Damn, the title looks so clickbait-ish.
Except it’s not:
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:
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:
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.
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.
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:
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.
Good article, have the same position as you and came to the same conclusion.
Would be interesting to hear your thoughts on 2 quick questions:
1) Do you intend to hold your position through earnings? 14th August 8pm SGT.
2) Why write puts instead of just using that 50k to buy more shares? Was it purely driven by high IV? Why 50k shares and 50k covered puts? Any reason for that split?
1) I thought really long and hard about this. I’ve combed through Blue Orca’s 2nd rebuttal reply, that one is of greater detail and much better quality as well.
I’ve also considered all the numerous reports from Citi and other analysts that give sky high target prices, much higher than currently…
and ultimately decided to take profit and not be greedy.
I actually think the 14th Aug ER is a good time for the company to strongly rebutt Blue Orca, but decided not to take the risk. Mainly because the financials are not really that great to begin with. There’s an awful lot of future growth priced in, and they just need to report good numbers BUT numbers that are not up to expectations and we’d see a crash and another round of panic.
So I took profit mostly at the $31.50++ mark. I still have some puts sold that are very likely to expire (exercise price $25)
2) Yes, mostly to limit my risk I guess.
Of course, on hindsight, I wished I just put everything into it’s equity.
But this is on hindsight.
In this particular case, the recovery was short and sharp, occurring within a matter of days.
There are numerous other instances whereby even with a firm rebuttal, the share price languishes, and after some time, with more short sellers, there’s another massive drop.
In this scenario, my sold puts would have much more protection as the premiums, and the high IV, woud’ve warded me with a sizable MOS before my options are in the red.
I walked away with a sizable 5 digit USD profit in a matter of days, so I’m not complaining.
We may very well see another big pop up after ER tomorrow, but ah well, we can’t win it all.
I’ve long learnt that we always have to leave something on the table and walk away and not try to eat every morsel that we can.
Finally, I’m not sure if you’ve read Blue Orca’s 2nd short sale report. The evidence there is more compelling, and perhaps it’s cos the company is in the blackout period, I haven’t seen anything in their replies that directly debunk Blue Orca’s allegations.
It’s their 2nd report that made me reconsider some of their points. Some of their points have valid evidences, and even at the very best, it’s obvious that the company failed to completely and accurately report on all their previous dealings.
Well thought through, thank you for your thoughts.
Will be holding through earnings myself (all equities, no options), albeit I have a far smaller position than what you had.
Banking on the fact that they will release a well-prepared rebuttal given the amount of time they’ve had since Blue Orca’s first and second report + of course, earnings meeting/exceeding expectations.
well, it does look like at least for now, that I got a tad lucky here huh.