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Tokyo IPO: March 2009 IPO Report
added: 2009-03-13

In my January report, I predicted that we would not see the first IPO of 2009 until the middle of February due to Japan’s switch in January 2009 to the electronic stock certificate system. However, the year’s first IPO was on March 12, one month later than my forecast, when Daiken Medical listed its shares on the TSE 2nd section.

During the past decade, the previous record for a late start was in 2005 when the first IPO was on February 8. This year’s delay was undoubtedly caused in part by the new settlement system. But this change was not the only reason for the absence of IPOs in the first two months of 2009.

There were 49 IPOs in 2008. Of these companies (excluding one that declared bankruptcy), 25 failed to achieve the earnings forecasts announced at the IPO or are certain to fall short of their forecasts. Furthermore, seven of the 17 companies that went public since October have subsequently lowered their forecasts. These forecast revisions show how quickly the business climate has deteriorated since the fall of 2008. I suspect that several companies that had been planning on a February IPO called it off just before receiving approval when their earnings dropped early in 2009. This is probably another reason that we saw no IPOs in January or February.

Next, let’s take a look at the performance of the stocks of companies that conducted an IPO in 2007 or 2008. This year, the Nikkei Average reached a peak early in January and then dropped sharply over the next two months. Despite this downturn, the prices of the 2007 and 2008 IPO stocks did not decline very much. In fact, stock prices on the TSE Mothers market are slightly higher now than at the end of 2008. Apparently, some investors are starting to take a second look at these companies.

Valuations of the 2007 and 2008 IPO stocks remain weak just as when I wrote my January report. The PER of these stocks is still below the average for Japan’s small-company markets. But many companies with a March fiscal year reduced their earnings forecasts when they announced third-quarter results. Of the 91 companies that conducted a 2007 IPO, 20 cut their earnings forecasts from a profit to a loss. Moreover, four of the 2008 IPO companies have already reported a loss. Since the economy is so weak, we can expect to see even more of these recent IPO companies become unprofitable. As a result, investors should not be enticed by low multiples. Remember that a company can revise its outlook at any time, instantly transforming a stock from being undervalued to overpriced. Just look at the 225 stocks in the Nikkei Average. The PER has jumped from 15 to almost 80 as companies cut earnings forecasts.

The first IPO of March, and 2009, has finally come. Six companies have scheduled IPOs in March. All of them are small. Only one of the six companies has ordinary income of more than 1 billion yen, including the two TSE 2nd section IPOs: Daiken Medical and Taiko Pharmaceutical. Of these six offerings, I want to spotlight the March 26 IPO by tella on JASDAQ NEO. A biotechnology company backed by venture capital, tella became profitable in only its fourth year (2007) and reported a profit again in 2008. The company listed its shares on JASDAQ NEO because its performance is still volatile. There is much potential for this company to earn a higher valuation because of its innovative cancer treatment technologies along with a record of profitability dating back to before the IPO.

IPO stocks are no longer as popular as they used to be. But in a way, this is good news. Individual investors often tell me that the low interest in IPOs greatly increases opportunities to earn a profit by purchasing stocks at the offering prices. One investor I met last Saturday told me that he has placed orders for three IPO stocks.

Market capitalization is below 10 billion yen for all of the March IPOs. That means even a small shift in the balance between supply and demand cause prices to move very quickly in either direction. The outlook for the stock market is still uncertain. But even at this difficult time, I suggest that investors turn their attention to recent IPO companies with low valuations and a small number of shares outstanding. You may surprise yourself by making a profit!

Source: Tokyo

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