(CHOIVO CAPITAL) SUPERMAX (7106) – The Greatest Fool?

For a copy with better formatting, go here, its alot easier on the eyes.

(CHOIVO CAPITAL) - SUPERMAX (7106) – The Greatest Fool?

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“Now shoulda woulda coulda, means I’m out of time
‘Cause shoulda woulda coulda, can’t change your mind
And I wonder, wonder, wonder what I’m gonna do
Shoulda woulda coulda are the last words of a fool”.

“Beverly Knight: Shoulda Woulda Coulda”

 

On 22 May 2020, I wrote this article.

Ragret Del Luna: 10 PE Glove Companies (SUPERMX – 7106)

When that article was written, SUPERMAX was at RM5.75.

When I wrote that article, i was filled with regret at not buying the week before, despite having discussed in depth with a trader friend of mine on the Average Selling Prices (“ASP”) price increases, and felt that it was not fully priced in.

The plan was to put around 20% – 30% of my portfolio in.

I even made the choice of choosing SUPERMAX out of all of them, though for all the wrong reason (ie it was the shittiest and when speculating you want the worst of the lot ). It was the best option due to them having the largest percentage of Own Brand Manufacturing sales, enabling them to raise prices with wanton abandon.

As many can guess by now, especially if you know me, and the type of person i am, as well as my weakness in staying out of speculating despite the edge being so clear; you would know that i did not buy a single share. I Shoulda Woulda Coulda done it. but i didn’t.

Instead, I just sat at the sidelines, going about my daily life, trying to ignore the sight, sound and clamor of it going up.

Talk about an exercise in futility, when you are part of 2 – 3 investment or trading group. SUPERMAX was the only thing anybody can talk off then.

Back then, I thought the price would go to maybe RM7 – RM8 and that’s it. As i felt that the previous increase from RM1.8 to RM5.7 have already incorporated a significant portion of the gains.

In addition, i was a little too emotional at missing out on the initial rise, and thus too focused on what i missed out on, and thus to see what it would become in the short term, when all the factors I listed in my blog post above,

1. Unprecedented Level of Demand for Rubber Gloves
2. Structural Capacity Constraints
3. Price Increases
4. Lower Costs
5. Everything else is shit.
6. Record KLSE Transaction Volume, Record Retailer Participation

converge and act together in ways that will feed back on each other and become what Charlie Munger would call a “Lollapalooza Effect”.

Also known as, SUPERMAX, RM24.44

It got so insane and the volumes so high, that Bursa actually crashed multiple times the last few months.

If I was more rational, I think it would be possible for me to buy at RM5.75 (or 1 – 2 weeks earlier) and sell out at probably RM17 – RM18

And so, there i was, starting the SUPERMAX journey as the Greatest Fool.

So why this article? To inform you of my stupidity?

Well, there is that and more.

 

Where can the Share Prices of SUPERMAX / Glove Companies go from here?

This I guess is the million-dollar question (it would be a literal question for some) on many people’s mind right now. Let me answer this question in 2 perspectives.

 

 

What is the market sentiment and the news like today? How it will be like in the future?

When I first wrote my article in May, we were just coming off the one of the sharpest stock market crashes in history, and the subsequently, one of the sharpest stock market recovery in history.

And at that point, there appeared to be nothing but good news in the horizon for glove companies. COVID 19 seemed like it was getting worse and worse, and the consensus then was that the vaccine is at least 1-2 years off.

(I disagreed with the vaccine bit, because that was a problem where, with enough political will and money, it will be solved. This is not pregnancy, where its impossible to get a baby in 1 month by getting 9 women pregnant)

It was so obvious that anyone could see it (and everyone did), which resulted in an unprecedented level of capital inflow into glove stocks.

And as share prices go up, along with the news of the worsening of COVID-19 around the world, as well as the increase of glove ASP’s by glove companies, this fed a certain positive feedback loop for the stock prices of glove companies.

Today, 3 – 4 months later, things are quite different.

China and Russia have effectively pushed their vaccines to final trials and is likely to mass produce them by the end of the year.

