Analysis and Comments
Summarizing the May IPO market is simple because there were only three IPOs: Hirakawa Hewtech on May 2, Kenkou Corporation on May 30 and SBI Futures on May 31. All three were similar because the opening price turned out to be the highest price. Hirakawa Hewtech managed to stay above its offering price until May 20.
There have been 67 IPOs in Japan during the first five months of 2006, 12 more than during the same period of 2005. This includes nine more IPOs on the first and second sections of the Tokyo Stock Exchange than in 2005. The increase in these IPOs is due to the large number of IPOs by companies with long histories.
Of this year’s 67 IPOs, only seven had share prices as of May 31 that were higher than the opening price: PEGASUS SEWING MACHINE, Shirai Electronics Industrial, Nippo Electric, Alpen, Toyo Tanso, Nepro Japan and ALCONIX.
Excluding Nepro Japan, these issues all have comparatively low, double-digit price appreciation relative to the offering price. This shows that issues that are not popular when first listed can subsequently go up in price following a good earnings announcement or other favorable event.
But this does not mean that prices are climbing for all issues that had low (double-digit) price appreciation relative to the offering price. Even if the increase relative to the offering price is low, a stock will be sold off unless the post-IPO price is viewed as too low.
IPO prices are based on the stock prices of peer companies, which may drop if the stock market weakens after the IPO price has been set. In fact, there has been a sharp drop in Japan’s small-company stock markets in recent months. This is why some prices for newly listed companies are too high, even when the offering price includes an IPO discount.
Looking at the seven companies listed above, the three manufacturers (PEGASUS SEWING MACHINE, Shirai Electronics and Nippo Electric) currently have a PER of about 13. It appears that these issues are considerably undervalued. That means there is only a minimal risk that the price will fall below the opening price.
However, due to the current market environment, in which small-company stock markets have been falling for several months, investors are best advised to wait until prices drop to a level that is obviously too low. This is because stock prices are no longer reflecting the growth potential of companies.
Until the middle of January 2006, prices on Japan’s small-company stock markets have been based on forecasts for earnings two to three years from now. But now, stock prices barely reflect projected earnings in the current fiscal year. Normally, stock prices factor in a company’s future prospects. But now the stock market has entered a more difficult period.
Nevertheless, the Nihon Keizai Shimbun reported that all stocks on Japan’s small-company stock markets are expected to post an aggregate earnings increase of 15.8% in the current fiscal year. This is far above the average earnings growth rate of 1.5% for companies listed on the Tokyo Stock Exchange.
Looking at PER data, the average PER is 20 for Tokyo Stock Exchange stocks and 23 for JASDAQ stocks. The JASDAQ multiple is too low even after taking into consideration the fact that today’s stock prices do not reflect growth prospects.
There are 26 IPOs scheduled for June. There is an excellent chance that some of these issues will have an opening price that is unquestionably too low. Readers who find such issues should act quickly. However, never forget that investment decisions must be based on a medium- to long-term perspective.
Nishibori Takashi
Tokyo IPO.com Chief EditorEmail to :editor@tokyoipo.com