INVESTING IN IPOs

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The Chinese Internet juggernaut raised $21.8 billion in a blockbuster public debut, and was on its way to $25 billion after the New York Stock Exchange said the underwriting banks would sell additional shares. On Monday, the company announced that underwriters had indeed exercised the option to purchase an additional 48 million shares at the $68 IPO price, which sealed the deal: The largest IPO in history belongs to Alibaba, a China-based e-commerce giant that is often described as a combination of eBay and Amazon (but bigger).

In raising $25 billion, Alibaba’s IPO surpassed the 2010 public offering from the Agricultural Bank of China, which raised $22.1 billion in its debut on the Hong Kong Stock Exchange. The previous top IPO in the U.S. was a $19.7 billion deal by Visa in 2008.

There has been an increase in the number of company listings on stock markets globally, reflecting the improvement in investor confidence and market fundamentals. According to Ernst and Young's EY Global IPO Trends - Q1 2014 report, this increase in IPO is expected to continue, although short-term uncertainties do exist. The global market had a very good start to the year, surging 47% to 239 initial price offerings (IPOs) in the first quarter compared with the previous corresponding quarter. There were 864 IPO deals in 2013 globally, a 3% increase from the preceding year. In terms of capital raised, there was a 27% increase to US$ 163 billion in 2013 from US$128.6 billion in 2012.

Malaysian IPOs

However, in Malaysia, the number of IPOs decreased to 17 last year from 29 in 2010, while proceeds fell 64.2% to Rm8.2 billion in 2013 from a record high of Rm22.9 billion in 2012.

The huge decline is largely attributed to the massive amount raised in 2012. That year, the three mega IPOs of Felda Global Ventures Holdings Bhd (FGV), IHH Healthcare Bhd and Astro Malaysia Holdings raised a total of Rm22.9 billion or 91% of the amount raised in 2012.

FGV’s listing, the world’s third largest IPO, was worth RM9.9 billion, while IHH’s RM4.5 billion offering saw it become Asia’s largest listed healthcare operator by market capitalisation.

In the first seven months of 2014, nine companies were listed on Bursa Malaysia, raising a total of RM4.8 billion. This came in below the estimates provided by Reuters, which had forecast Malaysia’s IPO proceeds to exceed RM29 billion and the number of deals to hit 15. In its estimates, it had included the potential mega IPOs of 1 Malaysia Development Bhd’s (1MDB) power assets and Malakoff Corp Bhd, neither of which materialised.

In July, 1MDB announced that it was planning to list in the fourth quarter of this year, with an offer size of more than RM9 billion. Meanwhile, Malakoff, according to a report by International Financing Review, has postponed its listing for the second time, to 2015. The approval for its IPO lapsed in September 2013.

Poi Koon Hwee, executive director at ZJ Advisory Bhd, says that despite the smaller IPOs here, Malaysia’s public offerings come from a wide range of sector (23%), yet the proceeds raised – at only 2% of the total amount- were very low.

The transport sector raised the most funds – about 37% of the total amount raised by IPOs last year. This was followed by the oil and gas (O&G) sector, at 29%.

The O&G sector is expected to see more IPOs in the future as the industry is experiencing robust growth. Among the potential IPOs are E.A. Technique (M) Sdn Bhd and Carmin Petroleum Bhd.

Poi notes that the investing sentiment among retail investors is positive. The rate of IPO subscription appears to be on an uptrend compared with the early 2000s.

“We have hardly seen any under-subscription in the recent IPOs. In fact, in 2014, all the IPOs were oversubscribed, ranging from 0.4 times for IOI Properties Group Bhd to 67.93 times for SCH Group Bhd, he says.

MAKING MONEY FROM IPOs

From a returns perspective, Poi says all the IPOs this year increased by an average of 28% over their listing price, as at July 22. All the IPOs closed higher than their listing price on the first day of trading, providing an average return 21%. This is higher than the global average first day return of 17.3%.

But investing in IPOs is not necessarily a sure thing. Gan Kim Khoon, head of equity capital markets at RHB Investment Bank, advises investors to understand the fundamentals of a company before investing in its shares.

Before the Asian financial crisis in 1997/98, many invested in IPOs without understand their underlying business. In 1996, there were 92 IPOs – record at the time- while in 1997, there were 88, prior to the bear market. Only 28 IPOs were recorded in 1998.

According to Poi, most of these listed companies could not sustain their strong performance and some were delisted after the financial crisis. Vastalux Energy Bhd is one such company. Listed in September 2008, its IPO was undersubscribed and its share price has never exceeded the IPO price.

Vastalux, a provider of offshore and onshore services in the O&G sector, listed at a time when oil prices were more than US$100 per barrel. However, its good fortune did not last and two years later, its licence from Petronas was and was eventually taken over by Barakah Offshore Petroleum Bhd in a reverse takeover.

DO YOUR HOMEWORK

So, how does one pick a fundamentally sound IPO to invest in? As these companies lack a track record, a good place to start would be to look at the attributes of IPO’s that outperformed the market in 2013, says ZJ Advisory’s Poi.

First, 70% of these companies have a dividend policy, which determines how much it distributes to shareholders in terms of percentage of profit, he points out. Also, 70% of the companies saw an improved bottom line in 2013, compared with 2012. Finally, except for Kanger International BHD and Solid Automative Bhd, all the other IPOs posted a net profit of more than RM20 million.

Doing one’s homework means a lot of reading. The company’s prospectus is one of the more important documents to rely on when assessing IPOs. Companies that want to list on Bursa have to obtain approval from the Securities Commission Malaysia (SC), as stated under Section 212 of the Capital Market Services Act 2007.

Investors can study the industry trends and business outlook to have an idea of the company’s prospectus. But he sceptical about the estimates and forecasts given, as figures can be adjusted to paint a rosier picture of the future.

Bear in mind that companies go for listing for a reason – to raise funds. So investors must take note of how it plans to use the funds raised from the issuance of shares, whether it is for expansion, working capital or debt repayment. Most of the time, a public offering allows business owners to cash out and unlock the value of the company at the prevailing IPO price by letting go of a portion of their ownership.

If a company is raising funds for expansion, it could be a positive sign as this could mean that company is in a growth stage. Conversely, it would be less positive if the company wants to use the proceeds to repay its borrowings.

Investors must also pay attention to the lock-up period, whereby the underwriters, which sometimes are investment banks, agree not to sell their shares for a period of time. There is a possibility that once the lock-up period expires, institutional investors will sell their holdings, causing the price to fall.

It is important to note the credentials of a company’s management team, as its abilities are crucial to achieving the company’s strategies. This is even more important when looking at special purpose acquisition companies (SPACs) because this vehicle has no historical financial information to prove its capabilities.

Track record, qualifications and experience in the relevant industries are some of the criteria used in assessing the capability of the management team. Investors should not ignore this section when studying the prospectus of a SPAC.

It would not be good idea for speculators to jump in right after the stock debuts because there is a possibility that it will fall below IPO price. Although all nine counters that listed on Bursa this year rose above their listing price on the first trading day, six of them have since declined from their closing price on their maiden trading day, as at July, 31.

If the share price has run ahead of its fundamentals and is trading above its fair value, then one should exercise caution or even stay away until there is retracement in the share price.

After all, he believes that the risks involved in investing in an IPO are similar to those when investing in shares. It does not really matter whether the shares you buy are on the secondary market or at the time of their IPO, the key is to make sure you know what are you buying into. 

Sources from personal money magazine, September edition