The Art of Stock Arbitrage – OCBC and Wing Hang bank

Dear friends,

Today, I would like to share an investment move  known as an Arbitrage. This is an investment method used by value investors who sees a short term opportunity in price difference of a value stock. Such case happens typically when there is merger and acquisition. Personally, I have read a bit about such method but it was only until recently when I managed to seize a decent opportunity to try it out. That was the case for OCBC’s purchasing of Wing Hang Bank.

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Let me share my thoughts and my moves and I hope you pick up some lessons that may help you profit as well.

Early this year, our local bank OCBC annouced that they are offering to purchase Wing Hang Bank in Hong Kong. What made me noticed that news was when OCBC’s share price fell to $9.40, which in my opinion is an attractive price. When I read the offer in details, one reason why the price fell was because it is offering to buy Wing Hang as 1.9 times its book value which is considered over paying for a purchase.

When I studied the fundamentals of Wing Hang, I personally found it sound, but was it worth it to pay 1.9 times its book value. More importantly, I did a quick check and its book value is HKD66.34 per share.

If OCBC does pay 1.9 times, it means that it will be paying HKD66.34 x 1.9 = HKD126.

When I was reading about this, the price of Wing Hang was HKD108. What this means was that if the deal goes through, the price will go up by HKD 126 – HKD 108 = HKD 18 or 16.67%.

The key is whether the deal will actually go through and if the price will be at HKD 126. I was tempted to test out this strategy but I hesitated as there is holding fees for buying Hong Kong Shares. What this meant was that even though I find Wing Hang bank to be a business I would like to own, it actually costs me to hold it. If in event the deal doesn’t go through, I may have to hold it for some time.

Finally, I decided to pull the trigger and go ahead since the conclusion will be in end March which means I will hold the stock for 1 month plus at most. To my pleasant surprise, the stock price increased steadily to HKD 116 within 2 weeks and I decided to let it go since my purpose is very clear for this move, a shorter term arbitrage play.

Well, currently as I write, the price of Wing Hang has rose to HKD 124 as there is more development and firmer confirmation of the deal. My personal take is while I could have made 16%, I am still happy making a 7% in 2 weeks. Overall, it adds another experience and tool to my knowledge and experience as an investor.

Til date, I am still fascinated how amazing it is to let money work for you when we look at it from a business perspective. I do hope to hear from you and your thought and do join us in learning to approach the stock market from a business perspective ~ the Value Investing Way!

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Mind Kinesis Research Team

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