Yes, the Russian vaccine is effective. And yes, that is a picture of Putin riding a bear with a gigantic needed that was posted on his Facebook (since deleted).

And i guarantee you, regardless of whether FDA or EURO approval is obtained for the vaccines above, even if it was rushed out with potential side defects. Countries will use it, because the trade offs is far worse, as many can see from the current economic fallout.

If i am frank, i think Sweden strategy of not doing anything (or maybe just a 2 – 4 week lock-down to allow the public healthcare system to get up to speed) was the right way to go.

And from current news in the US, i think they too will release a vaccine by year end, whatever the costs.

And as every day passes, the risk of a vaccine being released increases (and do note market prices in the future and not the past).

Its safe to say, the future news is not in favor of the present holders of glove companies stocks.

And in terms of sentiment.

Like how people tire caring about COVID-19 and following about the health and safety procedures, the endorphin high of owning glove stocks and watching it march steadily upwards have also worn off.

With 3 – 4 months to respond, the previously constrained capacity for glove production also does not seem so constrained anymore, with numerous new and old players planning to expand to take advantage of the price increases and incredible returns (for now).

If I were a betting man, COVID 19 was only a good thing for the glove companies in the short term, but a horrible thing long term wise.

Even before this, if you were to discount the ban on vinyl glove production by China.

Margins and ASP’s on gloves have been falling for 2 years. With COVID-19 basically bringing forward a ton of capacity expansion plans, funding the less efficient players to enable them to last longer, and attracting a lot of new players.

I expect supply to normalize in 3-6 months from now, before it goes into an oversupply situation, and prices plummet.

And this oversupply, resulting in lower prices is likely to be a structural issues that the industry is going to need years to shake off.

2 years from now, the share price of SUPERMAX is going to be far lower than the current price.

Does anyone still remember HENGYUAN, the lesson it taught in terms of financial results of temporary ASP increases, and its current vs previous share price?

The second perspective is this.

 

 

Who is the current and future owners of glove stocks

A few months back, back when Dayang was all the rage, i wrote this article.

The Art of Trading DAYANG Profitably Around Mr Koon Yew Yin and Mr Ooi Teik Bee.

One of the key ideas there i wrote about was about the “Diversity of Participants” which i think is very relevant today and i will elaborate it here again using SUPERMAX as an example.

Every market or individual stock is a complex system that is typically filled with a diverse group of participants who are irrational in one way or another.

They consist of people having different ideas and different views of things. Long term, short term etc etc, and all these individuals are a little or very irrational towards one end or the other.

For example,

The long-term investor may decide not to trade even though it may make sense for this quarter, allowing the trader to trade and make that profit.

The trader’s inability to sit still and hold, allows the long-term investor to buy it from them and hold it, making the money from the long-term growth of the company. Etc etc.

Despite the irrationality of their participants, their diversity ensures that they are all irrational in different directions, giving a net effect of zero, allowing the wisdom of crowds to prevail over the long term.

This ensures that the market is efficient and accurate most of the time. This means that over the long term, movements in share prices are usually in line with movement in earnings.

However, this diversity can often undergo phase transition, and thus result in boom or bust in the short term. What is a phase transition? This is where small incremental changes in causes lead to large-scale effects, or the “Grand Ah-Whoom!” moment.

What is this Grand Ah-Whoom! moment?

Imagine this. Put a tray of water into your freezer and the temperature drops to the threshold of freezing. The water remains a liquid until—ah-whoom—it suddenly turns into ice. Just a small incremental change in temperature leads to a change from liquid to solid.

The Grand Ah-Whoom! moment, occurs in many complex systems where collective behavior emerges from the interaction of its constituent parts. And this includes the behavior of the stock market.

In complex systems with human beings like the stock market, diversity is the most likely condition to fail first.

As you slowly remove diversity, nothing happens initially. Additional reductions may also have no effect. But at a certain critical point, a small incremental reduction causes the system to change qualitatively.

