOTOP-OR (the right share) price. This is the most straightforward formula. We will later use this formula to get the other 2 formulas.
Rights Price = Market Price after rights issue – Rights Issue Price
(note: rights price is the rights market price, rights issue price is the strike price, the exercise price)
SINOTOP-OR = SINOTOP AFTER – RM0.20
The right shares, like call options and stock options, allow you to buy the underlying share at a fixed amount, that’s RM0.20 (geeks call this ‘strike price’). So technically, the right price will simply be the market price minus the strike price. Because you either buy directly at market price, or you buy the rights shares first (like paying upfront deposit) and pay the remaining later when you exercise it. No matter which way you do, you are getting the same thing in the end, the SINOTOP shares, the same apples.
If SINOTOP-OR is trading below SINOTOP AFTER – 0.20, we say it is trading at a discount, because by buying this ‘apple’ via the rights issue, you get the apple cheaper by buying it directly in the market.
On the other hand, if SINOTOP is trading above SINOTOP AFTER – 0.20, we say it is trading at a premium, because this apple is now more expensive than the market price.
“Usually”, we seldom see behavior like SINOTOP where there is a significant difference between the rights price and the market price (a big discount in this case). Usually they are almost the same, either slight discount or slight premium.
Uninformed investor who sell SINOTOP-OR is understandable because rights shares have short life, usually a week (geek call it the ‘expiry date’). After this date, your rights is worthless and you can no longer sell it in the market, the only thing you can do is exercise it at the strike price and get new shares. So the only reason you want to hold rights shares is to exercise it. To exercise it, you need to take fresh money out from your wallet. So if an existing shareholders who doesn’t plan to exercise the rights or have no money to exercise the rights, he will have to sell the rights shares before it expires to get some money. Or else, he will get nothing after they expire!
And since SINOTOP is issuing a massive 10 rights share for 1 existing shares, existing investors suddenly have 10 rights share, they either have to come up with the 10 rights share money or they will have no choice but to dump it at the open market. And they can only sell within a week! Lots of supply in a short period of time, but no demand.
That’s why next time if you encounter such scenario where one of your stock holdings is issuing massive rights and you still want to own this stock, sell some of it before you get the rights to raise your cash and then buy back back again through the rights. Do not plan to sell the rights because many people are trying to do the same and you won’t get good price for your rights!
[Many companies issue rights but usually they don’t issue 10 right for 1. They normally issue say 1 right for 4, or 1 right for 8 so that is acceptable and it won’t create too much sell supply to the rights shares, like BSTEAD and AXIATA previously]
What went wrong with SINOTOP is still unknown, and why got sohai buying up at the market is also unknown! Because I have shown you, it didn’t make sense to buy at market price and sell the rights! Instead you should do the other way, sell at market price and buy the rights!
If you do not have the 2 formulas in hand, you can’t compare the differences BEFORE and AFTER and so you won’t be able to know how much the market price of SINOTOP has shot up since the rights issue. Let’s derived the 2 formulas.
Market Price before rights issue = Market Price after rights issue + ( Ratio x Rights Price )
The Ratio is 10:1 so is 10. The Rights Price has been derived earlier. Replacing the ratio and rights price, we get
SINOTOP BEFORE = SINOTOP AFTER + 10 ( SINOTOP AFTER – RM0.20 )
SINOTOP BEFORE = SINOTOP AFTER + 10 SINOTOP AFTER – RM2.00
SINOTOP BEFORE = 11 SINOTOP AFTER – RM2.00 … formula (1) to convert the AFTER price to BEFORE price equivalent for comparison.
By reversing the formula, we get
SINOTOP AFTER = ( SINOTOP BEFORE + RM2.00 ) / 11 … formula (2) to convert the BEFORE price to AFTER price equivalent for comparison.
Actually they are the same formula, depending on whether you want to convert km to miles or convert miles to km.
Since the right will expire very soon (in a week) and cease to exist, so this 2 formulas are more important than the rights formula earlier. The rights will be RM0 after it expires.
To make sense of SINOTOP, just the day before the right issue, it was traded around RM1.60. Just a day after the right issue, it was around RM0.40. To link this 2 numbers together, you can either convert the BEFORE price to AFTER or the AFTER price to before. You can use either formula.
