Subscribing to IPOs 1 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
I have never subscribed to an IPO, believe it or not. Of course, it is quite easy to do; one can just apply for them at any ATM. During late 2003 to early 2004 when the market was booming and IPOs were opening at least 20% above issue prices, queues apparently formed at ATMs to subscribe to these IPOs.

To me, IPOs are one of the purest indicators of market sentiment. Often, one can judge how optimistic people generally are about the market by how much the IPO opens above its issue price on the first day. When every IPO opens significantly above its issue price, this probably is not due to the IPO company having good fundamentals, but rather it might be a danger signal that general market sentiment and valuations might have peaked. Just as an aside, subscription rates are not as good an indicator, because many underwriters now advise the IPO company to allocate small portions for public subscription, with the effect that oversubscription is easy to achieve.

There are several reasons why I feel IPOs are not a good investment option. Firstly, IPOs essentially involve a dilution in company ownership of the insiders (the directors/substantial shareholders), a transfer of interest in the company to the public. This is generally known as the primary market (direct issue from company to public) and I don't like it because the sale is done with an asymmetry of information favouring the sellers (the insiders/the company). I would rather purchase on the secondary market (ie. on the open market). The second point is related to the first, which is that the IPO tends to be timed at when the company's earnings have peaked; this is understandable since the company obviously wants to milk the maximum IPO money from the IPO subscribers. I have observed this phenomenon quite often for China companies; obviously their corporate culture is highly geared towards the pragmatic (to put it euphemistically) and less towards the moral side. Thirdly, these companies do not have a track record; of course they have been operating a couple of years before the IPO, but opening up their accounts for public scrutiny and rigorous audit as a listed company requires a whole new level of corporate transparency altogether. Often there is a great discrepancy between proforma financial statements made for pre-IPO years and the actual financial statement made for the IPO year, with a bias (ie. higher) towards the former.

I guess if one is really desperate to put his money in an IPO, he should watch for some key points: firstly, that the IPO is of sufficient scale of operations, say a revenue base of S$100M or more, to ensure that it does not become some fly-by-night operation some months after the IPO; secondly, that there are some well-known placement investors, say Temasek Holdings or some foreign funds; thirdly, that there is a hot trading theme supporting the stock, say oil and gas for the moment; and last but not least, that the market is generally buoyant so that the stock does not immediately open underwater on its first day of trading.