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Tokyo: June 2009 IPO Report
added: 2009-06-16

There have been only seven IPOs in Japan during the first five months of 2009. The seven offerings procured a total of 8 billion yen. But only 2.6 billion yen, or 32%, came from stock sold to the public.

During the IPO boom years of 2005 and 2006, public offerings accounted for 45% and 40% of total funds procured, respectively. But this figure was only 29% in 2008 and is 32% thus far in 2009. Obviously, the IPO is becoming much less important as a means of procuring funds. On the other hand, secondary offerings are now much more than half of IPOs. That means many IPOs are conducted for the purpose of creating a market for a company’s stock. In fact, from time to time I see an offering that is, in effect, an "estate planning IPO."

Next, let’s see how IPO stocks have performed after trading began. The average opening price for the seven 2009 IPOs was 27% above the offering prices. This is somewhat better than the 18% average premium for the 49 IPOs in 2008. Assuming that offering prices are generally marked down to 20% to 30% below fair market value, these premiums are about what we should expect. However, five of the seven 2009 IPOs opened at a price that was within 5% of the offering price. Consequently, the 27% premium is solely the result of strong performances by the remaining two IPOs. The stocks of Ubiquitous Energy and Sockets both started trading at about twice their offering prices. In other words, not a single 2009 IPO started trading near its theoretical fair value.

On May 29, market prices of the seven 2009 IPOs were an average of 47% above their offering prices. But even this impressive gain does not compare favorably to the stock market rally that began in March, which is when the first IPOs took place. Two 2009 IPO stocks staged rallies of at least 100% following the start of trading: Taiko Pharmaceutical and tella. But the stocks of Ubiquitous Energy and Sockets, which opened far above the offering prices, have subsequently given back much of their premiums. Even after their declines, though, Ubiquitous Energy and Sockets are still strong at about 50% above their offering prices.

Very few IPO stocks of the past few years have stayed above their offering prices. That means we are witnessing a major shift in IPO market conditions. I believe the primary reason for this strength is that the trading value on Japan’s small-stock markets has finally hit bottom.

Even though May 2009 trading value on the TSE 1st section was lower than in April, trading value increased for JASDAQ and TSE Mothers and was level for the TSE 2nd section.

Investors have been bidding up the stock prices of large companies since the March 10 bottom. By May, the rally was losing momentum. In response, investors have been taking profits on large-company stocks and shifting the proceeds to midcap and small companies. I think this flow of funds to small-company stock markets is responsible for the strength of recent IPO stocks.

Two IPOs are scheduled for June: Jowa Holdings and Yashima Denki. This is the second time that Jowa Holdings has received approval to go public. Based on current fiscal year earnings forecasts announced by these companies and the maximum possible offering prices, Jowa Holdings has a PER of 9.2 times and Yashima Denki has a PER of 4.2 times. Furthermore, the dividend yield is 2.9% for Jowa Holdings and 5.2% for Yashima Denki. These are extremely low valuations, assuming that offering prices are actually within the provisional price ranges. Consequently, investors should expect to see the prices of these two stocks climb following these offerings.

The two June IPOs will raise to nine the number of IPOs in the first half of 2009. Simply doubling this figure produces a forecast of 18 offerings for the entire year. Since companies with a March fiscal year tend to start holding IPOs in the summer, we will probably see more than 20 IPOs this year. But most market observers agree that this figure will probably not surpass 30.

In my personal opinion, I believe securities companies that manage IPOs will still be unable to increase valuations of offering prices for some time. Furthermore, most individual investors who bought stocks at IPO price in recent years have reluctantly become long-term shareholders because market prices have dropped well below the offering prices. I suspect that every securities company wants to do something to bring an end to this undesirable situation.

If this is true, the outlook for the IPO market is positive. I think investors can expect to see almost all IPO stocks in 2009 climb back to their fair valuations from the offering prices, which will incorporate the standard IPO discount. Naturally, investors will need to examine individual issues and select stocks with the best prospects. Despite my confidence in the IPO market, I do not expect to see every IPO start trading well above the offering price, as was the case in 2005 and 2006. Market enthusiasm may push the opening prices of some IPOs this year to more than twice the offering prices. But if this happens, investors must never give in to the temptation to chase these stocks.

Nishibori Takashi

Source: Tokyo

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