March IPO Market Summary and Outlook for April

A total of 13 companies received approval to conduct IPOs in March. However, the actual number of offerings was only 12 because of the postponement of the IPO of Jowa Holdings, which was to list on the TSE 2nd section. This is the smallest number in March since Japanfs three small-company stock markets were established in 2000. Of the 12 offerings, five were listed on TSE Mothers, three on JASDAQ and one each on JASDAQ NEO, OSE Hercules, TSE 2nd section and Nagoya Centrex.

Stock prices in Japan were weak in March as the yen strengthened. In the middle of the month, the yen rose sharply, climbing from more than ¥100 to the U.S. dollar to about ¥95 in a single night. This triggered a drop in the Nikkei Average to ¥11,860 during interday trading on March 17. Due to these difficult market conditions, only half of the 12 March IPOs started trading at prices that were above their offering prices. There was no change in this ratio at the end of the month. Stocks that started trading above their offering prices remained at that level; the other six offerings were still below their offering prices at the end of March. Of the six companies that had stock prices above the offering prices, five are listed on TSE Mothers and four belong to the IT sector.

There have been 21 IPOs during the first three months of 2008, the smallest number since 2000. Since only one IPO has been approved for April, this will also be true of the first four months of 2008. Between 2000 and 2007, the smallest number of April IPOs was 12 in 2003 and the highest was 20 in 2006. Why? The cause is probably the absence of IPOs that are carried over to the next fiscal year. For example, a company that uses a fiscal year ending in March 31 for its IPO application may end up conducting the IPO in April. Over the past eight years, there has been an average of eight of these carryover IPOs in April each year.

The limit for using prior-year operating results for an IPO is the date of the annual shareholders meeting, which is when the financial statements are approved. As a result, there are normally a few carryover IPOs for March fiscal year-end companies in May and June, too. Over the past eight years, there has been an average of nine carryover IPOs in May and June for companies closing their books in March. If there are no carryover IPOs at all this year for March fiscal year companies, we will probably see a big drop in the total number of IPOs. At the beginning of this year, I predicted that the number of IPOs in 2008 would probably drop below 100. At this pace, however, this figure could be as low as about 80.

Stock prices have settled down somewhat at the beginning of April. Letfs take a look ahead for the secondary market stock prices of companies that conducted a recent IPO.

I will begin by examining the stock prices for all 2007 IPOs by companies that are traded on small company stock markets.

2007 IPO Opening Price/Offering Price
 
Issues
12/29/2007
1/31/2008
2/29/2008
3/31/2008
TSE Mothers
23
48.9%
29.2%
30.4%
30.8%
JASDAQ
46
-20.3%
-36.8%
-35.8%
-42.9%
OSE Hercules
25
-1.9%
-23.2%
-24.2%
-32.3%

As you can see from this table, on average, the 23 TSE Mothers IPO companies have stock prices that are more than 30% above their offering prices. This is precisely the same as the IPO discount ratio. If these companies have not reached a fiscal year end since their IPOs, that means the stocks have climbed to an appropriate valuation. But the stock prices of 2007 IPO companies traded on OSE Hercules and JASDAQ have yet to reach a major bottom.

What is the explanation for these differences? I believe the reason is market momentum rather than whether or not a stockfs valuation is high or low. And the best way to measure momentum is changes in trading volume and value.

On the TSE Mothers market, monthly trading value hit bottom in September 2007. Even when this marketfs index fell to a new 52-week low in March 2008, trading value was higher than in September. But on JASDAQ, which has had the worst performance of any Japanese stock market, monthly trading value continued to fall and reached a new annual low in March 2008. The difference is clear. Money is still moving in and out of the TSE Mothers market. But stocks are performing poorly on JASDAQ because of the low turnover rate of investments.

To determine future prospects for IPO stocks, I believe we should examine OSE Hercules and JASDAQ IPO stocks, which are far below their offering prices, rather than the TSE Mothers IPO stocks that have remained above their offering prices. I will use another opportunity to discuss which issues to target. But I will say that an upturn in trading value for three consecutive months on the JASDAQ and OSE Hercules markets would be a signal of growing momentum backed by inflows of new money. Investors should probably regard this upturn as a signal that recent IPO stocks now trading below their offering prices are about to make a move.


Nishibori Takashi
Tokyo IPO.com Chief Editor Email to :editor@tokyoipo.com