Taking SUPERMAX for example,

At the beginning before the COVID 19 boom, their active participants (Most majority shareholders do not really deal in the shares, and if they did, it is usually quietly. For this illustration I am going to ignore that subset) consist of mainly,

 

At RM1.8-RM2
Cyclical Value Investors (say 20%)
People who were trapped (say 70%)
Geniuses who saw the potential impact of COVID 19 on the stock (10%)

This results in the shares being quite undervalued, as the people who were trapped do not want to top up and the cyclical value investors, are there by virtue of their cheapness. While the geniuses, by virtue of being geniuses, and the rarity of geniuses, are the smallest portion.

As the boom starts, the market participants become increasingly diverse as new participants buy the share from the current participants, and the price slowly approaches fair value, the participants now consist of say (figures are just for illustration, they are likely to be different),

 

RM4.5-RM6
Cyclical Value Investors (15%)
People who were trapped (15%)
Growth Investors (15%)
Koon Yew Yin & TY Yap & Ooi Teik Bee & Other Goreng Insiders (5%)
Koon Yew Yin & TY Yap & Ooi Teik Bee & Other Goreng Outsiders (20%)
Geniuses who saw the impact of COVID 19 on the stock (10%)
Shrewd Traders (20%)

As the boom rushes along, the “Cyclical Value Investors” and “People who become trapped” becomes increasingly smaller portions of the pie. It’s also very possible that some people turn from “Cyclical Value Investors” to turn into “Shrewd Traders”, especially as the retailers (foolish and shrewd) and fund money looking to ride the wave come in.

And so the boom continues, and the shifts continue. Soon, our participants consist of

 

RM12-RM14
Growth Investors (5%)
Koon Yew Yin & TY Yap & Ooi Teik Bee & Other Goreng Insiders (5%)
Koon Yew Yin’s & TY Yap & Ooi Teik Bee’s Other Goreng Outsiders (30%)
Shrewd Retailers (Usually Momentum Traders) (15%)
Foolish Retailers (25%)
Fund Money (20%)

It is around this point, as the price climbs higher and higher territory, that the Koon Yew Yin & TY Yap & Ooi Teik Bee & Other Goreng Insiders, fund managers, shrewd retailers and growth investors may start selling as well.

Soon the price shoots way past fair value, as well as past the moon and mars, at which point, the shrewd individuals sells out and it looks more like this.

 

RM20-RM24
Koon Yew Yin & Other Foolish Insiders (2%)
Koon Yew Yin’s & TY Yap & Ooi Teik Bee’s Other Goreng Outsiders (30%)
Foolish Retailers (58%)
Fund Money (10%)

 

At this point, population diversity falls, invisible vulnerabilities and risk start to build despite the price constantly marching upwards or staying even.

Why?

Because every single one of these participants use extremely similar trading strategies, and as they keep buying, their common good performance is reinforced.

How do you know you’re at this stage?

“When everyone in the stock cannot think of even one bad thing that will happen, or about the company, and the comments all sound the same.”

This makes the population very brittle, and a small reduction in the demand for Supermax/Glove shares could have a strong destabilizing impact on their prices.

I’m sure you guys have noticed how some days, the share price drops like crazy before recovering.

It is at this point that risk is at absolute highest.

Why?

As most of the market participants have the same strategy, in the event the thesis, or in this case, the news that is coming out is not as positive they expected, or worse, a vaccine is released.

It’s not just some of the market participants who want to sell, but, ALL OF THEM.

And as prospective buyers are likely to be market participants with similar trading or investment strategies, demand dries up instantly as well.

In the meantime, even if positive news comes out (by positive i mean any delay in vaccine or Covid 19 mutation), it will not increase by much as everyone who wants to buy the stock already has it, and has exhausted their cash and credit lines.

In this case the expected value calculation is highly negative, it probably looks something like this.

20% Very Good News of Vaccine: Down 60%
50% Good Vaccine News: Down 20%
20% Vaccine Delay News: Up 5%
5% Covid-19 Mutation News: Up 10%
5% Vaccine Delay and Covid-19 Mutation News: Up 20%

Expected Value: (0.20-0.6)+(0.50-0.2)+(0.200.05)+(0.050.1)+(0.05*0.20)= -19.5%

This means all outcomes considered, this has a negative expected value of 19.5%, the week when this news come out, and its likely to fall further as people sell.

