Texwinca (0321.HK) – a Cigar Butt or Anything More?

Disclosure: I do not hold position in mentioned stock. Also, the price has increased slightly since I initially wrote it up (from HK$5.11 to HK$5.30), however all points in this write up are still valid with a price level of HK$5.30.

Company Overview and Recent History

Texwinca is a Hong Kong-listed textile & apparel company, with two main business segments: 1) Textile business, which produces, dyes & sells knitted fabric and yarn, & 2) Retail and distribution business, which sells casual apparel and accessories. Each segment contributes about the half of the revenue to the firm. The vertically integrated cost-efficient model used to work well, however both segments have been hit hard by some adversity recently.

Texwinca’s textile business is one of the largest fabric producers in the world, serving many global fashion brands like A&F, Ralph Loren and Gap. However, it is facing cyclical headwind driven by the soft global (especially US, which is the main textile revenue source) economy and the increasing production cost in mainland China.

The retail business sells its apparel majorly through brand Baleno. However, Baleno (along with many other local mainstreet fashion brands like Esprit, Giordano & Meters/bonwe) has been squeezed very hard in its mainland China market (its main retail revenue source) by new-entering international fast fashion brands like Zara, H&M and Uniqlo. Baleno, once a high end fashion brand, lost its value significantly in the past few years, and is now considered merely as an “immigration worker (lowest income city worker from rural area) brand”. To cope with the competition, the business tried to streamline by disposing all the non-core brands and focus solely on Baleno.

Driven by weak performance on both sides, the stock has lost more than 40% of its value since the recent peak at HKD 9.38 in July 2015. At the current stock price (5.11), the stock looks attractive from first glance with following traits:

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CDEV Stock/Warrant Arbitrage Play

Centennial Resource Development [Nasdaq:CDEV] is a Delaware Basin pure-play oil producer. It was formed through the Silver Run Acquisition Corp (a special purpose acquisition company) acquiring Centennial Resource Production (a distressed independent oil producer) in October 2016.

As a sweetener of the Silver Run IPO, each IPO share include a share of the straight stock and some warrants with strike price of $11.5 and expiring at 2/23/2021. On 2/27/2017, CDEV released an announcement of its intention to deliver notice of redemption of warrants (link here). Long story short, the warrants carried some condition that, if triggered, will allow the company to redeem (forcing exercise) all the outstanding warrants. The condition is that the stock’s close prices are at least equal or larger than $18 for any 20 trading days within a 30 trading day window, which was met by 2/24/2017. According to the announcement, the company will initiate the redemption starting from 3/1/2017 and the warrant holders will have until 3/31/2017 to exercise their warrants, or the company will redeem it at $0.01/warrant! Obviously, the most important thing for any warrant holders is that don’t forget to exercise or sell your warrants before 3/31/2017.

Some other thoughts I had is checking the arbitrage opportunity, now that we know the warrant is going to expire soon. I called up the investor relation department of CDEV and confirmed the cash-based approach (i.e. exercising the warrant by buying each share of CDEV @ $11.5) is no longer available, and the investors only have the cashless option, which is to convert each warrant to 0.376 shares of CDEV.

As of today, CDEV is closed at $18.64 and CDEVW is closed at $7.03. A quick calculation can be seen in below:

0.376*$18.64-$7.03 = -$0.02136, implying 30 bps spread on the warrant

Regarding liquidity capacity, CDEV had average daily volume about 1 million, and CDEVW however only had about 100,000. You probably cannot put more than 10% the daily volume or the market impact would eat the spread up. Given the liquidity constraint on the warrant side, it is already a gone opportunity, unfortunately.

Looking back, if someone were able to act on the announcement day (Stock closed at $19.54 & Warrant closed at $7.29 on 2/27/2017), the spread would be  0.376*$19.54-$7.29 =  $0.05704 (78 bps), which is still small but may be more actionable.

Howard Marks and his Buddhism-based Investment Philosophy – Book Note of [The Most Important Thing]

I always liked Howard Marks’ famous memo and his thoughts in various interviews, but only got chance recently to read his book [The Most Important Thing – Uncommon Sense for the Thoughtful Investor].

tmit_cover

Below are some topics that are most insightful for me.

Oriental philosophy on cyclicality

Within this book, as well in Marks’ past interviews, pendulum, which continuously swings from one end back to the other, was mentioned many times as a metaphor to illustrate his view of world, markets and human sentiments. Marks also revealed his spiritual root for such a philosophy, dating back to his Wharton days when he picked up Japanese Studies as the obligatory non-business major and learned Mujo (無常, a Buddhism doctrine means “Impermanence”). Not only Marks credited his Japanese Study by claiming “they contributed to my investment philosophy in a major way”, I believe he also passed along such philosophy to his decedents, as indicated by his son Andrew Marks’ plan to name his new money managing business after “Anicca”, which is Impermanence in Pali, the “native” language of Buddhism.

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Changyou.com (CYOU) – A value buy with potential near term earning catalyst

So here is how I came across this name. As I mentioned in my old post “A Part Time Investor’s Investment Process”, I didn’t have a systematic way of sourcing idea, thus usually leaving the portfolio under-invested. More recently, I started playing around with some quantitative funds’ strategy selection criteria, and found LSV’s fit my style pretty well. It goes by two parts: 1) identify value opportunities, by looking at some traditional ratios including EPS, current P/B, current P/CF and current P/S, if any of the ratios is lower than industry median, keep them for step 2; and 2) eliminate “value traps” by examining the recent momentum (e.g. Relative Price Strength over past 26 weeks >=0 & Relative Price Strength over past 13 week is larger than that of past 26 weeks. What is does is basically to look for cheap stocks in a turnaround story, the idea being if the market recently recognize a name, it usually is not a value trap. For further information about LSV, you could visit http://lsvasset.com/research/ for further research done by them.

