Thai stocks lack of rationality at times does not mean lack of returns.
A smart “beast” one can try to maneuver around but an insane one which at times defies any logic, even logic of survival, is a whole other ball game. Yet, I never looked at it as a “game”, nor do I “play” in Thai stocks as novices ask me for long. I make a go at it the old fashion way, working hard and able, and so earning it. Piece by piece and with plenty of mistakes…in hindsight. Yet the long term returns have been nothing short of impressive.
In the past I compared it to a chaotic construction site, where much is dirty, late and disorganized. Yet, make no mistake…throughout all this, it has been handsomely rewarding for many years here and I am happy to continue the learning curve, even after 20 years at it. Creating new wealth in Thai stocks is never a science nor a method, nor following a strict protocol; instead its ever a wild beast -never to be tamed.
In China they have a saying: “the best fishing can be in murky waters”, or “if the water is too clear the fish have no food”. But I keep on wondering, frustrating, seeking new ideas for earning superior returns.
Through the ever changing mess, uneven year after year for sure; its been a most rewarding challenge which has brought rewards. Not the least in being able to help many others, mostly you the members. Rewards and merits are not just to be counted in financial terms and I thank you all for your nice mails and yearly contribution with the expense I incur seeking these returns.
***
Take the steel industry for example. Here I could be asked why I not include a steel stock in my recent choices? TSTH (2.12) Tata Steel, being the clear choice pick of the sector. See www.tatasteelthailand.com
Many brokers have been advocating this stock for long, yet it has gone nowhere, just sitting a few spreads above 2. High daily trading volume for sure but uneventfull price wise. I confess I don’t understand the steel industry. Is this a commodities play? Does one need to understand inventories on hand and the cost or market price? Do they do well when the regional economies re-bound, like now? I know enough here, to not know. Here is the proverbial wrench “the monkey threw into the machinery”, because consider :
China’s planned steel-producing capacity at various points can be large enough to meet not only its own needs, but also those of the worlds 2 giant economies, Japan and the US! China has tried to corner the world market in iron ore with little regard for world demand for steel -or for the fact that the world already produces ample amounts to meet global demand. Recent figures show that China can produce some 450 mill. tons of steel per year. By contrast, Japan’s comparative number is 120 mill. tons, the US less then 100, and EU about 150 mill tons. In China, about a third of steel production actually goes to building just more steel producing capacity, a third for exports -and the last third for its actual domestic demand. “China’s steel market therefore represents a huge danger for the world market” *
The Chinese have embarked on this huge steel producing venture/capacity, despite having an economy which is still not much larger then 3 times the economy of the Netherlands*. The obvious danger of this folly is the clear risk on hugely stockpiling of such a commodity (among others) which then can/will eventually create a bursting bubble. Similarly is auto production, where China says its gearing up to huge numbers, unrealistic numbers, without regard to what actually the demand will be, by say year 2012.
Steel stocks may do well in Thailand over time, but I am staying away.
***
Free warrants bu why deep in-the-money warrants?
To change the subject a bit, but not the follies. Consider the free warrants issued by various listed companies of late (especially on the MAI). Of course, this makes good sense as a “shareholder sweetener” -and stocks have acted well on such news. Free warrants are to the benefit of shareholders and employees alike.
Take company A for example, whose stock price is say currently at 2.50 Baht. The company issues new warrants convertible to new shares in this example at 3 Baht per new share. Because the time given to convert is 3 years, such warrants would still trade in my view around 0.60 to 0.80 Baht, per warrant. Despite being out-of-the money by 0.50 Baht (3-2.50), they have time premium built in. This time premium will be higher if the stock is more volatile. (Yet time premium is something few engineers seem to want to understand?)
To keep the example simple, now consider company B which issues the same number of warrants, but makes them convertible at only 1.50, with the underlying stock also trading at the same 2.50 Baht level. This means these warrants are in-the-money by 1 Baht, as the conversion price is 1 Baht below the current market price. To my guess, and from what I have observed over time, these warrants would trade in the market at say around 1.70 -1.90, or for a time premium of only 0.20 - 0.40 Baht. Of course this can vary.
I realize there can be some tax considerations to the insiders which I have left out just to keep things simple, but clearly company A has created more new value to its shareholders. As the relative time premium given by the market is considerably higher for company A, then it is for company B. In one case there is time premium even while the warrants are presently worthless.
If I just take the mid range, the time premium given is 0.30 Baht per warrant for company B, vs 0.70, for company A. I realize I am guessing with some experience what time premium the market will assign, but there is no question that an out-of-the money warrant will get a considerably larger relative time premium, then a deep-in the money warrant. Yet it seems few people understand this in Bangkok? Am I missing something? Please enlighten me.
Since a company usually issues many million new warrants, a say 0.40 Baht difference in time value geared, sp represents a huge amount of added value to shareholders, through this higher time premium assigned.
Recently, one smaller MAI company has announced 160 million new warrants **, or for each 2 old shares, one new warrant will be given free to shareholders. In my above example the difference in time premium is 0. 40 Baht, or so 160 mill new warrants, times 0.40 Baht comes to 64 mill. Baht. This so is the theoretical lost shareholder value, due to mgt. insisting on a conversion price being so low or as we say, so deep in-the-money. Save some taxes at the cost of millions?
Of course a company which announces warrants convertible at higher the current market price, is also signaling to the market the company expects their stock price to be above the set conversion price and this before they expire. This, versus the more stale announcement of deep in-the-money warrants, which may signal a more lethargic view. Warrants are dillutive as they result in eventually more shares outstanding, but clearly setting a higher conversion price also brings in far larger amounts of new equity to the company.
Oh, well so be it and the messiness continues on many fronts, yet at the end of the day we here make solid returns the old fashion way, we earn it. I earn it and share it with you. While keep wondering.
Best Regards,
Paul Renaud.
PS. You can see a previous article, just click on the link below, where I review how warrants work:
“On what you may often have wondered -but then never dared to ask”.
/
* See the excellent book “The World is curved” by David M. Smick. (2009), page 113.
** Yes its LVT.
