August IPO Market Summary and Outlook for September
There have been 29 IPOs during the first eight months of 2008, with only a single IPO between April and July. But in August, four companies went public, a level of activity we have not seen in quite a while.
In August, there were two JASDAQ IPOs and one each on the OSE Hercules and TSE Mothers markets. Ascot, VentureRepublic and Tri-Stage, which completed IPOs early in the month, all had opening prices that were below their offering prices. Furthermore, the prices of all three stocks at the end of August were even lower than the opening prices. There wasn’t even enough support to keep the market price above the first trade. Seigakusya, which went public later in August, started trading at precisely its offering price. But by the end of the month, the stock was 32% higher than the offering price, a dramatic difference compared with the lackluster performance of the other three August IPOs.
Month-end valuations of the four August IPOs are low. Ascot, a real estate developer, had a PER of only 1.6, an extremely low multiple that is directly linked to the series of bankruptcies at small real estate developers in Japan. At the other three August IPO companies, the PER ranges from 5.4 to 16.6, which is well below the average for 2008 IPOs.
The following table shows the average forward PERs of 2007 and 2008 IPOs categorized by their exchange listings. Multiples of companies that have gone public during the past two years are well below the averages for all stocks on these exchanges. The biggest differences between average PERs for IPOs and all stocks are on the JASDAQ and Tokyo Stock Exchange.
(Multiples are based on earnings forecasts announced by companies and closing prices as of August 29. Consolidated figures are used when available.)
TSE Mothers
ＪＡＳＤＡＱ OSE Hercules
TSE 1st/2nd
There appears to be a correlation between stock price valuations and the difference between the market price and offering price. On the TSE Mothers market, which has a high PER, the August 29 closing prices were generally higher than the offering prices for 2007 and 2008 IPOs. For the JASDAQ and Tokyo Stock Exchange IPOs, which have a low PER, the August 29 closing prices are mostly lower than the offering prices for the 2007 and 2008 IPOs. Looking at the small company stock markets, the drop in the TSE Mothers index has been substantial. Nevertheless, the stocks of companies that conducted a 2007 or 2008 IPOs on this exchange have an average PER of about 25. Obviously, investors still expect these companies to continue growing.
TSE Mothers ＪＡＳＤＡＱ OSE Hercules TSE 1st/2nd
In September, three companies are planning an IPO. The most interesting one is the September 5 IPO of Sunny Side Up. This company manages athletes and other individuals. For example, Sunny Side Up has contracts with Kosuke Kitajima, who won two breaststroke gold medals at the Beijing Olympics, and Hidetoshi Nakata, a well-known soccer player. Since memories of Kitajima’s accomplishments are still fresh, investors may bid up the opening price to well above the offering price. But investors need to be cautious. The opening price may end up being the peak due to the widespread negative sentiment of investors. Investors who want to buy an IPO stock should aim for a short-term gain. Once investors make a profit following the start of trading, there is no rush to repurchase the stock. Investors who wait for a stock to settle down until they buy will probably still be in time to earn a capital gain.
During the final four months of 2008, there will be about 20 IPOs at the most. As I just explained, valuations of IPOs are giving investors an opportunity that comes once only every few years to pick up these stocks at bargain prices. Since the number of IPOs is small, investors can thoroughly study each company without taking up too much time. A good strategy is focusing on continuity rather than growth. Investors should select stocks of companies that will still be performing well five years from now. I think this approach is very likely to produce returns that outperform stock indexes. Looking for stocks that can produce short-term gains is pointless. Investors should instead adopt a long-term stance, aiming for capital gains that will come from shifts in valuations once stock markets return to normal.
Nishibori Takashi
Tokyo IPO.com Chief Editor Email to :editor@tokyoipo.com