11% Returns In A Single Day. Thank You Blue Orca Capital!

Damn, the title looks so clickbait-ish.

Except it’s not:

771) GDS.jpg

Approximately USD 5.5K + of returns in 1 day, with an invested capital of approximately 50K +.

Here’s the story.

3 days ago, Blue Orca Capital released a short attack on data centre operator, GDS Holdings. You can read the specifics here:

https://static1.squarespace.com/static/5a81b554be42d6b09e19fc09/t/5b6070a60e2e72e41d0d78aa/1533046975799/Blue+Orca+Short+GDS+Holdings+%28NASDAQ+GDS%29.pdf

BTW, I love how they open their short sell reports:

“THIS RESEARCH REPORT EXPRESSES SOLELY OUR OPINIONS. We are short sellers. We are biased. So are long investors. So is GDS. So are the banks that raised money for the Company. If you are invested (either long or short) in GDS, so are you. Just because we are biased does not mean that we are wrong. “

Well, few people who are not vested will be interested to click on that link and read the entire short report, so let me very quickly summarize it.

1 of the key reasons for the short seller’s attack is the fact that GDS Holdings reported a 94% utilization rate for their flagship data centre – the G6 Building. However, Blue Orca managed to speak to 2 other independent data centre operators, who claim to be operating data centres within the same G6 Building.

One of them, GZIDC, offered the undercover Blue Orca guys a significant amount of space in the same data centre, even following up with a quote.

This led Blue Orca to conclude that GDS Holdings was overstating their “100% committed and 94% utilization rate” of G6 Building. (Since 2 other separate independent operators utilize large areas of G6 Building too)

In other words, Blue Orca was accusing GDS Holdings of basically being a scam and overstating their utilization rates when… well, nobody’s actually using the areas.

Fortunately for me, in this instance, I actually do know someone working in the industry and based in China. Although he had no specific knowledge of G6 Building itself, he told me that in the industry, it’s common practice to have many master leases and sub leases, and even more than 1 sub lessee.

That made sense as the industry is fragmented, and many smaller data operators often band together to negotiate their leases.

It wasn’t clear at that point in time, but GDS Holdings has since released a statement that confirmed my initial suspicions, and collaborated what my friend told me:

“GDS has commitments for 100% of the space of GZ1 from two customers.  GDS is currently receiving revenue for 94% of the total committed space of GZ1 from these two customers, which is in line with the Company’s definition of “area utilized”.  The two operators referenced in the Report are leasing the capacity from one of the above customers.” 

In short, GDS Holdings deals with only 2 customers, 1 of which has subleased their space to 2 other data centre operators. GZIDC was one of them, and that’s who Blue Orca spoke to!

So while there were “rows and rows of servers” that were un-utilized, as reported by Blue Orca, technically, well, to put it crudely, it’s not GDS Holdings’ problem.

It’s the problem of the 2 customers. As long as the 2 customers are good for the money, GDS doesn’t need to bother about whoever they lease to, or the lack thereof.

So perhaps we can fault GDS Holdings for being errr, inaccurate in their language used when reporting…. that’s about all we can fault GDS Holdings for.

“94% utilization rate” suggests that 94% of the available capacity is utilized… but in reality, GDS is actually “receiving revenue for 94% of the space for GZ1”.

Not quite the same. But, not really a biggie either.

There are some other points too, but I shan’t go into the specifics of each point because honestly, come on, put your hands up, up to this stage, how many people really understand what you just read above?

Unless you’ve some understanding of the background situation, otherwise, well, I’m just talking to myself.

So let me just talk about what I did.

I took a day to quickly try to figure out what exactly happened. 2 days after the short sell attack, which is yesterday, I decided to deploy significant capital on GDS Holdings.

I postulated that the outcome is pretty much binary. The share price has already tanked something like 36% since the short attack.

Either GDS Holdings is a fraud like what Blue Orca suggested, or Blue Orca is wrong and GDS Holdings will see a sharp recovery in its share price.

Since GDS Holdings is reporting results on the 14th August, this  means they’re in a sorta “blackout” period now and can’t really reply in detail or risk releasing sensitive info that they’re not supposed to release. This tells me that Blue Orca is not really interested to just sink the company legitimately. They want to attack when GDS is at its weakest, knowing fully well that GDS is unable to respond adequately during this window.

In any case, I figured that at the very latest, GDS would be able to refute the accusations when they release their results, which is less than a fortnight away.