If it is RM0.40 AFTER, what it is the equivalent BEFORE?
SINOTOP BEFORE = 11 SINOTOP AFTER – RM2.00
= 11 x RM0.40 – RM2
= RM2.40
That means SINOTOP has ‘technically’ shot up from RM1.60 to $2.40 in terms of BEFORE price, a 50% raise in high volume in 1 day!
4 days later, the AFTER price shoot up to RM0.65. Converting it to BEFORE price, it would be RM5.15!!! 220% gain from RM1.60 in 4 days after the rights issue. No wonder BURSA is issuing them questioning letter. But the directors responded in the same way, “we are not aware of anything.”
This is more mysterious when you take into consideration that just 1 month earlier, the BEFORE price is only RM0.85. An increase from RM0.85 to RM5.15 in 1 month is 500%!
And even MORE mysterious is that there are rights shares pending that sell for only RM0.12 with an issue price of RM0.20! Again who is the sohai who buy SINOTOP at the market but refuse to buy the SINOTOP-OR and exercise it to get SINOTOP shares for 50% discount to market price?
It is possible that I did the wrong calculation above, if you spot any mistakes, please let me know as I am eager to find out too.
To make more sense, let’s get back to basic formula that normal investor can understand easier.
A BEFORE investor who buy at BEFORE price will now be holding the same stock at AFTER price + 10 rights shares. This is our basic formula.
Market Price before rights issue = Market Price after rights issue + ( Ratio x Rights Price )
SINOTOP BEFORE = SINOTOP AFTER + 10 Rights Price
The investor might be thinking that since BEFORE the rights, it is at RM1.60, and AFTER the right, it is RM0.65, so they estimate that the “right” rights price should be
Rights Price = ( SINOTOP BEFORE – SINOTOP AFTER ) /10
That way they get the rights price at (RM1.60 – RM0.65)/10 = RM0.095. If they are able to sell their rights shares above RM0.095, they are still much richer than before by holding the “inflated” RM0.65 SINOTOP shares.
But I don’t think they should be too happy because the pricing of SINOTOP after right issue is far way off from logic. As I have shown you, RM0.65 means an equivalent of RM5.15 for the BEFORE price! A jump of 220% in 4 days! Unless you have unloaded everything (both the shares and the rights), you are “richer” because you are relying on the inflated SINOTOP share price.
Problem #1 – SINOTOP price is highly inflated. It jumped 220% in 4 days.
Problem #2 – 50% mispricing between SINOTOP and SINOTOP-OR. Buying SINOTOP-OR to get SINOTOP is 50% cheaper than buying SINOTOP at market. But they are the same apple!
Let’s turn the mirror and use formula (2) to compare in AFTER price.
SINOTOP AFTER= [ SINOTOP BEFORE + RM2.00 ] / 11 … formula (2)
Before the rights issue, SINOTOP is trading at around RM1.60. So technically, SINOTOP AFTER should be worth RM0.33 after the right issue if it is equivalent to RM1.60. But it is RM0.65 now! Almost 100% jump in 4 days.
The pricing of the right is about “right” right now [sorry for using 3 right words in 1 sentence].
Because if you get the right at RM0.12, and exercise to get the stock at RM0.20, your total cost would be RM0.32, almost equivalent to the RM1.60 price before the right issue. So now we know getting the shares through the rights “right” now is almost the same as buying it at RM1.60 before the right issue.
And since one month ago it is traded at only around RM0.85, the equivalent AFTER price would be only (RM0.85 + RM2.00) / 11 = RM0.25!!!
I also think formula (2) is a better metric to use than formula (1) because it can explain in this way – If you have bought the SINOTOP shares before the right issue and you exercise all your rights, what is your average cost for your SINOTOP shares? If you bought it at RM1.60, and exercise all shares at RM2.00, you got 11 shares in return. So averaged cost is RM0.33, which is formula (2). Selling it later at RM0.65 gives you a profit of almost 100% based on your cost.
Formula (2) is also the formula to adjust historical pricing in stocks charts before the rights issue.
So if you are a SINOTOP shareholders or plan to buy SINOTOP, it is your homework to know if SINOTOP is really worth RM1.60 BEFORE the rights issue (which is equivalent to your cost of RM0.32 right now if you buy through rights). If it is not worth RM0.32 right now, it is definitely not worth RM0.65.
