Bonus From Flyke (!!!) + Results From Enhanced Options Strategy

Some time ago, I wrote about a failed investment I made – Flyke International:

Lessons from a failed investment – Flyke International Holdings

Do read the previous post for some context. This particular example is a great example for typical value investors to learn from.

Flyke (HK listed) was trading at crazy low valuations, backed by cash and there just doesn’t seem to be any way else for the share price to go except up, or trend sideways.

I wasn’t counting on fraud management to abscond with the company’s money though. The company’s stock was suspended from trading for some years now, whilst they tried to work through their financials. Being prudent, I wrote off the value of my investment in Flyke completely in 2013, although I still hold 300,000 shares currently.

Recently, the company finally published all their past financials, and met one of the key criteria to resume trading. The figures look as terrible as I would’ve expect.

Check that out.

The company went from 1.1BILLION RMB in revenue in 2013… to ZERO in 2014.

Equity value was 834 MILLION RMB in 2012, and became NEGATIVE just 1 year later in 2013!

Wow. It actually takes a REAL genius, to destroy a total of 850mil RMB worth of value in a single year. It’s actually not that easy to achieve that. You’d have to really rack your brains to do the worst possible thing for the company, each time  you’ve to make a decision.

Either that, or you just take the money and run.

And that’s exactly what happened.

Lin Wenjian and Lin Wenzu (they are brothers, both in real life and in crime. Special mention goes out to Lin Mingxu, who is also in the management team and is their brother as well) both just DISAPPEARED. Worse still, since they only resigned as company directors, but not the directors of the subsidiaries in China, the new management was unable to access the company’s subsidiaries plants and other assets in China.

Well, the company statements were cautious enough not to accuse them of fraud, but here I am, saying THIS IS OUTRIGHT FRAUD.

Since they’re henceforth uncontactable, I don’t think they’re going to come out and sue me for defamation.

That’s the issue with S-chips. Flyke is not a S-chip, since it’s listed in HK, but it’s the same nevertheless. Lin Wenjian was the company’s chairman and CEO. The company is run by family, and heavily family owned. Yet, they chose to steal the shareholders’ money and abscond. That’s the level of management integrity we have in these chinese companies.

No sense of loyalty to shareholders who have trusted them. I wrote off the value long ago, but how about those who have larger stakes, or those who have invested heavily in them?

To top it off, the reports make no mention of any legal ramifications. No police report. They took off with the company’s money, and that’s it. New team comes in, let’s start again blah blah.

These guys should be hanged. I mean that literally. How many lives did they destroy? It’s only a pinch in the pocket for me ($30k worth of pinches!) but I’m sure there are poor chinese folks who have perhaps, even their entire life savings vested with them.

And it’s not like they NEED the money. These brothers are not poor. They’re top management of a listed company. It’s just pure greed.

And I hate to say it, but it does look like they’ve gotten away with it.

That’s China for you. China is a big place, and with 850mil RMB, you can do a lot of stuff, bribe a lot of people and get away with murder. Literally.

I hope karma comes back to bite them real bad.

So, why did I mention there’s a bonus?

The company has since done a restructuring, and there’ll be a RTO. New assets will be hived into Flyke. From a shoe manufacturer, it’ll be transformed into a property developer. As stated, there’ll be a 3 for 5 shares swap.

Now, it’s still early days, and I have no idea what are the new assets, what the prospects are like and what the share price would likely be. But I’ve written everything off completely some years back, so it’s going to be a real bonus to just get something back.

And who knows, if I’m lucky, I might even be able to walk away from this without any losses. (except from opportunity costs from having such a long suspension!)

It’s still a very nice bonus nevertheless.

---

In my previous post, I mentioned about my new enhanced options strategy. It’s the end of the week, so it’s been exactly 2 weeks and I can now share hard data. Here’s how the activities look:

The cashflows generated since 12/04/2017 (2 weeks ago) amount to USD $7,747.92!

The capital remains the same, and is currently, still a relatively small proportion of my total AUM.

Ignore the assigned options because those are meant to remain constant over time, or will be divested at a profit.

By just extrapolating, this means I’d be expecting approximately USD $15K of CFs using this strategy, which is almost twice of what I did previously.

Of course, as mentioned previously, I’m cautious because 2 weeks worth of data can’t tell you anything. Still, my plan is to allocate more capital into this over time, as I improve on the thought processes. In fact, by the end of the year, I should be able to at least triple my AUM allocation under this options strategy, if the data checks out.

So things are good and I’m happy with the results.

On a different note, I’ve recently increased my exposure to LTC Corporation slightly, by 20,000+ shares, at between $0.6 – $0.62. I’m expecting more of the same for the coming quarterly results: + FCF accruing to the cash holdings and increased profits y-o-y.

That’s all I have this quick post, wishing all readers a good long weekend ahead!

Have fun hunting!

Advertisement

Lessons from a failed investment – Flyke International Holdings

As mentioned in earlier posts, I think it’s a human tendency to focus on our successes, but often it’s the failures that are more instructive. To be fair and balanced, this post will be about one of my failures.