So after doing some DD, I decided to deploy significant capital that same night. I sorta announced it on IN actually:

772) Announce

I ended up buying 2,000 shares of GDS Holdings directly, and selling several put options (set aside another $50k or so to back up the puts I’ve sold)

And I’m actually late to the game, as the share price has recovered 20% or so by the time I’ve entered, as I spent a day trying to figure out if Blue Orca’s assertions were actually valid.

The 1 thing that I do have to learn to do better… is to stop trying to nit pick on the pennies.

My profit would’ve been at least a few more grand more, if I had learnt to stop trying to wait for a better price, and just get it at the bid price once I’ve decided. Afterall, if we’re dealing with a unique situation, these pennies don’t really matter in the big picture.

Waiting and waiting cost me dearly.

I also opted to sell some put options because with the massive drop, the volatility of the options made the premiums really juicy for the risk accorded.

773) GDS implied volatility.jpg

140% Implied Volatility!

So… what next?

Unlike in the case of Broadcom and Disney, I intend to take profit in this relatively quickly. It’s not a long term hold for me.

The reason being simply valuations. GDS Holdings may not be a fraud IMO, but it is certainly not cheap. The company has not have any free cashflow, as they channeled funds to grow quickly. On top of that, GDS has relatively high debt, and high receivables as well.

This can turn out to be a toxic combination if it snowballs, we  just need a couple of these receivables defaulting and things can get tricky.

Sides, my thesis for investing to begin with, is to capitalize on the fact that Blue Orca (thank god for these guys!) created a massive and sudden drop in the share price.

774) GDS share price.jpg

Let’s see how this pans out over the next few days/weeks.


I’ve previously written about Broadcom:

TTI: “I’m Sorry, It’s All Over Between Us. I’m Breaking Up With You”

Since then, I’ve expanded my positions, selling some naked calls and more puts.

Tonight…. is when I “harvest” the 1st set of expiring put options:

775) AVGO.jpg

The share price right now is around… USD 215.30.

Unless something absolutely crazy happens in the next few hours (like Trump and Kim nuking it out suddenly)… I’m pocketing my USD 1,715.71 tonight.

And unless something crazy happens in the next 5 trading days after today, I’m expecting the calls to expire too.

With Broadcom, I’m happy to wait longer, hence, my exit is likely to be in the form of an exercised sold call option.

This is a different situation from GDS Holdings, whereby I’d probably not sell any calls, but take profit by exiting directly.

Next week will be real exciting as several of my holdings, esp the long term SGX listed holdings, announce results.

I probably won’t have the time (or interest actually) to write about them, cos I’d be off on holidays right after. So, that’s all I have here.

Have fun investing.

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Wow. In My 4 Years Of Experience In Options… This Is A First.

I wasn’t intending on a post so quickly after the previous one. But this is quite crazy.

Some recent positions have done really well, really quickly.

I’ve written, in real time, about each of these positions in InvestingNote.

769) TTI positions.jpg

First, I bought some shares in Singtel at $3.12, trading it a mere 2 days later at $3.25, which is pretty good. I don’t really wanna write too much about this cos lotsa guys own Singtel, and it hasn’t been very rewarding.

Many tortured souls out there, don’t want them coming up to me with pitch forks.

Next, I built a small position in Falcon Energy, betting that they’d manage to restructure their debt successfully. They’re still not out of the woods yet, but at least they managed to increase their liquidity with a $23mil injection from the partial sale of CH Offshore. Anyway, I’d just cut and paste my response to someone who asked me for my thoughts on Falcon Energy:

No plans to do a write up on FE cos it’s a small position and I’m gg on holidays next month… 
Maybe let me just share here briefly then: 
As of mrq, FE had current debts payable of $132mil (all figures are rough and taken off the back of my head, so may be slightly inaccurate. Typing on mobile here) 
and cash on hand of something like $12mil I think. Even their total current assets is something like just under $120mil. 
In other words, they are pretty much insolvent, and can only remain viable under 2 scenarios: 
1) Lenders restructure debt, either by taking a haircut or by dragging out payment period 
2) They get a white knight capital infusion 
Failing which, the only other alternative is BK. 
So the scenario then is binary in nature: Either insolvent and BK or survive in 1 form or other. 
And we know that the lenders are not going to sit ard and do nothing, so there’s pressure for something to materialize. We just don’t know if it’s going to be BK or survival. 
The key though, is that at that point, when the share price was under $0.03, the markets are pricing in near certain bankruptcy. Their NTA was ard 13 US cents, and the markets were assigning a value of 3 SG cents to them. 
My entry price is an average of $0.033 simply cos I made a stupid mistake when keying in my orders and ended up selling instead of buying, and had to buyback in the end and incurred more costs, including a penalty fee for buying in. So that jacked up my average price substantially. Otherwise, it’d have been below 0.03 
(https://www.investingnote.com/posts/893150)