The market price now is inflated to RM0.65, if you are buying the rights to get the shares, do you think the stock price will still be RM0.65 after you get the shares (around 1 month)? If yes, you will make a 100% profit! You will be profitable as long as it is above RM0.32. But really got naked woman walking on the street? Some nude beach got but is this the rare nude beach?
I got itchy and bought a little bit of SINOTOP-OR before I do any homework (bad role model). I do so to motivate me to work out the numbers (lame excuse) and now I have to admit that I wish I have not bought any. I either have to sell it at a loss tomorrow or work out the real fundamentals numbers of Be Tops before I decide if I want to go ahead and exercise the rights.
Ahhh, pain in the ass. If you know anything about SINOTOP or saw any mistakes I made in the calculation, please write a comment below. Thank you.
p/s Why using formula (1) gives us 220% gain while formula (2) is only 100%? This is because when we compare in BEFORE price, the new rights shares haven’t exist and we need to deduct the cost out from it ($2). So the % gain is based only on initial cost buying the pre-right shares only (without including the new cost to buy the new shares). On the other hand, formula (2) which is more realistic, averaging the gain with all shares and cost. I have to admit, I am confused myself. 
If an investor bought RM10,000 of shares before the rights issue at RM1.60, he got 6,250 shares. After the right issue, he will get 62,500 right shares and if he exercised them all at RM0.20, he will need another RM12,500, making his total investment RM22,500 and he will now have a total shares of 68,750. If the stock is selling at RM0.65 today, his whole investment will be worth 68,750 x RM0.65 = RM44,687, which is almost 100% gain. Which is formula (2).
On the other hand, if we use the “unrealistic” formula (1), we need to get back to the time where there is no rights issue. So although the whole investment is worth RM44,687, we need to deduct the investment cost of RM12,500 to it, and get RM32,187. That will be a gain of 220% comparing to the cost of RM10,000. We have assume 0% gain from the shares obtained from the rights shares and attribute all profits to the pre-rights shares. Not an accurate representation.
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Where got so BIG chicken running on road…
Hi Ah yap.
I tried to find more info on Bursa for the t&c applied in order to exercise the rights, but it doesnt state clearly. Is there any constraints on exercising the rights? Can you exercise it anytime before the expiry date or only upon expiration date? How long does it take for the shares to be credited to your CDS account once exercised?
My view on this is – the company was pumping up the price before the ex-date, by doing so, you basically make yourself much richer after you get the rights. (assuming the price after ex-date doesnt go down too much and you could exercise your rights anytime after 29-Jun). To explain why the right price is so low compare to the mother share: i would agree with your point on investors are misled by the fact that since the rights cost them so little after the big hike on the mother shares, to avoid the waiting time and hassle in exercising the rights, they would rather just sell off the rights and get the cash.
Dispatch Date: 30/06/2010
Trading of Rights Start On: 29/06/2010
Trading of Rights End On: 13/07/2010
Last Day and Time for:
- Sale of Provisional Allotment of Right: 12/07/2010 05:00 PM
- Transfer of Provisional Allotment of Right: 15/07/2010 04:00 PM
- Acceptance and Payment: 20/07/2010 05:00 PM
- Excess Share Application and Payment: 20/07/2010 05:00 PM
The new shares are expected to list on 03/08/2010 which is the date you can sell. Today the rights dropped to RM0.10! You can own SINOTOP via the rights for only RM0.30 while the market price of SINOTOP today is RM0.64. A discount of RM0.34?! Something is wrong.
Hi Ah Yap
I did not know what this Sinotop which is traded quite heavily in the market is until I read your blog. I think there is nothing wrong in your calculations. Congratulation, you fat tat already by buying the right at 12 sen and with exercise price of 20 sen, and sell your share at 65 sen, hopefully and only in say a month’s time, thereby making a profit of more than 100%. However, at 65 sen a piece ex-rights for Sinotop, the original holders( I believe they are all insiders) have had their worth in Sinotop increased by few hundred percent as rightfully mentioned by you. These people will be real sohais if they do not unload all their Sinotop shares now until the rights are listed say in a month’s time. They can still make a profit as long as Sinotop is above 25 sen as computed by you. They can only unload with good price with the trap above. What do you think the price of Sinotop will be when the massive amount of right issues are listed? Got big fat frogs jumping around ah? I would recommend readers to read this old book, ‘Reminiscences of a stock operator’ by Edwin Lefevre.
