Saturday, February 1, 2020

My Game Plan On The Wuhan Coronavirus Crisis

The dreaded China market will finally going to reopen tomorrow in what looks to be a massacre sell-off in the market after what most other markets had experienced in the last few days.

The China A50 futures are currently down 1000 points from the last closing of 13,800 on 23rd Jan 2020 to 12,700, so we should be expecting a trigger 8% to 10% sell-off when market reopens tomorrow. This should then goes on to continue likely over the next few days as we are likely to see margin calls coming in and sell-off accelerating.

For investors who are looking to take opportunity of this correction, there is no better time to get in than probably the last 4 years (last was 2016 China sell-off event) since the entry point is more attractive but given a more cautious outlook.

Still, if you do believe that the Wuhan crisis will one day blew over (which likely will given today's advance technology and countries better prepared to handle the epidemic), you should be looking at a very well decent return when market rebounds back later.

I am going to share a little bit about my game plan for next week.

This is something that is purely based on my own game plan so please do your own diligence and do not follow me (risk is your own). The game plan might also change and evolve over time depending on how things work out and the amount of warchest I have currently on hand.

1.) Gather as much warchest as possible

In times like this you want to exercise your options on your cash which have been sitting duck for a number of years.

Since the assumption is that cash has been underperforming your larger portfolio for a number of years in the past, it is time to make up for it now by going for extravagant returns (in excess of 20%) to balance out your overall irr you have on your cash returns.

For myself, I currently have close to 70% warchest at the moment after selling off Top Glove last week at $2.51, which helped push the overall portfolio upwards but net off by the sharp fall for Straco.

2.) Switch defensive to higher beta stocks

I've sold off my Comfortdelgro at $2.18, which I've taken a 3 cents loss on the position I've just bought last month.

This is again deliberately done in order to conserve more cash positions to take advantage of the current crisis and to generate higher returns by switching to a higher beta risk stock.

Comfortdelgro, being a defensive in the industry has been relatively unscathed by this crisis so it is not a good idea to continue holding or add them in the portfolio for now.

3.) Going for HK and China stocks

Exposure to HK and China stocks are obviously going to be the real value play here as they are those with the most direct impact to the current crisis, with China potentially shutting down almost all their activities for the last 2 weeks until when things get better.

Because of this, most HK and China stocks are being battered more and some valuations look more attractive since they have fallen more than what their business activities are suggesting. If we truly believe that China can handle this crisis and things would get better in a year, we can compute the earnings and cashflow exposure base scenario and then take the necessary positions from it.

For example, Straco, which has more than 67% exposure to China, have shut down their China operations and attractions until impending instructions from their local government. If we study their business and financials, the impact to this shut down (including the flyer) will be at around $10m of operating cash outflow in a quarter, which translates to about $40m in a year, less maintenance capex. This would translates to about 8 cents/share on the company. What this theoretically means is if the share price has fallen by more than 8% since the pre-crisis, it might be a good opportunity to add them since they have been oversold (Straco has fallen from 67 cents to 56 cents, indicating a fall of more than 11 cents). This is just one way of thinking.

4.) Back to Fundamentals

My entry point for HK & China stocks are also strict by default, which means they must pass the required criteria I've set based on the strong fundamentals they have in the first place.

The point I'm making here is that strong companies would eventually bounce back stronger in a crisis while weak companies mostly get weaker being exposed to such vulnerability. We don't want to pick China companies that has weak fundamentals and are unable to rebound when this crisis ends.

5.) CFD Margins

I will likely be utilizing my CFD margin account again in order to stretch the availability of the limited cash I have on hand.

70% warchest on a 10% margin requirement allows you to utilize up to 700% warchest but it is likely it won't come to that. If you've read my CFD articles in the past, I think a 2.5x to 3x leverage would be relatively safe for as long as your entry price is deemed attractive in the first place (i.e you don't average down too fast).

Still, a very disciplined approach is required in order to compute the amount of requirements you need to cover the least of the worst scenario.

6.) Look for those companies that require 10% or 20% margins requirement

There are companies which only requires a 10% margins requirement which means you are able to stretch your leverage further by allowing only 10% of your initial funds to buy a position. The leverage will have to incur an interest costs of ~ 3%/year.

There are also companies which are more illiquid and will have 50% or 70% margins requirement. In this case, the requirement gets stricter and it doesn't allow room for much leverage (for instance, Straco has a 50% margin requirement up until 8,500 shares and 70% margin requirement up until 15,000 shares).

7.) Holding period is short to mid-term (i.e 3 months to 1.5 years)

My holding period is likely to be short to mid term and I want to de-myth the notion that long term holdings will surely do well.

For a number of years, I have always believed that a strict entry requirement is more important than holding long term because there are always a number of factors that could impact the market. Still, if the company truly has a strong economic moat like Amazon, Facebook, Microsoft and alike, then I'd agree that it is better to compound them in the long run. 

What works well for you might not work well for me and vice versa so I think this is a debatable subject based on your own criteria.

Final Thoughts

My game plan is very likely to be different from yours but most if not all of us have the very same objective, that is to come out stronger in this crisis than when we've started it.

In the next article, I'd list down all the watchlists I am eyeing in this crisis and any of the positions I've taken next week.

Thanks for reading.

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  1. Thanks for sharing.
    No many people can stay claim under a big market sell off, but that really is a must-have character for achieving a high return portfolio.

    1. Hi Shan Shu Shu

      Indeed, we must stay calm during these moments and reevaluate our positions to see if they can withstand the temporary headwinds ahead.


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  2. Think I raised about 30% more for warchest from last week sale. How to deploy now is the next hurdle.

    1. Hi Cory

      Wow 30% is a lot of recycling. Hope that warchest can be put to a good use now.

  3. Hi Brian, i have been looking into China and HK too in the recent weeks.

    1. Hi Boonhow

      Do share with us any of your watch list or buy companies to watch out for :)

    2. Hi B, i am looking at insurance companies and property conglomerates in china and hong kong. havent zoom down to any particular companies yet.

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