CYOU came out from these filters and happened to be a Chinese ADR, which I thought I may be able to gain some informational edge by researching in its local language. First, still need to give credits to following posts provided me some directions. By the way, their timings are much better as the stock price already went up 40% from the price level they posted their ideas. However, without the recent price surge, it possibly won’t go through the step 2 of momentum checking, meaning I wouldn’t be able to see it until the name started to rebound anyway.

https://www.valueinvestorsclub.com/idea/CHANGYOU.COM_LTD/137906

http://seekingalpha.com/article/3962034-changyou-extremely-undervalued-possible-privatization-candidate

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Book Notes – So You Want to Start a Hedge Fund

I know it sounds like a cheesy book name, but like Joel Greenbaltt‘s classic “You Can Be a Stock Market Genius“, this is another great book with cheesy name. The author Ted Seides is one of David Swensen‘s proteges, having worked on both asset owner and money manager sides. Therefore, this book offers unique perspectives (from both capital allocator and money manager angles) on how to build a great money managing business. Lastly, although the book name may be alluding to step by step how-to guidance on starting a hedge, it doesn’t have anything like that. Rather it is fully loaded with real cases, about how start up funds succeeded or failed,  which are invaluable lessons for anyone considering starting their own money managing businesses.

soyouwanttostartahedgefund

I think I probably read this book too early as it could serve these readers with more experiences and are closer to the point of setting up their own funds. Nonetheless, following are the lessons I found most valuable to me. They either significantly changed my existing views or offered brand new insights to me. Continue reading

Indirect Hard Lessons – Gurus’ Recent Mistakes

As an old saying says, “you best teacher is your last mistake.” However what’s challenging for value investors is that it’s very difficult to realize you’ve made a mistake to start with. As you are always going against herds, you’ve already made “mistakes” in others’ eyes, meaning you are left alone to make the judgement. Plus, you have to re-convince yourself about your verdicts when the name keeps going down after your purchases, or if the names move higher you just cannot stop feeling good about yourself, either way it’s really hard to maintain an objective view on your own past decisions.

Market recently has seen some big failures on names backed by some legendary value investors. Although may not be able to learn the lesson as deeply as the investor themselves do, I found these are great case studies nonetheless.

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Thoughts on Nexpoint Residential (NXRT)

Disclosure: I established a long position in NXRT on 4/4/2016.

First of all, I want to thank following posts drew my attention to this name. It caught my eye first that Michael Burry held it as his biggest position.

Michael Burry’s SEC 13F filing

Clark Street Value post about NXRT

Value Investors Club post about NXRT

 

After I made my trade, I wanted to write something about it, however I noticed there are this Gurufocus article on 4/4/2016 and this Seeking Alpha article published on 4/5/2016 already did most of the job and shared some of my views. Thus, I will be brief on the upside as you will be able to get them from articles listed above, and will try to dig more into the downside.

Short pitch: NXRT is one of the few REITs using “value add” strategy on class B properties. The management is very determined to execute on this strategy and thinks the market didn’t get them (small cap, spun off a year ago, only 2 analysts from some boutique sell sides covering them). In my view, this firm is actually a flipper partnership under a REITs cover (to avoid corporate level tax), and their flipping strategy seems to be very lucrative (if it works out).

Following I will touch some of the red flags that people dislike the most (and I disliked initially):

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A Part Time Investor’s Investment Process

For the past few years, I have been doing value investing practice on an ad hoc basis. I read news & investment message board, follow the ones I deem interesting, do some my own researches & make decisions on building positions. So far, overall I have more hits than misses and my personal investment fund’s performance has been in line with S&P 500, even though I usually keep 30-50% cash at hand due to lack of opportunities (except for 2013 during which year the index ran up 30% and the cash drag bit me badly). Clearly, the cash drag was my problem. I also know that it is mainly because of the ineffectiveness of sourcing potential opportunities, given that my spare time resources are limited. To solve this issue, I have to have a formal investment process.

Based on my current knowledge, a typical value investing process would look like this:

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Shoulders of Giants -Brian Bares Interview

Before today, I never heard the name Brian Bares even though I follow value investing world closely. I came across this interview and thought it’s definitely worth sharing.

Brian  Bares is the founder and CIO of Bares Capital Investment, a Austin based small/micro cap focused value money manager. He studied math and worked for a quantitative value investing shop before he started his own fund in 2000.

I’m impressed by his clear reasoning when addressing questions and the differentiating position he set for the firm by specializing in concentrated small/micro cap strategies.

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[Pinned Post] Who’s Who – Behind VIC Anonymous Users

[Latest update: 8/13/2019, please go to the bottom to see new additions]

Value Investors Club (VIC), founded by the legendary investor Joel Greenblatt, is an anonymous elite value investing club whose admission is said to be very selective. According to John Petry, the co-founder of the club, there’s “a lot of very well known money managers” and “very, very successful hedge fund managers” who all use the site. However, from traits left by these “anonymous” users, we may be able to tell these well known and successful investors. I firstly carried out some of these researches purely out of my curiosity, but later found identifying these great investors helps me focus on quality ideas and discussions. Sometime I cannot tell who exactly they are, but certainly can tell the ideas were from some greatest minds. By all means, these guys’ writings are great stuff to read regardless who’s behind.

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