Hi, Ah Yap :
Thanks your sharing.
Any idea of the purpose for Sinotop to issue the right ?
Actually the current Sinotop price is reasonable for this moment :
SINOTOP BEFORE = SINOTOP AFTER + (10 x SINOTOP-OR)
SINOTOP-OR = (SINOTOP BEFORE – SINOTOP Current Price)/10
SINOTOP-OR = (RM1.60 – RM0.65)/10
SINOTOP-OR = RM0.095
I believe this is the reason why SINOTOP-OR drop to RM0.10 today and the SINOTOP price still RM0.65.
But dun forget the price of SINOTOP before annouce the right issue only ~ RM0.85 on 3rd June 2010 (At 6/23/10, the price increased to RM1.60 is “goreng” by investor). let say the reasonable price for SINOTOP BEFORE is RM0.85, mean :
SINOTOP-OR = (SINOTOP BEFORE – SINOTOP Current Price)/10
SINOTOP-OR = (RM0.85 – RM0.65)/10 = RM0.02 only !!!
And i believe when that time shares are listing to bursa on 03/08/2010, that time the SINOTOP price definitely drop to ~ RM0.25.
If this is not KLSE (a lousy stock exchange that we cannot short stocks), we can just short as much SINOTOP as we can and immediately buy back equivalent amount of SINOTOP-OR, profiting an immediately 50% ‘arbitrage’ play.
Confirm got something dirty behind. Closing price on 1 July (Thursday)
SINOTOP 0.445
SINOTOP-OR 0.05
My best guess, insiders and buaya goreng it up last few days after rights issue, building up high volume into top 10 most active stocks luring uninformed speculator to buy in. Unless your math very good, most people won’t be able to get the before/after price right and won’t know the price actually has been goreng up at least 100% in 4 days. Then buaya start to unload stocks. Today volume drop a lot and price also drop a lot.
I check fundamental data and there is nothing interesting too. Item 6.2 page 45 in Prospectus. Proforma EPS is expected to be 4.6sen to 5.5sen under the minimum and maximum subscription scenario. All chinese shoe stocks trade below PE4, give it a generous PE6, the max this stock is worth is RM0.27 toRM0.33, that means it is significantly overprice.
The proforma eps calculation didn’t take into the potential dilution effect of the convertibles totaled ~1 million shares if management beat certain performance and that dilution will cut EPS to half by doubling the shares count.
I am also a bit shock to find out that BURSA actually allows them to do rights issue even before the BE TOP assets is really inserted into SINOTOP. The timeline for complete merging is before 3/8/2010. What if something goes wrong and the merging die inside the stomach?
After the rights stock are listed on 3/8, the price is guaranteed to be a lot lower than today.
I believe when the rights shares are listed come 3/8, it may even be lower than the adjusted for rights average price of 25 sen – 27 sen in May when there was no volume due to the massive capital which is no longer tightly held.
Do you think it will be a good buy of SINOTOP-OR at the price of 0.045……I am new to stock and please advise. Appreciate your peace of advice. Thanks.
the current sinotop in the market is inflated price. many are too anxious to sell the rights which will expire soon and valueless. it just meant many punters are out there holding this shares, not genuine investors and know nothing much about this rights issue. sinotop price will stabilise after the rights issue become real sinotop and able to sell in the market.
Thanks for your valuable comment KC…….
First of all, I think Ah Yap is giving a very good explanation on the calculation, now, just wonder who can come up a fair value after all the exercise and dilution had done. If the fair value is able to stand at least RM0.26 and above, it is still make sense to buy the OR in current price and convert it. But if the fair value is below RM0.20, than the OR is worthless.
so, before 13th of july.
we must sell all the stock of sinotop -or,
if not it will become paper o?
