Tuesday, January 03, 2006

Mesdaq IPOs - Meltdown & Reasons


Used to be, investors would jump in with all they have whenever there was a subscription for new IPOs. Back in the early 90s till the financial implosion in 97, most IPOs were recording opening day gains of at least 30%, and usually a lot more than that. Even during the dreary post financial crisis days, one can still get decent gains on most IPOs. For the past 3 years, Mesdaq IPOs started shakily, but thanks to new listings such as Symphony House (now transferred to the Main Board) and the huge (but sedentary YTL-e), investors got more comfortable with Mesdaq stocks. As long as one can make money, people will come in droves. Sensing an opportunity, syndicates got involved quickly. The authorities basically practiced a hands-off approach as the rise in Mesdaq activity bodes well for future listings and viability of Mesdaq.

This is good for most concerned as entrepreneurs get to cash out (well, some or most of it, if they play it smart). VCs and angel investors got to really cash out big time, thus propelling interest for the VCs to fund more start-ups.

In The Edge Daily, it was reported that: "Most Mesdaq Market initial public offerings (IPOs) in 2005 were disappointing, with more than half or 26 of the 46 listings closing on Dec 30 below their offer prices. Analysts blame the disappointing performance of these Mesdaq counters on unexciting prospects, high valuations and poor market sentiment. ... On a brighter note, analysts say a handful of Mesdaq companies such as mTouche Technology Bhd and Green Packet Bhd appear to have gotten their strategies right and are moving in the right direction. ... ES Ceramics Technology Bhd was the worst performer. Its share price fell 66% to 18.5 sen as of Dec 30 from its offer price of 55 sen. Ygl Convergence Bhd is down 58% to 37.5 sen (IPO price 90 sen); ConnectCounty Holdings Bhd 60% to 13 sen (32 sen); MLabs Systems Bhd 49% to 28 sen (55 sen). EcoFuture Bhd is down 50% to 12.5 sen (25 sen) and Vitrox Corporation Bhd 28% to 43 sen (60 sen). ... However, analysts say there were several companies that bucked the trend, especially those with strong business models and growth strategy. mTouche’s share price surged 460% to RM3.36 (60 sen) while Green Packet’s jumped 270% to RM2.04 (55 sen). TMC Life Sciences Bhd is up 136% to 90 sen (38 sen) and KZen Solutions Bhd 92% to 63.5 sen (33 sen). "

The authorities have threathened to tighten listing requirements for Mesdaq companies. Since Nov 29 last year, companies now must provide a profit forecast while non-technology-based but high-growth firms must have an audited operating revenue for at least three years. My view is that the authorities should take a hands-off approach (as much as possible) as over-regulation will impede the natural forces critical for the well-being of a "good capital market". Tightening listing requirements is good as it was a too easy to list before - but we should be careful from here on as we don't want to make it so hard to list. Bearing in mind these are "growth stocks", the risks associated with them would be much higher and investors have to understand and live with it.

What the authorities should do, is to tighten where/when the owners/promoters get to sell their shares. As these are growth companies, one is listing to secure capital to fund their growth - it is not a cashing out exercise. That being the case, the owners/promoters must show as much committment to the company as the investors are willing to bear the high risk of buying their company shares. Even the current rules are too loose for owners/promoters. We first need to tighten rules that allow owners/promoters to sell their shares. We need to discourage them from a quick turnaround. I would recommend something like:
a) owners/promoters must collectively hold at least 50% of the company's outstanding shares for 4 years
b) after the first 4 years, the minimum ownership level will be lowered to 40% for another 4 years
c) owner/promoter cannot sell a single share until 12 months after its IPO, even then they can only sell no more than 5% of outstanding shares each year

That would solve part of the problem of dumping. The danger here is that if we enforce lock-ups of a large amount of shares, it will make it easier for syndicates to play havoc with them, without the need for approval/consent from owners/promoters. However, this is not the kind of problem faced by Mesdaq listings, but rather the grave under-performance of new IPOs. Let's face the facts, for every Mesdaq IPO, only a very small amount gets to the hands of the public. The bulk has been placed out to institutions, high net worth individuals or fund managers. The fact that most of them still went below their IPO price soon after tells us that even "astute financial minds" do not consider the growth prospects of most these companies to be up to scratch. If they do, they would be holding on to these shares.

So why do we have a problem with most new IPO listings. For one, it is the over-aggressiveness of merchant bankers to score new deals that the "viability" and "growth prospects" are being glossed over. I am a firm believer in free market forces, i.e. when a merchant banker brings an issue to the market, the risks transfers to the buyer of the shares. It is up to the buyer to assess the inherent risks and attractiveness of the counter. Too much hand-holding by the merchant banker,... well, you might as well ask the merchant bank to buy the shares themselves and sell it to you when the price goes up! However, we must have a stronger link and effect on merchant banks to their IPOs, so that investors know their reputation is on the line. We need the media to focus more on performances of the Mesdaq firms and the merchant banks that took them public. If there is more accountability, eventually the merchant bankers will tighten up on themselves on the listability of a firm, whether they can get long term institutional shareholders to hold the shares instead of "trading outfits", and whether they can sell the growth prospects/concepts for the stock - plus they will make more of an effort to educate and inform the public on the prospects and make-up of each company. Below are the bankers involved in the under-performers and out-performers cited in the article in The Edge Daily. You draw your own conclusions, but its pretty clear to me. Just go ahead and list the Mesdaq IPOs and their sponsors for the past 2 years and see how they have been performing.

Under-performers

YGL Convergence - K&N Kenanga
ES Ceramics - AmMerchant Bank
Connect County -AmMerchant Bank
MLabs Systems - Alliance Merchant Bank
EcoFuture - Affin Merchant Bank
Vitrox - Hwang DBS

Out-Performers

mTouche - Public Merchant Bank
KZen Solutions - Public Merchant Bank
Green Packet - OSK Merchant Bank
TMC Life Sciences - AmMerchant Bank

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