Since the outcome is binary, how’d I end up on the side of them surviving? 
1) Oil prices were recovering. I’m not saying this helps from a fundamental aspect. that is, I don’t think the oil price recovery = more revenue for FE = able to survive. 
Nope. Not at all. These things take time to filter down. And to begin with, many of their contracts would’ve locked in the prices. So saying oil price going up = they will do well is too broad and useless. BUT when the basic industry’s commodity is improving, the 3 banks and lenders are likely to be more willing to restructure. 
In my experience, banks are unlikely to force a BK cos its a messy process, and even if their debt is secured, after taking into account the legal processes and such, they’d either still get a haircut and likely see their monies after a prolonged duration. They will be likely to restructure a dragged out repayment process instead. The only reason to NOT do this, is if the borrower is very unlikely to be able to pay up even X months or years down the road, and/or requires more capital infusions. It is for this reason, that the optics of an improving industry is very important for getting some leeway from the lenders. 
2) If we zoom into the BS of the company, they are facing insolvency now because of the large debt due currently. 
Yet the non current liabilities is quite manageable, aka there is little long term debt. This suggests that if the lenders are able to drag out the payment periods, the company’s current debt profile will immediately improve. If I can see that, the parties involved can too. Forcing FE to pay up right now and risk forcing them to go into BK, VS dragging out payment periods or delaying collection WITHOUT any further capital infusions, and eventually being able to collect in full without any haircut…. 
which would you do if you were the lender? 
3) The wide gap between NAV and the price! Even in the event of liquidation… 3 SG cents vs 13 US cents? 
Even if we write off 50% of the asset values carried in the books… there’s still a wide MOS there 
4) Whilst the company keeps reporting losses……. the key number that the lenders will zoom into is the CFO. And cashflows from operations is positive in the mrq (Can’t rem exactly how much) 
5) FF Wong made a personal investment of $2mil. From my previous experience with Boustead, I know how this guy invests. He’s extremely conservative, and if he’s putting money in, it’s cos the situation is derisked. For god’s sake, this guy gave up 3 opportunities to deploy Boustead’s cash when they are in advanced negotiations, each time because he identified some risk. He’s very careful with money. 
6) Despite all these points, my position size in this is very small. Just 200,000. I won’t lose sleep regardless of how the situation pans out, yet % returns wise, it’s pretty attractive as I get a what… 40%? ROI within a month or so. (based on current figures at least)

Then, I built a position in APAC Realty, buying up 40,000 shares at $0.6, on the back of the ABSD news and the massive drop. The logic is simple. The headline news created a lot of fear and APAC fell something like 25% or so in a single day. That’s when I started buying.

I still haven’t decided if I’m going to take profit at the current $0.66 price or so… 10% return in a week+ is rather attractive. Or perhaps I’d just wait another 1-2 weeks for their Q2 earning results. Will ponder about this over the weekend.

Then of course, there’s my new squeeze – Broadcom, who has done really well, really quickly.

BUT THIS. This is a first for me.

I’ve a bunch of Chesapeake Energy options expiring tonight. Some time ago, having sold CHK $5 puts, I was expecting them to be assigned tonight, as the share price was something like $4.4.

That’s fine with me, since I’m prepared to add to my CHK positions < $5. (Lesser after accounting for the premiums)

As the share price was so far away from the $5 exercise price, I’d pretty much taken for granted that they will certainly end tonight below $5, and I’d have to pay up to buy the shares at $5.

Apparently… my counter party thought so too.

Cos… they ended up assigning the options 1 day early, at 1am this morning:

CHK assigned.jpg

Well, they (and myself too) were not banking on THIS to happen right after assigning the shares to me:

https://www.channelnewsasia.com/news/business/chesapeake-energy-plans-to-sell-utica-shale-stake-for-us-2-billion-10566690

Wow. Talk about timing!

With this piece of news, the share price pre-market, is going ballistic, and is up 13% suddenly!

770) CHK share price.jpg

And of course. The $2bil will cut CHK’s debt substantially, and delever the company. And it’s not just the actual debt cutting. It’s the lowered interest expenses that suddenly puts the company on a much stronger footing. My investing thesis has always been that the assets are mostly untapped, yet there will be parties willing to pay for these shale assets. It took a long time coming, and I certainly wasn’t expecting a complete sale of the utica shale assets.

Man. I’m pretty sure the counter party totally regrets exercising those options.

Since I’ve picked the shares up early, I’m free to swing to the other side of the fence and sell calls on these positions.

I’ve a feeling this is going to be a great weekend.