Monday, January 11, 2010

The Hype over Dual Listings

Fresh into the new year, and after taking a good rest from the festivities, it suddenly struck me that I had some issues to comment on and wax lyrical over. Dual listings is one of them, and I got pretty much incensed over the recent hype over dual listing proposals made by several SGX-Listed companies (incidentally, I can recall about 6 and they all happen to be S-Chips or SGX-Listed China Shares).

The fact that everyone is getting excited over the dual listings had me thinking – was there a material change in the business which should elicit such a response? Or were people merely getting excited over a story (as usual) and following the herd instinct? The first to list on a separate bourse was China XLX, and when the shares started trading on HKSE, the share price over in Singapore jumped nearly 100% to 90+ cents before settling to a more “reasonable” level of about 65 cents, but still higher than the pre-dual listing news of about 40-50 cents. Apparently, the argument presented was that such companies which could list on two bourses should therefore command higher valuations, and so the Singapore share price should re-rate to follow those on HKSE.

The following is a laundry list of the China companies and their dual listing plans and status:-


One can observe that there are 5 companies in the list and they are either planning a listing in Taiwan or Hong Kong. One must then ask the rationale for the proposed listing, and whether it advances the company’s plans for expansion, or merely serves as a platform for its shares to be tradeable on both exchanges? Apparently, the issue of valuations had come up and was discussed in some articles around the time the news was made known of such dual listings. It is widely recognized and known (though never publicly acknowledged) that China companies in Singapore (“S-Shares”) trade at lower valuations than their counterparts in Hong Kong, Taiwan and even China. Arguably, of course, the size and scale of the company’s operations play a part in determining their valuation; but this can be conveniently forgotten as analysts scramble over themselves to compare companies in the same industry which are listed on different bourses.

If the reason was indeed that the company is seeking a dual listing to get “higher valuations”, this would necessarily imply that Management is share-price driven rather than value-driven, as a higher share price serves no practical purpose to the business except to raise its profile and provide more fodder for analysts and brokerages to crow about. Of course, one may provide the argument that a higher share price would mean money can be raised more easily through a secondary offering, with less dilution to existing shareholders. This again begs the question – why does the company need to raise money through a secondary offering? Seeing that the listing on another bourse is certain to raise more funds (except for China XLX where the listing is purely “cosmetic”), one should question why valuations should be higher in the first place and why Management places such importance on this fact. It is a hard question shareholders have to ask – is Management more concerned about building the business or are they being more share-price driven?

Another observation is that punters and traders are jumping up and down in excitement at seeing possible arbitrage opportunities by buying shares on one bourse and almost instantly selling them on another, until this bubble was burst when Hong Kong announced that it needed 15 days to deliver the scrip from Singapore over to Hong Kong, before the shares could be sold from there. That effectively killed off any enthusiasm for this method of money-making. However, it has not stopped die-hard punters from chasing up the prices of such dual-listing companies in the hopes that either a greater fool will buy it from them at a future date (most likely this refers to the actual listing date), as evidenced by the poor fools who bought China XLX at 90.5 cents; or that the prospects of the underlying business have suddenly become much rosier and the company is more investment-worthy than before it had announced the dual listing.

I find the latter reason to be untrue for a few reasons. Assuming the company, in all its good intentions, had decided to dual list to raise more funds, it could save costs and instead do a secondary offering right here in Singapore. The regulatory procedures and lodgement of a separate prospectus on another bourse incurs additional costs which shareholders have to bear. Being dual listed also means more expenses are incurred to maintain the listings, and more work has to be done to report news, press releases and results on two different exchanges. Recall that Creative Technology delisted from NASDAQ for this very reason – high costs of maintaining a listing on two separate bourses. At the same time, I also fail to see how exciting it can be when a company announces a fund raising exercise; and they do this by issuing new shares and diluting existing shareholders. Of course, companies may carefully conceal the true intention of the fund raising or cloak it in another form by releasing a very awe-inspiring press release, with mention of grand plans or new markets being conquered. However, I always like to err on the side of caution and assume that the laws of economics eventually ensure that all companies will revert to the mean in terms of growth potential, which means one need not get too carried away by optimism when the reality can be far more sobering.