Flyke International is one of my failed investments. I first initiated a position in Flyke in 2011, ultimately putting about $30k of capital into the company.

Flyke International is a HK listed, shoe soles making company. They also manufacture their own line of apparel and shoes, and own retail shops selling apparels such as the lower margin sportswear and a higher margin casual wear. They also help other brands to manufacture shoe soles, which they then export.

Income statement

By all metrics, Flyke was a value investor’s dream when I first initiated a position… well if you look strictly and only at the financials.

The PER was <4, price to book was around 0.4, NPM was unusually high at 13.9% (I’ll later come to realise that is really ridiculously high for a apparel retailer).

Return on equity, which is one of my favorite metrics if the company employs little debt, is also ridiculously high at around 25%-28% for FY10 and FY11, and much higher (>40%!) in the years prior. ROE becomes an inaccurate valuation metric if the company employs a lot of debt though, as the equity portion becomes artifically bloated.

In any case, if one looks at the numbers and ONLY the numbers alone, this is a very compelling case for a value investor.

On top of all this, just before I invested, the company had issued a ton of stock options to a private investor at an exercise price that’s much higher than my purchase price.

And the ultimate cherry is that the company itself did share buybacks, again at a price that is much higher than my purchase price. All very confidence boosting eh?

So… dirt cheap valuations, high returns for the past 5 years, a business that is vertically integrated (they manufacture for themselves, export to other retailers, and have their own retail stores), management consists of family members. This should be a home run, isn’t it?

The 1st sign of trouble came in end 2012. Even then it didn’t look too bad.

The company released a profit warning, saying they’re expecting reduced profitability due to blahblahblah, and that they’d reduce stores, closing unprofitable ones and consolidating in strongholds etc.

Reduced profitability. That’s no big deal. Which company doesn’t experience reduced profitability from time to time?

The company quickly went down hill from there onwards. The financials deteriorated at an alarming rate and the company came up with a plan, which, to their credit, was clearly spelt out to shareholders:

Finally, the worst came in early 2014 when the company failed to file it’s financials, citing missing funds that are unaccounted for. The shares had their listing suspended, while an “internal investigation” was carried out. I won’t go into details except to say that since then, it has just gotten even worse. The external forensic accounting company that was hired actually resigned, citing a lack of cooperation and payment.

In short, this whole thing has blown up. In my mind, this is a fraud company. Flyke, it turns out, is a fluke. (pun intended)

The rot starts at the top, with the management being unable to account for certain funds. Although the company is listed on the HKEx, this is primarily a chinese company with operations mostly in China. After multiple “forensic accounting” and “investigations”, all of which ran into problems, Flyke is still currently suspended on the HKEx.

As of now, this is the latest development:

BLAH.

Aftermath

I have since written off my entire investment in Flyke. Fortunately $30k is not a huge proportion of my portfolio. Painful nevertheless, but not fatal. If, and when, the shares ever become available for trading again, I’d be selling my entire stake in Flyke at any price available. I don’t think that’s going to ever happen though.

Lessons learnt

Now, what can I do better?

To be honest…. not much in this instance.

I certainly did my due diligence. Aside from dirt cheap financials, I did a qualitative assessment of the shoe and apparel market before I invested. Although Flyke was nowhere near the top and the most popular brands in China, they did move towards “westernizing” the brand. The Chinese consumers are also notoriously ficklet minded and I didn’t want to pay a premium for a top brand which may fall wayside quickly.

There was also certainly a valuation moat.

OK, there are some small tell tale signs. For example, their company secretary changed just before the entire company got suspended. This by itself though, wouldn’t be a big sign as secretaries change all the time isn’t it?

This though, is a bigger warning sign:

If these jokers can pass resolutions and get 100% approval, (which is basically  just themselves), they must feel like they can get away with anything.

The ultimate lesson I have learnt though, is that despite all due diligence that one can do, sometimes, the vagaries of life are such that a successful investment may still not materialize no matter what you do.

Many things in investing are out of our control. Detailed analysis only swings the odds into your favor, not guarantee that the investment will be a hit. Over the long run, the hardworking, detailed analyst will outperform one that hasn’t done any work. In a single sample though, (a single investment) anything can happen.

It’s like going to the casino competing against a professional gambler. The professional who has prepared, studied and analysed, over several bets, will win the layman who is leisurely placing a bet. In any single hand though, the layman has every chance of beating the professional gambler.

This is where some diversification comes into play. My portfolio has always been intended as a concentrated one, but still, a certain diversification is required. Since this debacle, I’ve always looked at every company and considered: “Is this a Flyke?”

Current Musings

On a different note, since my divestment of Hock Lian Seng, I’ve started looking at places to deploy my capital. I’ve concluded that I’d likely keep most of the capital liquid, as I am generally rather pessimistic on the outlook. I’m also likely to build a short position at some point on S&P index, and possibly the Nikkei as well. I may find some ridiculously over valued company to short as well.

I did deploy some capital in the past couple of weeks though. I’ll likely do a comprehensive post on the company soon, and if I have the time, I’ll try to make it the most detailed one I have done thus far.