$CEB (5311.MY)$ Source of information: @RH Research Date: 20...

Source of information: @RH Research

Date: 2024/8/6

What happened to Cape EMS, which fell more than 50% in two weeks?

A perfect storm, from the downward revision of performance guidance, confidence crisis, market factors, to large shareholders being margin called and forced to liquidate their positions.

Within less than a month, the turnover ratio has exceeded 100%, which means that the total shares of 992 million have completely changed hands. Just today, the turnover rate is about 25%.

In fact, since its listing last year, every unpleasant incident has laid the groundwork for a vicious cycle, leading to the collapse of the stock price.

1️⃣ As early as 2021, Fortress, a Pre-IPO investor, was introduced, with about 20% stake held by dozens of independent investors. Their cost per share was RM0.30, compared to the listing price of RM0.90, which allowed them to easily make a 200% return.

They originally intended to cash out, but the exchange set a lock-up period for the second half of the year, forcing them to watch the stock price rise without being able to sell. When the lock-up period ended, they rushed to sell, resulting in the stock price not rising during a good market condition. They faced a lot of selling pressure.

In Q4 last year, a private placement was carried out at a price of RM1.07 per share, mainly to raise funds for the acquisition of the US company iConn. The stock price had been stable all along, but after the financial results were released in February this year, panic selling occurred.

Investors including Pre-IPO investors, retail investors, and local funds rushed to sell, cutting their losses. It is worth mentioning that when funds participate in rights issues and incur losses, they usually lose confidence completely.

The best examples are MI and Aemulus, which conducted rights issues during the peak period a few years ago. MI took 1-2 years to gradually climb back up from the bottom, while Aemulus is still lying on the floor. The two are far apart from their previous stock price peaks.

Very few listed companies in the local market provide earnings guidance, usually passing it off as "cautiously optimistic". Cape is different, not only indicating growth of several tens of basis points, but also providing a specific range.

It is because of this move that analysts firmly believe this guidance is the benchmark. If it cannot be achieved, it is considered the company's fault, as they are believed to have provided misleading guidance, and confidence is gradually lost.

After losing the support of local funds, they could still rely on the participation of retail investors. Over the past 2 months, many promotional activities have been carried out, attracting many market participants. However, unexpectedly, things turned out contrary to what they hoped for.

Due to the impact of certain environmental factors, this year's growth did not meet expectations. Actually, this can be understood, as business people know that many factors are beyond their control.
What went wrong is that they continued to promote even when the performance conditions had changed. When the news spread, the stock price plummeted, triggering a "stampede" of funds and attracting the attention of the short sellers.

To make matters worse, at this time, the US stock market suddenly collapsed, causing the already very fragile 'market' to loosen, leading to another major drop. The founder and major shareholder faced pressure from margin calls, being forcefully sold by investment banks, resulting in a fund 'stampede' event.

If the stock price fails to stop falling, or if the major shareholders fail to replenish, the worst-case scenario is a vicious cycle, with falling stock prices triggering a new round of margin calls endlessly.

Ultimately, the recent plunge is the result of a series of events, rather than happening overnight. So how can market confidence be rebuilt? Perhaps only performance is the best 'remedy'.

Assuming the full-year profit is the same as last year at RM45 million, the current stock price valuation of RM0.405 gives a PE ratio of 9 times.

As for at what stock price the fall will stop, it depends on how deep this 'slingshot' can press. The deeper the pressure, the stronger the rebound.

In the end, everything seems to be going wrong, with an unlucky year. Perhaps the initial public offering of Cape was a wrong decision.
Purely for sharing.