Now as you can see in my elaboration earlier, often the goreng artist like Mr Ooi and TY Yap is very shrewd, and would have sold a large portion of their position as prices go up and inform their followers (Or at least Mr Ooi did, no comment on what TY Yap did, whom i consider more one of the most unsavory characters in the Malaysian market. But if you read the news online, you would have an inkling) .

This is where you may see some “consolidation” in terms of chart movements, which is where TY Yap & Mr Ooi & Other Goreng Insiders direct followers, shrewd traders and fund managers are transferring their shares to the foolish retailers.

Mr Koon on the other hand, often considers himself an investor and does not learn from his lessons and, to be blunt, swallows his own bullshit.

He will hold on longer, or wait for margin calls to force him to sell.

In 2018, he was burnt properly in 2018 from Jaks and Sendai and ended up losing more than half his networth and had to sell land in Ipoh, because he swallowed his own bullshit and was over leveraged.

Before making it and more back frying Dayang in 2019.

Before losing 90% of his net-worth in 2020 from swallowing his own bullshit and being over leveraged. An information he would like the public to forget today, considering that his blog post for that was deleted.

And now, he appears to have made most of it back from the rubber gloves, and looking at his constant postings (reading my article on how to trade around OTB and KYY, this is the stage where he is all in and no more money left to buy), and appears to have again swallowed his own bullshit and is again over leveraged.

I wonder what will happen this time.

History does not repeat itself, but it sure does rhyme.

While the foolish retail participant who are now out in record amounts due to the work from home initiatives, who is in reality a trader, but foolishly considers himself an investor, will likely make the fatal mistake of averaging down, often on margin.

Turning a bad trade, into a mediocre and fatal investment.

And with time, diversity returns, and the foolish retailer, turns into people who are trapped. And as prices fall further, with the cyclical value investors return.

 

Conclusion

There is a saying that many traders, especially the shrewd ones, live by.

“Do not try and make the last dollar”

And this is for good reason.

For most of these momentum or goreng trading strategies, the key ingredient for it to work, is to attract the greater fool to purchase the stock. And it is a very viable strategy.

And the last dollar is there to attract the greatest fools who will take the steaming pile of shit from everyone else.

And as each day passes, and as the stock prices increases, the average level of foolishness increases.

And so, if you are trading this strategy, the question you need to ask yourself is,

“Who else haven’t buy?”

“Who are the other greater fools left?”

Well, the below picture that was released one month or so ago, when Supermax was RM17.4.

For me, this is as great an indicator of where you are in the cycle as you are ever going to get.

If I was implementing this strategy, this was a sign that we are near the top.

If the uncle selling chicken in pasar also buy d, who else is left to buy from you?

Do you think they are greater fools left?

Well, when this all started, i was the greatest fool. And i hope that you, the person reading this, will not be the greatest fool when the clock strikes 12 and the music stops.

I am likely wrong at this very specific point in time (in fact given my track record, it may go up on Monday), but as each day passes, the probability of me being right increases.

With that, i end this. I hope things end will for you. And if you are still holding and currently have some gains and losses. I hope this piece helps you make up your mind.

Good luck, 走好,不送.

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There is an old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.”

Like sardine traders, many financial market participants are attracted to speculation, never bothering to taste the sardines they are trading. Speculation offers the prospect of instant gratification; why get rich slowly if you can get rich quickly? Moreover, speculation involves going along with the crowd, not against it. There is comfort in consensus; those in the majority gain confidence from their very number.

Today many financial-market participants, knowingly or unknowingly, have become speculators. They may not even realize that they are playing a “greater-fool game,” buying overvalued securities and expecting — hoping — to find someone, a greater fool, to buy from them at a still higher price.

Seth Klarman

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Disclaimers: Refer here.

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Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram: https://t.me/philipcapitalmanagement (This is Phillips Telegram Chat, but i consider it the best telegram to follow for Malaysia Markets period. Its amazing how we got here given our history. He's one of the few with whom where i find myself more wrong than right whenever we argue/discuss)

Whatsapp: Email me, for Whatsapp, i can only accept up to 256 people (unlike telegram where the limit is 20k). So i try to be more selective for this.

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