February IPO Market Summary and Outlook for March

Since there were no IPOs in January, Japan’s IPO activity in 2007 started with the year’s first IPO on February 6. In all, there were 20 IPOs in February: eight on JASDAQ, four on Osaka Hercules, three on Sapporo Ambitious, two on the TSE second section, and one each on the TSE first section, TSE Mothers and Nagoya Centrex. This was a small decline in activity compared with the 23 IPOs that took place during February 2006. Funds procured by the February 2007 IPOs only amounted to about ¥53.2 billion, far below the hundreds of billions procured in each of the last three months of 2006.

On average, IPO opening prices in February 2007 were 39.71% higher than the offering prices, much less than the average of 76.98% for all of 2006. These issues were weak on the secondary market, too. By the end of the month, only five of the 20 February IPOs had market prices that were higher than the opening prices. In addition, seven of these IPOs had month-end market prices below their offering prices, an unmistakable sign that investors are shunning small-company markets.

Three February IPOs have market prices that are far above both their offering and opening prices. These companies are ASAX, a real estate-secured loan company listed on the TSE second section on February 16; FCM, a metal processing and materials company listed on Osaka Hercules on February 28; and AQ Interactive, a game software development and sales company that conducted a February 28 IPO with a JASDAQ registration. Both ASAX and FCM do not have any shareholders, such as venture capital firms, that could create a severe supply-demand imbalance following the IPO. Furthermore, both companies have highly distinctive business models. Their high share prices most likely reflect investors’ recognition of these attributes. AQ Interactive is led by Hayao Nakayama, former president of game software development giant Sega. Investors apparently expect this company to establish a major presence in the game software industry. Furthermore, investors are hoping that the recent launch of several new game consoles will generate higher sales of new titles.

There are 23 IPOs planned for March. During March 2006, there were 20 IPOs, but funds procured totaled ¥176.2 billion due to several large offerings. This year, however, March IPO procurement is expected to be low just as in February, totaling only ¥55.5 billion.

The most interesting March IPO is the offering by Universal Studios Japan scheduled for March 16. This IPO will procure an estimated ¥28 billion, but a secondary offering by current shareholders accounts for about 60% of this amount. This secondary offering may bring back memories among many investors of the destruction caused by these offerings following the Aozora Bank and Accordia Golf IPOs in October and November 2006. But investors should also remember that IPOs procured a total of ¥750 billion during these two months. That means the Universal Studios Japan secondary offering will probably have a much smaller impact on the IPO market. However, following this IPO, investors should be cautious because the stock price is likely to be held down by the large number of shareholders who want to sell their Universal Studios Japan stock.

Based on Tokyo IPO data, companies that conducted an IPO during the past 18 months have an average PER that is below the average for the market as a whole. There is an excellent chance that these below-average PERs will quickly climb to a more suitable level once investors begin to channel funds into small-company markets again.

Based on February 28 closing prices, the 82 JASDAQ-traded companies that conducted an IPO between July 2005 and December 2006 had a forward PER of 15.7. This is almost 40% less than the average PER of approximately 25 for all JASDAQ companies, demonstrating that investors are allowing these recent IPO stocks to languish at low valuations.

Investors who do their homework carefully will very likely be able to identify many companies that have outstanding prospects for generating handsome returns within the next 12 months.

 

Nishibori Takashi
Tokyo IPO.com Chief Editor

Email to :editor@tokyoipo.com