November IPO Market Summary and Outlook for December
There was a total of 14 IPOs in November: five on JASDAQ, three on the TSE first section, two each on TSE Mothers and Nagoya Centrex, and one each on the TSE second section and Osaka Hercules. This was much more activity than in November 2005, when there were only three IPOs. In all, the November IPOs raised ¥450.0 billion compared with ¥300.5 billion in October 2006.
Between October 3 and November 14, there were five IPOs in the ¥100 billion range. The largest was Aozora Bank (¥199.2 billion), followed by Nomura Real Estate (¥164.5 billion), Accordia Golf (¥113.9 billion), Takata (¥98.4 billion) and Idemitsu Kosan (¥81.3 billion). Together, these five companies raised ¥667.4 billion from investors. This represented a remarkable 57% of the funds procured by all 152 IPOs this year as of November 17.
There is no problem if we assume that these big-five companies merely attracted capital that would have gone to other new investments anyway. However, the IPO market has been severely impacted by the enormous sales by existing shareholders using an IPO as their exit strategy. Such sales have amounted to ¥405.5 billion. Aozora Bank and Accordia Golf were both revitalization projects undertaken by foreign funds. As a result, these funds regarded the two IPOs as merely an extra reward for having completed these projects successfully. For companies with market capitalizations of this size, it is inconceivable that new shareholders can generate a return anywhere near the profits reaped by these foreign funds. Obviously, these funds have already captured the lionfs share of the available earnings from the Aozora Bank and Accordia Golf revitalizations.
Due to these recent large-scale IPOs, the average October IPO opening price was only 12.67% above the average offering price and the average opening and offering prices for the November IPOs were virtually the same. These figures are far below the 2006 average of 76.54%. Overall, IPOs have weakened to the point where they can barely maintain their offering prices. But the IREP IPO (Osaka Hercules), which was only two days after Aozora Bankfs IPO, was quite popular. The opening price was 37% above the offering price, which is not particularly high. But no shares were traded on the first day as the large volume of buy orders pushed the indicated price up by the maximum amount allowed by the exchange. Dai-ichi Seiko (JASDAQ), which conducted its IPO the following day, had an opening price of ¥3,200, the same as its offering price. But the dayfs final trade was ¥3,860, a one-day increase of ¥660. A large volume of funds was locked up by the big IPOs over the past two months. However, price movements of these two smaller IPOs demonstrate that the IPO of Aozora Bank quickly freed up a large volume of these funds for other investments. Opening prices had been held down by nothing more than poor supply-demand dynamics. A dramatic shift occurred in the IPO market when the supply-demand balance improved in mid-November.
Thirty IPOs are planned for December 2006, a fairly large number, but the same as in December 2005. The 30 companies plan to raise a total of ¥120 billion, but no single IPO is in the ¥100 billion range. As a result, we are unlikely to see a dramatic deterioration in supply-demand dynamics, a problem that plagued the IPO market in October and November
December IPOs include the issues of two companies that had received approval to go public but subsequently had their approvals cancelled. One comeback company is GameOn, which has an on-line game business. The other is Sourcenext, a developer and marketer of security software that is well known to the Japanese public through its TV commercials. Elecom, a November 22 IPO, is another example of a company that lost and then regained its IPO approval. We will closely watch these three comeback companies with high hopes; each one regained its IPO approval even though the standards have become even tighter.
Investors should realize that opportunities involving IPOs become increasingly attractive precisely as opening prices decline relative to offering prices. The first step is to identify October and November IPO companies where the current stock price has fallen below the offering price. Next, investors should consider adding to their portfolios the companies that will continue to post sales and ordinary income growth in the current fiscal year. Investors must never forget that investments in companies traded on small-cap markets are based solely on the premise of earnings growth.
Nishibori Takashi
Tokyo IPO.com Chief EditorEmail to :editor@tokyoipo.com