Are IPO stocks the way to go? June 19, 2017

To date, there have been 8 equity IPOs in 2017 as shown in the table below. All of them showed positive results if we compare the IPO prices to the first day closing price.

Does this mean that buying shares through IPO will equate to investment profits?

Are IPO stocks the way to go?
Source: SGX; Retrieved 19/6/17

I personally feel that investors should not blindly chase after IPO stocks, as they do not necessarily equate to profits. Instead, investors should consider factors such as the fundamentals of the company, the nature of business, the reasons and purpose of IPO, as well as growth drivers for the company before making their investment decision. Investors should note that, unlike in recent cases, there have been IPO counters that have opened and traded below their IPO price in the past, and took a while for them to reach their IPO price, if ever.

In the cases of IPO stocks trading higher on the first day, it indirectly shows that investors feel these stocks were undervalued and hence were willing to buy the shares at higher than IPO prices. All of the 8 IPO stocks in 2017 so far were also oversubscribed during the subscription period. This could also indicate that investors may have faith in IPO stocks, as it reflects that demand is higher than supply. The degree of oversubscription of the IPO stocks might also provide some indication to market sentiments and interest in the new listings.

In my opinion, investors can consider the following factors before investing into new IPO stocks:

1) The degree and reason for oversubscription

These would indicate public interest, and the supply and demand gap. For example over the past 2 weeks in which 3 counters had their IPO. Sanli was 12.8X oversubscribed, World Class Global was 2.1X oversubscribed, while HRnet was 15X oversubscribed. However HRnet has a number of cornerstone investors, which may be the reason why it was so highly oversubscribed. Thus the oversubscription level might have some correlation with the first day price performance of these IPO stocks, where Sanli rose 66% as opposed to World Class Global’s increase of 5% when comparing IPO price to first day closing price.

2) The type of industry it is in, and the degree of competitiveness in the industry

Investors might be more interested in IPO stocks in new industries such as HRnet which is the first recruitment firm to be listed, however, there will be a lack of data for investors to compare and gauge the firm’s performance. Competition level in the industries of new IPO stocks will also affect confidence in the counter’s ability to perform.

3) The reason for the IPO

The purpose for the IPO would allow investors to understand how the proceeds from the IPO would be utilized. For example, IPO to allow for expansion using the proceeds for asset acquisition or new projects would be more appealing to investors compared to using the proceeds to reward existing shareholders and employees. For example, HRnet’s reason for IPO is more about providing liquidity to employees rather than raising cash to acquire new business, thus it might be the reason behind the smaller price movement in the first trading day of only a 2% increase compared to its IPO price.

4) Growth potential of the company

Growth potential is related to scalability of the company and how the IPO proceeds will be utilised. The market potential for the company to expand domestically and/or internationally will affect how investors rate the short and long term growth prospects of the company. Utilization of the IPO proceeds will then give investors a clearer picture on how the management of the company is growing the company and how efficient the new fund injections will be used.

Going forward, the IPO market in Singapore remains interesting, with at least 3 counters scheduled to IPO in the near future, including Singtel’s fibre broadband unit- NetLink Trust, Malaysian online marketing Company- Shopper360, and Singapore e-commerce company- Y Ventures Group.

Should you want to know more information on the markets or what to look out for, you can speak to a Dealer at a Phillip Investor Centre near you.


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About the author

Mr Siew Wei En Samuel
Equity Dealer

Mr Siew Wei En Samuel - Equity Dealer, POEMS Dealing (Toa Payoh), Phillip Securities Pte Ltd

Mr. Samuel Siew currently provides dealing services to over 10,000 trading accounts and is part of the POEMS Dealing, the core in-house dealing department of Phillip Securities Pte Ltd. Apart from his Dealing role, he also gives training seminars to further enrich his clients’ financial knowledge.

Samuel often conducts Market Outlook/ Educational/ Product seminars monthly for clients and Tertiary Institutions in both English and Chinese. He believes in value investing, and focuses on stocks with good company fundamentals, as well as dividend paying stocks. Samuel regularly provides market commentary for Lianhe Zaobao, Capital 95.8FM and 938 Live FM.

Samuel holds a Bachelor of Degree of Commerce with a Double Major in Marketing & Finance from Curtin University.

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