As seen on Newspaper! My contribution to “How to pick a winning IPO” or “投资IPO 如何“趋吉避凶”?”

investing in winning ipo newpaper article

Got my first request to contribute to a local newspaper!  The article was published on the  ZaoBao financial section ok! Don’t play play. 🙂

The journalist asked me if I could help contribute my thoughts of IPO investing and of course I said “sure!” So here is the full answers I gave from the questions he asked.  Down below you can find the actual news write up.

Hope you enjoy this article!

What are the factors an investors should take note of while investing in IPOs?

When investing in IPO, the factors that we need to consider are very similar to investing in any other listed company. Except that we do not have the luxury of price and company information history. That can be a great disadvantage as investor can only depend on the limited information provided by the company on the prospectus. So in those sense, risk in IPO investing are higher.

 Many IPO prosectus are extremely thick and packed with information. How can an investor get an accurate snapshot of the company as well as extract important and pertinent information without going through every single words in the prospectus?

For different industries, you will have to focus on different sets of numbers to truly understand the strength of the company. There is no one standard answers for all types of company. But in general, for most companies, you should always ask yourself these questions:

1. What is the competitive moat of that company? Is it their brand name, management team or patent? Essentially, asking if they will face strong competition in the same industry.  One of the strongest competitive moats is brand name. Having a good brand name will intrinsically mean they have been around and have the resilient to weather the ups and down of the economic cycle.
2. How are their key financial ratios? Investors should look beyond revenue, profit and compare key ratios like PE with competitors in the same industries. This will give you a much better indication if you are overpaying for the shares. Again, for different industries, you should focus on different ratios.
3. Where is the company going to spend the raised funds? If you see that most of the raised funds are to pay down debt, it sends a signal that they do not have growth plans in the near future.
4. What is the potential growth potential of this company? This, I think is the most important factor. Because when you are investing in a company, you are essentially investing for the future not the present. So it is therefore very important for you to understand the potential for growth. They maybe a very strong player for now. But if their business model or nature of their company do not enable them to expand, that will mean limited upside.

 What should the investors take into consideration beyond IPO prospectus?

One other important factor is market sentiment. If you put yourself in the shoe of the company, would you want to list when the market is buoyant or when it is down? The answer is obvious.  The company would definitely want to list at a time where maximum value can be extracted. After all, you can only list one time! So it is not uncommon to hear company pull out of listing at the last minute. One recent example is Dynasty REIT, where they suspended the offering due to “market condition”.

Using local IPOs as example, how could one buy into winning IPOs such as Google, and and avoid the pitfalls as seen in IPOs like that of Facebook?

You chose a very interesting pair of companies for comparison. There are already a lot of articles written about them and many reasons why FB did poorly, but I will try to relate the answer to one of factors mentioned when considering IPO.

1. Valuation and Financial ratios.
   1. From the key financial summary table below, you can see that by just looking at the revenue and income, Facebook does look attractive as their profit margin is twice that of Google. But if you go one step further and calculate just 2 financial ratios, you will see the story is quite different. With the Price-to-revenue ratio of 23.7X, the expectation is that FB is going to grow 2 or 3 times faster than Google. Is that reasonable? To answer that you will need to dig further to see the revenue growth prior the IPO. In Google case, the revenue growth was around 125% to 234% in 2003 and early 2004. That was the reason to justify the very high PE ratio. But for FB, the highest revenue growth was only 88% from 2010 to 2011.  In fact revenue growth in the last quarter before IPO was flat! So just by looking at those ratios, it should set investor’s alarm bell ringing very loud.

2. So if the ratios are so unattractive why are their still people buying the stock? It boils down to market hype. A lot of investors are comparing FB to Google and do not want to miss out the opportunity to ride on the explosive trend demonstrated by Google. But many of them didn’t realise that unlike Google, Facebook did not have the growth track record to support the high valuation.

 What is your outlook on the current IPO markets and the year ahead both locally and globally?

In the recent IPO report by Ernst & Young, they reported a slow down in 2012 Q3 global IPO deal value and volume. Compared to last year, the value of deals has dropped by as much as 46% and volume by equally the same percentage. Not surprisingly most of the IPO deals are from Asia, followed by US and than EMEA. But moving forward they expect the IPO in Q4 to pick up especially for Asia. There are about 200 Asian companies in the IPO registration pipeline which accounts for more than 50% of global IPO pipeline!

Singapore is no different. There is an expectation that we will see more REITS and Business Trusts surfacing. This is mainly due to the very positive demand for high yielding shares in part due to the many monetary easing policies globally. Investors now are very hungry for investment to grow their capital in this low interest and high liquidity environment.

Good news for investors is that we will have more options for investment, but we also need to be extra careful in picking company with the right valuation and not those with inflated assets that will leave you high and dry when crisis strikes.

Here is the actual Chinese newspaper version:

So you can see the actual article published is less than what  I provided.. 🙁  I guess he have to censor something and make the article more readable.  Oh and I did not contribute in Chinese. I did it in English and he did all the translation! 🙂