Thursday 28 Mar 2024
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This article first appeared in Corporate, The Edge Malaysia Weekly, on June 27 - July 3, 2016.

THE mood for initial public offerings (IPOs) in Asia-Pacific has been sombre due to the volatile start to the year in the world’s financial markets. But Max Loh Khum Whai, regional managing partner for Asean at Ernst & Young LLP, believes the worst is over for the IPO market and that it will improve on the back of a steadier stock market.

Still, investors probably would not see a robust IPO market until next year, he says.

“That’s because the second half of 2016 is beset by the US presidential elections, Brexit debate and Trans-Pacific Partnership ratification, which add a lot of uncertainty to the market. When there is uncertainty, people’s confidence and trust will be eroded and things don’t move as fast. That’s why I am cautious [about the IPO market] in the second half of this year,” he tells The Edge.

“IPO activity is premised on economic growth and market confidence. So, with uncertainty hanging over us amid slow economic growth, IPOs tend to take a back seat because companies will wait it out and sell their shares later at a higher price.

“But a look at the IPO pipeline shows that there are entrepreneurs and technology companies waiting to come to market at the right time,” says Loh.

This year, Hong Kong is set to remain as Asia-Pacific’s biggest IPO market by amount of funds raised, buoyed by Chinese firms.

Still, Loh notes that the funds raised in Hong Kong so far this year are lower than a year ago.

“The IPO market in Southeast Asia, meanwhile, has been a bit muted amid declining commodity prices, reduced capital flows to emerging markets and pressure on their currencies. The prospect of rising interest rates in the US also puts a dampener on the market,” he explains.

“There is also the argument that many of the region’s large established companies have already listed, leaving only the entrepreneurs, start-ups and tech firms whose IPO offerings are much smaller in size, even though the number [of IPOs] has grown.

“Having said that, there are entrepreneurs out there who will always need to tell their IPO story. We do see companies coming to market whenever there are windows of opportunity,” Loh says, adding that the weak IPO numbers are not yet a concern.

 

‘A dangerous game’

Loh warns that those evaluating tech firms using multiples of revenue instead of earnings need to be “aware and beware”. “It is the same story as 2001 during the dotcom era that led to the dotcom bubble.”

He reasons that the value of tech start-ups often has to be determined based on revenue multiples as they are new with little or no profits, but their future potential is immense if they execute their plan well.

However, the problem with this approach is that a company’s projection of the future can be disrupted.

“Of course, if you get it right and your model is superior, the potential is huge. But it is a dangerous game,” says Loh.

“As investors, one can always invest in the shares of bricks-and-mortar companies that promise a return of 5% per year, or one can go for high-risk investments that have higher expected returns of up to 20% to 30% a year. That is the beauty of the [capital] markets.

“The reality is that investors always forget the times when they got their fingers burnt. After every cycle, people give lots of warnings, but investors are still eager to pump money into high-yielding investments in a zero or negative interest rate environment. So, if you have excess cash, what do you invest in? Is it in properties? Or the debt markets? Bonds and real estate investment trusts have been popular because they give you steady yields, but they are not as exciting as equities,” he adds.

 

Is the dotcom bubble about to burst again?

“I think the world has become more realistic. The banks and financial institutions are much stronger than they were in the previous crises and are able to withstand a lot more shocks. Some of these apparent collapses have led to more stringent regulations.

“Will there be another tech bubble? I think even if there is, it won’t be as extreme as in the past because regulators have put in checks and balances and investors have been warned if these unicorns (tech start-ups) are overvalued,” says Loh. 

“Personally, I don’t think it is the [stock] exchanges’ duty to ensure that the companies are fit for purpose before they list. It is the investors’ responsibility. The regulators’ responsibility is to make sure that everything is disclosed and that these companies follow the rules.”

Meanwhile, special purpose acquisition companies (SPACs), which originated in the US, have been seeing their share of challenges since the Securities Commission Malaysia introduced the concept to the Malaysian market in 2009.

The four SPACs listed on Bursa Malaysia, which all focus on oil and gas, have been grappling with the implications of a prolonged period of low oil prices. To date, only Hibiscus Petroleum Bhd has completed its qualifying acquisition.

Loh views SPACs as a different risk class of its own.

“SPACs don’t have an operating history and no business plan other than the intention to find one or more operating companies to acquire. They are high-risk investments as investors need to trust the companies to utilise their money efficiently and effectively,” he explains.

“Even in an established company, you can look at the business but what is most important is that you should assess the management. You can have the best business model but if you don’t have the right person to execute it, that is a problem.

“That’s why for some IPOs, when they have some cornerstone investors that are well-established, people have a [higher] level of confidence,” says Loh.

“Ultimately, it depends on yourself. What is your risk appetite? For tech companies, if you are comfortable that their business model will take them somewhere, then you can put your money into them.

“For SPACs … personally, I am not so sold on the concept unless they can demonstrate the areas they are going to invest in,” Loh remarks.

“Having said that, for every IPO that has come along or every company that is successful, there are nine others that have fallen by the wayside,” he says, citing venture capitalists’ 80/20 rule where they work on the basis that 20% of their investments in new ventures will generate 80% of their profits.

 

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