To end off this post (which is beginning to sound like a rant – my apologies for that), all I will say is that one should be discerning and inquisitive when a company announces plans for a dual listing. One should scrutinize the announcement and its underlying implications before jumping into the deep end of the pool. Because sometimes, you may find that there are sharks in the water.

*Note: As of this writing, another 2 companies, Epure and Novo Group, have proposed listing on HKSE. It seems like the “fever” is catching.

22 comments:

xor said...

hi musicwhiz,

thanks for the piece! couldn't have said it better myself.

Musicwhiz said...

Hi Xor,

You're welcome. Thanks for visiting!

Regards,
Musicwhiz

cif5000 said...

What are your thoughts on Tat Hong's dual listing?

Musicwhiz said...

Hello cif5000,

Tat Hong is not dual listed on SGX and ASX. You must be referring to their 70% owned subsidiary Tutt Bryant which is listed on ASX. They also own about 20% of Yongmao which is listed on SGX.

Thanks,
Musicwhiz

cif5000 said...

Before they delisted from ASX, they had a dual-listing.

Musicwhiz said...

Hi cif5000,

You are right! I believe they delisted to cut costs from dual listing. As to my views on it, I think they were trying to raise more money at the time to expand their crane fleet. There isn't much info on the rationale at the time for dual listing, but from what I know they started out listing on ASX then later listed on SGX as they are a Singapore company after all; later on they decided to delist from ASX as it was costly to stay listed on both bourses and there was no point in maintaining it.

Hope that answers your question. You always pose very nice questions, especially about Tat Hong. :)

Cheers,
Musicwhiz

cif5000 said...

To keep it short.

Why ASX first? Why dual list (for a period) before delisting from ASX? Was the management watching share price (of course they did)? And volume (YES!!)?. Does that tell us anything about the management (good or bad)?

Tat Hong gone thru that earlier. Does that influence your perception on Dual Listing? Or Tat Hong? Or that Tat Hong could be classified as exceptional?

My take is that the primary aim of all listings is to access the capital market.

Oops...too long.

Musicwhiz said...

Hi cif5000,

I concede that you are probably right. Management was watching the share price and volume to do their listing in order to raise proceeds. I am not trying to hide that fact - they did it to raise money for their expansion. But arguably, the examples I have shown in my post consist of Taiwan and Hong Kong where valuations are known to be much higher than SGX. For Tat Hong to list on ASX then SGX, I do not think it was a valuation issue, so I do not think Management deliberately did so to bump up the share price.

However, you are right to say listing offers access to capital markets. I'll admit that is indeed one of the reasons for companies to tap different bourses, and thus should not be construed as a totally negative thing. Perhaps I had been too cynical and caustic.

Does that change my perception of Tat Hong? Well, I must say I am not as impressed with the Management as say, Boustead or MTQ, because the way they handle cash is not as efficient as the two companies above. But then again, it could also be due to the nature of the business and the economics of the industry; so it's a little like comparing apples to oranges. I think Management did a decent job of running the company through several booms and busts; but of course you are free to differ on your opinion of that.

Don't worry it's never too long a comment. Donmihaihai used to come up with much longer stuff, and I also read it word for word. What you guys say is important!

Thanks,
Musicwhiz

test said...

Shouldn't value investors be neutral instead of negatively bias against a stock which is opting for dual listing? After all, as what you've said, dual listing doesnt affect the fundamental of the stock. In fact, only those company which show potential for future growth will be approved to be listed, won't it be happier for stock holder that other people see the potential of the company? If leveraging to expand is bad, it will be contradicting to buy stock listed in the stock exchange in the first place. I m quite confused over this...

Dancerene said...

Other reasons for dual listing may include:
- to diversify investor-base (esp. for companies seeking strategic investors)
- relative ease of raising cash due to greater interest from overseas investors (esp. for companies with established presence in that market)
- create greater awareness to faciliate penetration into that market
- intention to delist from SGX after successful listing in other stock exchange.

Musicwhiz said...

Hi test,

Well, you've got a point in that the company is still the same company; but the problem I have is that the dual listing is being hyped up and people are making profits from the hype, instead of basing it on the fundamentals of the Company. I have no issue with companies which genuinely need to raise funds for expansion.

