A breakdown by markets is presented below:

Analysis and Comments

One notable trend is the growth in the number of companies listing their shares on the first and second sections of the Tokyo Stock Exchange along with the low number of IPOs on markets for small, entrepreneurial companies. This trend may be due to the rebound in earnings at “old economy” companies because of the strong Japanese economy. Among these first and second section IPOs were two securities companies and two former second-tier regional banks, all of which probably conducted offerings to raise capital prior to the expected monetary tightening by the Bank of Japan.

The average size of IPOs in the first quarter was smaller than one year earlier. In the first quarter of 2006, 44 IPOs raised a total of ¥ 247.0 billion compared with 35 issues and ¥246.1 billion in the first quarter of 2005.

The percentage change in the opening price (relative to the IPO price) in the first quarter of 2006 was slightly lower than one year earlier:
2005 107.5% (first trade was at 2.07 times the IPO price)
2006 88.2% (first trade was at 1.88 times the IPO price)

A close examination reveals that the opening price ratio figures fall into two categories. The first is popular issues that required two to three days until the first trade occurred. The second is the large number of less popular issues where the first trade occurred less than 30 minutes after the market opened.

Turning to price movements following an IPO, a subject of much interest to readers, the average increase relative to the IPO price was 8.3% between the IPO dates and March 31. This is a somewhat disappointing performance during a period when the Nikkei average rose to a 52-week high.

Why did IPOs perform so poorly? The answer to this question is linked to the financial condition of individual investors.

Markets were rocked in the middle of January by the “Livedoor shock.” While the downturn among large stocks was brief, stock prices on the Tokyo Mothers and Osaka Hercules markets did not bounce back quickly. It appears that individual investors, a major backer of the IPO market, did not have available funds because they bought small company stocks at high prices during the rally in the small company sector in late 2005 and early 2006. Almost all of these stocks held by individuals, both cash and margin positions, have market prices below cost. These unrealized losses will probably restrict the actions of these investors for a long time.

But exactly how long will this situation last?

We believe that stock prices will not rally until participation in the small-company stock markets expands to include institutional investors as well as individuals.

Mutual funds that invest in small and midcap companies base their investment decisions on results for the March 2005 fiscal year and the outlook for the next fiscal year. But if companies raise their forecasts, some funds maystart buying without waiting for the release of March 2005 fiscal year results.

As was written many times in March blogs, the shortest path to success is to carefully pick up stocks that are undervalued in terms of their PER and dividend yield (although the dividend record date has just passed for many companies). In particular, it may be wise for investors to take a close look at companies on the second section of the Tokyo Stock Exchange.

In April, there will be 20 IPOs, eight more than one year earlier. This includes eight Osaka Hercules issues, signaling a rebound for this market. The increase is most likely due to the successful introduction by this market of a new transaction processing system. As a result, approval was granted at once for a number of IPOs that had been awaiting approval since 2005.

The number of IPOs will probably be extremely low in May, as is customary every year. Accordingly, the IPO market may strengthen in the middle of April.

 

Nishibori Takashi
Tokyo IPO.com Chief Editor

Email to :editor@tokyoipo.com