You can still convert it into share, than it will not become paper, but when people trade OR, they may buy many lot due to the price is cheap, they forget if they want to convert it, they may need to take out a lot of money.
but right now SINOTOP dah 28 cents…so the big question: will it go up after July 13th?
it is will be convert auto to the sinotop share?
let say now the OR price 10 lot on 0.20 = rm200
when 3 of aug sinotop share is 2.00
sinotop before = is 1.60 right.
will i gain or lose?
tras
If you bought today at 2 sen, you have to pay 20 sen to subscribe ie your cost will be 22 sen. If by the time the rights shares are listed, it is more than 22 sen, you gain (ignoring commission).
I myself bought at 7 sen. I have no choice but to subscribe to minimise my loss. Hopefully the price will be around 25 sen. That was the price before it started to move up. Then I would have loss 2 sen instead of 5 sen if I sell it at 2 sen
I think the player is now narrowing the gap of the OR and the mother share, so if the OR able to stay at RM0.02 for this last few day of life, the mother share may drop to about RM0.22 to reflect it valued between this 2 relation, so the conclusion is, this is more to a trap than a opportunity on the OR trading period, but after all the share list on 3rd Aug, may be they have diffrent game play.
Anyone know about why Sinotop issuing the right share ? Is Sinotop tender any project ? I’m also not so luckly because i bought the OR at 10 cent. Imagine that 1 mother share given 10 OR mean if all the OR converted to mother share at 8/3/10, the volume of Sinotop will 10x more then now and if there is no any new project, definitely the price will drop to less then before “goreng” price.
You can just treat the SINOTOP is totally a new Company to raise fund as new IPO at 20cent, but investor this time no need to go for balloting process, just buy the right share, and convert it you will certainly get the share, and the previously John Master share holder have a chance to cash out during this exercise just like other IPO, some major share holder before a company listing is cashing out just when it is listed, i don’t think all the right will be converted to share, actually if all the right really converted to share, meaning people are confidence on this Company and the price will stable at least at 20cent as everyone pay this amount to get their share.
sinotop-or is a price you factored in for future, i.e. at a later stage upon exercising the rights and able to start selling them, by then the price wont be as good as the price of sinotop market price now. that’s why u cannot compare sinotop-or vs sinotop price in the market. sinotop price has been jacked up earlier before that to make people believe the market price for sinotop-or is of good value to buy.
Looking at the status/fundamentals / announcements of the company as a whole – the UMA notwithstanding – I feel that SINOTOP is ‘okay’ as a company and, hopefully after a few weeks or so, the price will rise to above RM0.40 cents. i agree with Goh that we should just consider this like buying any share at around 0.30 cents (after including the 20 cent hike) and moving from there.
yes, it’s a trap if ppl were greedy and so bought a LOT of OR shares! but it could be an opportunity if you believe that SINOTOP will perform well as a company?
Another strategy for those who are stuck with OR is to subcribe for excess. If you are successfull you costs is only 20 sen. This would reduce your average price. I don’t think the rights will be fully subscribed.
Shareholders are selling their rights shares yesterday and today in view that the rights shares will be credited on Tue, hence in time for delivery. It it short selling but this is Boleh land where fortune favours the brave. Handsome profit buy OR at 0.5 sen + subscribe rights at 20 sen=20.5 sen and sell at say 33 sen yesterday 60% profit in 1 months!
Hi, Petanon1 :
As i know the new shares (convert from OR) is available to trading on 3August2010. Do you know why the share holder is able to sell it on 7/29 ?
Thanks….
The system allows it. The answer is the Fix Delivery and Settlement System (FDSS) in Bursa. Delivery is on T+3 from the sale date. You know your shares will be in your CDS on 3/8, so you work backwards. If you have sold on last Thur when the closing price was 36.5 sen, it would be on time for delivery in T+3 ie tomorrow unless they want to investigate and catch everyone for short selling. Now, do you think they will do that?
WILL D SHARE FLY TOMORROW
> WILL D SHARE FLY TOMORROW
You need to ask the sotong (find one in nearby restaurant). lol
If Paul chooses ‘fly’, he should be turned into shashimi. Even my pet goldfish knows that.
“After the rights stock are listed on 3/8, the price is guaranteed to be a lot lower than today”..
How true!! Price today 0.17. The real winner behind every listed company is and always will be the owner(s). All I can say is “good play” to those behind the “pump and dump”
Last Friday’s close at 16 sen is frightening! Or is the owner trying to push down the price to collect and push up later! This way he makes all the way down and makes all the way up! Now is the time to accumulate!