And as you have said, using debt is not always a good thing, but depending on circumstances, may be better than equity issuance. So one must see the conditions and the situation.

Thanks for the comment.

Musicwhiz

Musicwhiz said...

Hello Dancerene,

Thanks for listing those good reasons for dual listing! They act as a counter-balance to the negative aspects I highlighted in my post. I admit I may have been too cynical when I penned the post, and hence left out the positive aspects of dual listing.

Regards,
Musicwhiz

Latte Money said...

Nice analysis. I had initially thought that it is a positive move for these companies due to all the hype. Now I know better.

Btw, I was wondering if you'd like a link exchange with my new blog on personal finance at http://www.lattemoney.com/

In fact, I have already linked to you.

dsea said...

Hi Musicwhiz

Different valuation in different industries in different exchanges is the norm.

This could be "clustering" effect. Investors like certain industries and value it accordingly.

eg., Aussie and canadian stock exchanges had been host to mining stocks. Similarly, if the mining stock list in Singapore, they will not get good valuation.

Likewise, if you are a property firm, you would choose HK for your listing as HK are obsessed abt property and banking. Manufacturing in HK bourse get the short end of the stick with lower valuation.

Bursa malaysia is host to at least 5 latex/nitrile glove related companies. (which bring wonder to why a Malaysia company in latex/nitrile glove manufacturing wants to list in SINGAPORE?)

NASDAQ had been host to high tech and NYSE more to the old traditional blue chips.

Frankly, management owes a duty to existing owners to search for best listing bourse. Would you prefer to sell your shares in your firm at a higher valuation or lower valutaion?

Musicwhiz said...

Hi Latte Money,

Thanks for visiting, have added a link to your blog.

Regards,
Musicwhiz

Musicwhiz said...

Hi Dsea,

Good point you brought up! It's true that some bourses can better value certain types of companies, like the examples you had given. One which immediately comes to mind for me is Oslo Bors, which can value oil and gas companies very well. Guess that was why Ezra chose to list EOCL there!

But on the flip side, if you are a long-term owner of a business, you won't really bother about "higher valuations" in order to sell out. You would just sit tight on your shares.

Cheers,
Musicwhiz

dsea said...

yup Muzicwiz....

indeed, valuation is interesting.

As seller, we want best pricing, as buyer we want best pricing too. What is therefore "best pricing"?

Would you buy an IPO if the seller is Warren Buffet? the fact that he is a seller may flop an IPO....as such, the most recent Insurance Company IPO in NYSE(read in newspaper, forgot the name of IPO)

Musicwhiz said...

Hi dsea,

Yeah well valuation is a matter of perspective, and there is no "right pricing" as you put it, there is simply a transaction based on the concept of "willing buyer, willing seller".

I guess the thing I emphasize is to look for margin of safety by choosing to buy at lower valuations, and selling out when valuations seem excessive in relation to the projected growth of the Company.

Thanks,
Musicwhiz

Roger said...

Pac Andes has also jumped onto the bandwagon.

How about ADR? Is it also mere hype?

Musicwhiz said...

Hi Roger,

Well if you ask me, ADR are not truly a "dual listing". No new shares are being sold, but the shares are simply made available to the American investors. That said, I do agree the purpose is still dubious, which is to encourage more "liquidity" in the trading of the shares.

Cheers,
Musicwhiz

Mervyn Teo said...

Henxin tech went up lots today. Given that its not even confirmed ..its like an extremity to yr examples.

In fact I looked at the counter way before it announced dual listing. Not cheap then, but now worse. Sometimes I really wonder have I gone wrong in my analysis.

Anw, nice chatting with you on NIS forum and I linked u to my blog. Cheers

Musicwhiz said...

Hi Mervyn,

Yah well Hengxin is just another one of the dual listing aspirants. Nothing too surprising with Mr. Market's reaction. He's been reacting like this to almost all dual listing announcements anyway.

I would assert that you are neither right nor wrong just because Mr. Market tells you something. Over the long-term, it's whether you can maintain a decent return on your investment which will determine if you had chosen the right company, and not by judgement from short-term price movements.

That's what I firmly believe in; though I probably sound like some dinosaur in a museum.

I should charge entrance fees....LOL !

Cheers,
Musicwhiz