In the last 2 weeks the enterprise value of Ninetowns has moved from -$30 million to +$120 million. This trade took longer than expected to materialize, but the market finally appears to be recognizing the value of Ninetowns.
Normally we would hold onto Ninetowns a little longer as a $120 million enterprise value is still reasonable, but we are increasingly worried about the valuations of all Chinese stocks so we are taking this opportunity to lock in a 65% profit.
However, we decided to buy some October $7.50 calls with 10% of the profit from this trade. Just in case Ninetowns doubles again (as has happened with more than few small cap China stocks over the last week) we will still be well positioned. If the Ninetowns run is over then we will still net 55% on the trade.
Ninetowns could still receive a nice move when the Alibaba IPO comes out in early November so it is still on our radar, but for now we think this is a good time to take profits and buy a small number of October calls.
* Sell NINE near $6.50
* Buy QIIJU.xx near $0.35 (quantity equal to 10% of profit from NINE trade)
NINE 1-yr. chart: