It’s been quite some time since I’ve blogged about Initial Public Offerings (i.e. IPO), with my last post on this being dated April 2009 and the previous one was more than 2 years ago in August 2007! Over this time, I have learnt a lot more about the nature of IPO and also how their appearance (and disappearance) tends to coincide with economic cycles. Let me elaborate further.
It has been noticed by me that when markets crash and valuations hit extreme rock bottom, no companies out there will be willing to list. This is because they will be unable to raise much money are the valuation multiples used would be rock-bottom, and also since they are one of the few who may choose to list, they may also be subject to greater scrutiny by the investing public. The rationale for listing will always be to raise funds, and of course the more funds raised with the same number of additional issued shares, the better, as there will be less dilution to the founding shareholders.
Conversely, if we look at the situation at the height of the bull market in 2007, IPO were being churned out like clockwork and all sorts of kachang-puteh companies (i.e. companies without much substance) could list without much problem. All one needed was to spin an attractive growth story, fill in some nice-looking numbers and come up with glossy marketing material and everyone would pile in to catch a piece of the action. I remember it being so bad that forums were filled with punters (they call them “stags”) who bet on the closing price on the first day of IPO and how many % they would be above their offer price. Sadly, I must admit that I was also one of the uninformed who tried my hand at applying for one of these “hot issues” , till I realized better some time later and stopped altogether. All sorts of companies, whether good, bad or ugly, will be able to list at lofty valuations during a bull market, and the onus is up to the investor to ensure he does his due diligence so as to avoid massive losses when such promises of growth do not come true.
Taking a glance back at our local bourse over the past 1.5 years, I noted a still healthy pipeline of IPOs all the way till September 2008 (the month of the Lehman Brothers collapse). In October 2008 there was just 1 IPO (China Kunda) and another in November 2008 (Otto Marine), after which the IPO pipeline totally and completely dried up until January 2009 (Westminster – Catalist) and February 2009 (Japan Foods – also Catalist). From this simple observation, it can be concluded that the sharp plunge in valuations from the October 2008 to March 2009 period caused the IPO tide to recede, such that no companies wanted to list at all for fear of getting very poor valuations. Ironically, if a company were to choose to list at such low valuations, and if its business model was a sound one, one would actually be able to get a very good price at IPO to be able to hold long-term, as one would be buying into a company at depressed valuations (similar to buying a company already trading on SGX at low valuations).
Once March 2009 passed, and valuations took a sharp upward swing in May 2009, the IPOs started trickling back. It began with Teho in June 2009, then followed up with 3 companies each in July, August and September 2009, making it a total of 10 companies in just 4 months, compared to just 2 companies in the first 5 months of 2009. Now the trickle is becoming somewhat of a torrent, with 3 IPO aspirants planning to list at about the same time (Ziwo on Oct 8, Goodland Group also on Oct 8 and Hengyang Petrochemical Logistics on Oct 9). Judging from the response to the new IPOs (all closed “above water”) and also the recent news about the IPO market “hotting” up in Hong Kong and China, I have no doubt that sentiment and valuations are indeed on the rise, allowing many firms to realize their “dream” of listing and gaining recognition. As I write this, another IPO aspirant called Jason Marine is trying to list on Catalist by selling shares at S$0.21 apiece. The shares will be traded on October 21, 2009.
The discerning investor would have to plough through thick wads of prospectus to be able to differentiate the wheat from the chaff, but I feel this is unnecessary; for IPOs are generally “priced to perform” and are usually using low or moderate historical PERs to justify their pricing. Moving forward, whether these PERs appear low or not would be judged based on the future performance of the businesses which these companies are involved in. I can safely say that only 1 out of 10 IPO companies has characteristics which make it investment-worthy; but even then my track record with IPO companies has been less than stellar. Ultimately, it would still be more prudent for the investor to look for companies which have track records and have been listed for a good number of years, as they offer more information on whether they had delivered on earlier promises and whether they can successfully weather economic storms. With the stock market hitting new year-to-date highs, one must be even more cautious and discerning when ploughing through newly-listed companies looking for bargains.
Showing posts with label IPO. Show all posts
Showing posts with label IPO. Show all posts
Thursday, October 15, 2009
Sunday, April 26, 2009
Confessions of an S-Share CEO
Recently, it came to my attention that an anonymous letter had been penned and circulated to various parties regarding “confessions” made by a (supposed) CEO of a Singapore-listed S-Share company. This letter was supposed to be written to let the whole world know about the shady insider dealings in relation to the IPOs of China Companies listed on the Singapore Bourse, as well as to reveal the inner machinations which went on “behind the scenes” which enabled many parties to get rich; but which ultimately left the retail investor “holding the baby”.
While the authenticity of such a “confession” can be debated, what was written (yes, I do have the full copy of the text but it would be too lengthy to post it here, so please follow this link ) constitutes a peek into the shady and dubious world of deal-making, private equity and the eventual listing. Even Ms. Teh Hooi Ling of the Business Times wrote an article on this in yesterday’s Business Times commenting on various aspects of such deals and how these companies can be hyped up, marketed and eventually sold to the public. It is not unlike the heydays of the dot.com IPO boom which led many new companies to aggressively sell their shares to unwary investors, all with the promise of growing revenues and soaring profits. I would like to use this article to illustrate some aspects of IPOs and deal-making which I feel can be learnt and which are significant to retail investors like myself.
It was mentioned in the article that if you pumped enough money into a company, it could look very much more “alive” than it really is. This was alluding to the fact that if one wished to “promote” a company, all one needed to do was to find some private equity investors (“angel” investors), put money in, aggressively spend on capex and new products; then push them to customers all on credit, all the while booking in the revenues but not collecting the cash. Such an accounting “trick” is widespread in commodity businesses (the letter stated that it was a “chemical fibre” business in the textile industry, which led some to speculate that it may be the recently suspended Fibrechem). Barriers to entry are low and as margins are thin, so introducing new products and investing in technology is risky especially if customers are not willing to take up the new products. Hence, the deal-maker (Mr. D in the article) is the one responsible for making a mountain out of a molehill (figuratively speaking) and transforming the company to something much bigger than it actually was. In other words, mediocrity was perceived as quality based on a change in appearances.
The article also highlights the fact that in most IPOs, the ones who benefited the most are the original people who pumped money into the company at very low valuations (perhaps 1-2X PER), and which later filed an application to list under bullish conditions, thereby garnering gains of 5 to 20 times of their initial investment. Since companies could be “dressed up” to look very nice, the numbers may not be heavily scrutinized by the general public prior to IPO, and anyway everyone knows that IPOs are hot during bull markets as everyone wishes to “stag” it on its first trading day. This is probably one reason why IPO stands for “It’s Probably Over-priced” ! Companies will choose to sell their shares during periods when their shares can command the highest valuations, as this means they can raise the maximum amount of money possible, even if they don’t need it ! IPOs are sometimes also mechanisms for the existing owners to cash out and get filthy rich in a short period of time.
Investors who buy into such growth stories have to be wary of the people pushing the IPOs, as the article clearly states that everyone in the IPO-cycle benefits in some way from the listing – except the retail investor. A very noteworthy paragraph which I will reproduce here states as such:
“Everyone got what they wanted. The Chinese companies got their money to expand their business (which at a later stage, no one is really sure which company really had any business to start with), the entrepreneurs were handsomely rewarded for the risks they undertook, the deal makers got their fees, the angels made their killings, the bankers collected their fees and dished out new loans, the lawyers and accountants recruited more young graduates to cope with the record work volume, the stock exchange got their “new mandate as the second board of the Chinese companies”, the investors got their hot-and-sizzling China concept stocks and above all, the rich and the influential members of the “invisible clubs” were all happily enriching their own pockets”.
I think the above is self-explanatory and only serves to reinforce the fact that everyone has a part to play to push through an IPO as there is a lot of money to be made even before a company gets listed. Investors have to spend time separating the wheat from the chaff and this is admittedly not easy; but one easy thing to note is that the quality of IPO companies drops as the bull market gets hotter and hotter, and valuations get more and more crazy.
One final point I wish to highlight is that the bubble eventually HAS to burst, just as it did for the dot.com companies in 2000. The immense hype, easy money and over-leveraging were the perfect storm for a crash and the subsequent bust. Even in 2006 and 2007, when S-Shares were touted as the next big thing, there was already an element of “bubbling” as the China growth story was pushed and touted again and again by a myriad of analysts. Everyone wanted the party to last and indeed, everyone acted like Cinderella dancing in a room without clocks. When midnight struck, everything was reduced to pumpkins and mice. This is a lesson for me and other investors too – beware of hype and slick marketing; don’t leave your brains at the door when evaluating companies. It takes a very clear, sharp, objective, rational and analytical mind to see through the thick coat of gloss which covers the true prospects and financial situations of many a company.
While the authenticity of such a “confession” can be debated, what was written (yes, I do have the full copy of the text but it would be too lengthy to post it here, so please follow this link ) constitutes a peek into the shady and dubious world of deal-making, private equity and the eventual listing. Even Ms. Teh Hooi Ling of the Business Times wrote an article on this in yesterday’s Business Times commenting on various aspects of such deals and how these companies can be hyped up, marketed and eventually sold to the public. It is not unlike the heydays of the dot.com IPO boom which led many new companies to aggressively sell their shares to unwary investors, all with the promise of growing revenues and soaring profits. I would like to use this article to illustrate some aspects of IPOs and deal-making which I feel can be learnt and which are significant to retail investors like myself.
It was mentioned in the article that if you pumped enough money into a company, it could look very much more “alive” than it really is. This was alluding to the fact that if one wished to “promote” a company, all one needed to do was to find some private equity investors (“angel” investors), put money in, aggressively spend on capex and new products; then push them to customers all on credit, all the while booking in the revenues but not collecting the cash. Such an accounting “trick” is widespread in commodity businesses (the letter stated that it was a “chemical fibre” business in the textile industry, which led some to speculate that it may be the recently suspended Fibrechem). Barriers to entry are low and as margins are thin, so introducing new products and investing in technology is risky especially if customers are not willing to take up the new products. Hence, the deal-maker (Mr. D in the article) is the one responsible for making a mountain out of a molehill (figuratively speaking) and transforming the company to something much bigger than it actually was. In other words, mediocrity was perceived as quality based on a change in appearances.
The article also highlights the fact that in most IPOs, the ones who benefited the most are the original people who pumped money into the company at very low valuations (perhaps 1-2X PER), and which later filed an application to list under bullish conditions, thereby garnering gains of 5 to 20 times of their initial investment. Since companies could be “dressed up” to look very nice, the numbers may not be heavily scrutinized by the general public prior to IPO, and anyway everyone knows that IPOs are hot during bull markets as everyone wishes to “stag” it on its first trading day. This is probably one reason why IPO stands for “It’s Probably Over-priced” ! Companies will choose to sell their shares during periods when their shares can command the highest valuations, as this means they can raise the maximum amount of money possible, even if they don’t need it ! IPOs are sometimes also mechanisms for the existing owners to cash out and get filthy rich in a short period of time.
Investors who buy into such growth stories have to be wary of the people pushing the IPOs, as the article clearly states that everyone in the IPO-cycle benefits in some way from the listing – except the retail investor. A very noteworthy paragraph which I will reproduce here states as such:
“Everyone got what they wanted. The Chinese companies got their money to expand their business (which at a later stage, no one is really sure which company really had any business to start with), the entrepreneurs were handsomely rewarded for the risks they undertook, the deal makers got their fees, the angels made their killings, the bankers collected their fees and dished out new loans, the lawyers and accountants recruited more young graduates to cope with the record work volume, the stock exchange got their “new mandate as the second board of the Chinese companies”, the investors got their hot-and-sizzling China concept stocks and above all, the rich and the influential members of the “invisible clubs” were all happily enriching their own pockets”.
I think the above is self-explanatory and only serves to reinforce the fact that everyone has a part to play to push through an IPO as there is a lot of money to be made even before a company gets listed. Investors have to spend time separating the wheat from the chaff and this is admittedly not easy; but one easy thing to note is that the quality of IPO companies drops as the bull market gets hotter and hotter, and valuations get more and more crazy.
One final point I wish to highlight is that the bubble eventually HAS to burst, just as it did for the dot.com companies in 2000. The immense hype, easy money and over-leveraging were the perfect storm for a crash and the subsequent bust. Even in 2006 and 2007, when S-Shares were touted as the next big thing, there was already an element of “bubbling” as the China growth story was pushed and touted again and again by a myriad of analysts. Everyone wanted the party to last and indeed, everyone acted like Cinderella dancing in a room without clocks. When midnight struck, everything was reduced to pumpkins and mice. This is a lesson for me and other investors too – beware of hype and slick marketing; don’t leave your brains at the door when evaluating companies. It takes a very clear, sharp, objective, rational and analytical mind to see through the thick coat of gloss which covers the true prospects and financial situations of many a company.
Saturday, August 04, 2007
Initial Public Offerings – To Invest or Not To Invest ?
Firstly, a brief introduction and summary: Initial Public Offerings or IPOs are companies which wish to go public in order to raise more funds through an equity offering to institutional investors and the public (also called retail investors). A company can either list on the Main Board of SGX or the second board called SESDAQ which has less stringent requirements. I do not exactly know what the requirements are (you can check this out on SGX) but I do know you need a three-year profit record for Main Board listings.
Everyone seems to be jumping on the IPO bandwagon these days. In a bull market (as is the case now, notwithstanding the corrections), all the newly listed companies’ valuations can go pretty crazy. If one actually follows and tracks the balloting ratios for the more recent IPOs (in the last 6 months), you will see that the retail float is usually very small (about 2-3 million shares) and the chances for allotment can get as low as 1/99 for one lot ! To me, this is hardly worth the effort to apply as you will use up your S$2 application fee and get a 1% chance to get 1,000 shares ! If you factor in the brokerage from the sale of the IPO (assuming you stag it), it can barely give you a decent profit ! Thus, I would advise readers to concentrate on companies which have a track record or earnings visibility, in order to have a greater margin of safety.
Another point I would like to mention is that most companies tend to list at the peak of their “cycle”, meaning that they choose the most opportune time to go public (when sales or profits have hit a peak). I have seen this for several companies as I read their prospectuses; profit seems to just leap up suddenly for FY 2006 seemingly for no reason at all. The question a discerning investor should ask is whether the continued good performance is sustainable. Most IPOs are marketed with glossy front covers, full pages photos and marketing jargon drumming up the merits of the company while playing down the risks. Large bar charts are used to trumpet high CAGRs for revenues and earnings, but again one should ask if this is sustainable and whether the industry is a cyclical one. Also, remember to apply a simple Porter’s 5-Forces analysis on the company’s industry to see if it is a market leader, or whether it has prospects.
One crucial thing most investors may miss are the margins for the 3 preceding years, as well as the risk factors mentioned within the prospectus. In the first place, the prospectus is one huge, thick stack of paper which is heavy enough to kill a small mammal ! There was an article some time back in the Business Times which suggested that companies drastically reduced the amount of information in the prospectus and just summarize the key points which are relevant to retail investors. This would save lots of paper and make people less averse to reading these thick manuals ! On the issue of margins, an investor should note that for some of the recent IPOs, the company actually had declining gross profit margins which were not captured in the “marketing” section of the prospectus. Such details are conveniently “hidden” right smack in the centre of the prospectus and investors (most of whom may be laymen to accounting jargon) have to dig through a pile of information just to find something relevant. I sincerely hope that the authorities at MAS will streamline the whole IPO process and make it less tedious and cumbersome both for the company and for retail investors.
My final point to make is that most companies, even if they have sound fundamentals and are in a growth industry, may not have an adequate track record to make it a worthwhile investment. Not much is usually known about newly listed companies, they may not have websites and analysts may hesitate to write reports because they are waiting for either a results announcement or some significant event. Thus, investing in IPOs on the first day of listing can be considered almost a gamble as the company’s intrinsic value cannot be calculated or estimated with reasonable certainty. Just to give an example, I hesitated on investing in Swiber because it was a new IPO. Only after it released its 4Q 2006 results and after it clinched the Brunei Shell’s US$146.6 million contract did I decide to buy part of the company. Even then, it was after much tracking of its announcements, reading up on the industry and the business and the usual homework to be done before an investment is made.
My Conclusion: Do NOT be an eager beaver to invest in newly-listed companies. Most have non-existent track records and may list at the peak of their business cycle. Plus, in the current bull market, most IPOs are opening at super inflated prices versus their offer price, and are thus extremely risky to invest in. My advice is to do your homework and exercise patience in order to sift out the outstanding companies from the weak/mediocre ones. Once enough information has been obtained to make an informed decision, one can then safely invest in an IPO.
Firstly, a brief introduction and summary: Initial Public Offerings or IPOs are companies which wish to go public in order to raise more funds through an equity offering to institutional investors and the public (also called retail investors). A company can either list on the Main Board of SGX or the second board called SESDAQ which has less stringent requirements. I do not exactly know what the requirements are (you can check this out on SGX) but I do know you need a three-year profit record for Main Board listings.
Everyone seems to be jumping on the IPO bandwagon these days. In a bull market (as is the case now, notwithstanding the corrections), all the newly listed companies’ valuations can go pretty crazy. If one actually follows and tracks the balloting ratios for the more recent IPOs (in the last 6 months), you will see that the retail float is usually very small (about 2-3 million shares) and the chances for allotment can get as low as 1/99 for one lot ! To me, this is hardly worth the effort to apply as you will use up your S$2 application fee and get a 1% chance to get 1,000 shares ! If you factor in the brokerage from the sale of the IPO (assuming you stag it), it can barely give you a decent profit ! Thus, I would advise readers to concentrate on companies which have a track record or earnings visibility, in order to have a greater margin of safety.
Another point I would like to mention is that most companies tend to list at the peak of their “cycle”, meaning that they choose the most opportune time to go public (when sales or profits have hit a peak). I have seen this for several companies as I read their prospectuses; profit seems to just leap up suddenly for FY 2006 seemingly for no reason at all. The question a discerning investor should ask is whether the continued good performance is sustainable. Most IPOs are marketed with glossy front covers, full pages photos and marketing jargon drumming up the merits of the company while playing down the risks. Large bar charts are used to trumpet high CAGRs for revenues and earnings, but again one should ask if this is sustainable and whether the industry is a cyclical one. Also, remember to apply a simple Porter’s 5-Forces analysis on the company’s industry to see if it is a market leader, or whether it has prospects.
One crucial thing most investors may miss are the margins for the 3 preceding years, as well as the risk factors mentioned within the prospectus. In the first place, the prospectus is one huge, thick stack of paper which is heavy enough to kill a small mammal ! There was an article some time back in the Business Times which suggested that companies drastically reduced the amount of information in the prospectus and just summarize the key points which are relevant to retail investors. This would save lots of paper and make people less averse to reading these thick manuals ! On the issue of margins, an investor should note that for some of the recent IPOs, the company actually had declining gross profit margins which were not captured in the “marketing” section of the prospectus. Such details are conveniently “hidden” right smack in the centre of the prospectus and investors (most of whom may be laymen to accounting jargon) have to dig through a pile of information just to find something relevant. I sincerely hope that the authorities at MAS will streamline the whole IPO process and make it less tedious and cumbersome both for the company and for retail investors.
My final point to make is that most companies, even if they have sound fundamentals and are in a growth industry, may not have an adequate track record to make it a worthwhile investment. Not much is usually known about newly listed companies, they may not have websites and analysts may hesitate to write reports because they are waiting for either a results announcement or some significant event. Thus, investing in IPOs on the first day of listing can be considered almost a gamble as the company’s intrinsic value cannot be calculated or estimated with reasonable certainty. Just to give an example, I hesitated on investing in Swiber because it was a new IPO. Only after it released its 4Q 2006 results and after it clinched the Brunei Shell’s US$146.6 million contract did I decide to buy part of the company. Even then, it was after much tracking of its announcements, reading up on the industry and the business and the usual homework to be done before an investment is made.
My Conclusion: Do NOT be an eager beaver to invest in newly-listed companies. Most have non-existent track records and may list at the peak of their business cycle. Plus, in the current bull market, most IPOs are opening at super inflated prices versus their offer price, and are thus extremely risky to invest in. My advice is to do your homework and exercise patience in order to sift out the outstanding companies from the weak/mediocre ones. Once enough information has been obtained to make an informed decision, one can then safely invest in an IPO.
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