Every now and then, the market throws you a curveball that
is impossible to hit.
This is a story about Xinghua Port Holdings (XPH). What
started out as a promising spin-off opportunity could end up terribly wrong as
I am writing this.
Let’s begin with the investment thesis. XPH is a spin-off
from Pan-United. The terms are simple—one share of XPH for every existing share
of Pan-U. So it is no surprise that post-spin-off, XPH will experience selling
pressure, which it did. Shortly after, XPH announced its full year results and
it was not too shabby. To summarize, the earnings per share, without the
listing fee taken into account, will mean that XPH is trading at some 10 PE.
Insiders has been buying from the open-market while it was selling at 1.1-2. A
Frost&Sullivan analyst remarked that the business should
experience a CAGR of about 10 percent.
The Speculative “Opportunity That I Missed”
The idea of investing in spin-off is that the price is
temporarily under pressure due to selling—hey, these shares are free, so it is
normal for a disinterested Pan-U shareholder to dispose them for profits.
Right after I shared this idea with a senior investor in the
morning, the stock went up to as high as 1.8 dollars. I didn’t get to “see” it
live—it was a few hours after the fact. So the opportunity for me to trade this
stock is $1.5. That represents a 36% profit in a matter of days.
I did my math and refuse to sell. The reason is simple: This
stock is cheap. It should be earning a EPS of 0.174 HKD per share. At a
not-so-extravagant PE of 10, this stock should trade at 1.74 HKD.
So I key in a 1.74 sell and went back to work. The trade
didn’t materialized after all.
The Sell-down
So the HKEX being much more volatile in nature, sold this
stock from 1.5 to 1.2x. I bought more at 1.28. Every time the market moves down
with no economic basis behind it, I will act. Hence, XPH became my 2nd biggest position in my little portfolio.
The Real Bad News
On 2nd April, this happened:
And a couple of days later, the company follow-up with:
Things can go horribly wrong from here, so this stock will suffer an approximate 20% loss in stock price or more. I suspect this will have a serious drag down on my portfolio. I am now expecting to under-perform any indices out there. In fact, XHP dropped -6.5% yesterday. Together with the sell-down on all my other holdings, I am now less than 5% ahead of the market. Just days ago, the lead was about 10%.
I have clearly only 2 options here:
(a) invest more at -20% (or more!)
(b) sell half and ride the storm; this halved the risk, and I am unlikely to get a decent price tomorrow. This could be followed up with (a).
I have no intent to sell everything as I believe this problem is temporarily. I believe in investing when there are problems-- unfortunately I am now vested before problem struck.
It is certainly easy to invest during a downtrend when there are no news, but this is different.
