June IPO Market Summary and Outlook for July

In June, there were seven JASDAQ, five TSE Mothers and two Osaka Hercules IPOs, a total of 14 issues. In the first half of 2007, there have been 73 IPOs compared with 93 in the first half of 2006. Much of this decline occurred in June, which had 12 fewer IPOs than in June 2006.

Opening prices of the June IPOs were much different than for IPOs in the prior months of 2007. Through May, the 2007 IPO opening prices were an average of 38% above the offering prices. But in June, the average premium for the 14 IPOs rose to 92%. The main reason is that prices on Japan’s small-company stock markets stopped falling in the middle of May. Since then, the JASDAQ, TSE Mothers and other indexes have all been recovering. This rebound has made individual investors more confident about buying stocks sold through IPOs.

There was also a significant change in the June IPOs with regard to secondary market trends. In prior months, the opening price was the peak for almost every IPO. For the June IPOs, though, prices continued to climb even though the opening prices were already far above the offering prices. In fact, stock prices at the end of June were much higher than the opening prices for the majority of the 14 IPOs. Only two June IPOs had month-end stock prices that were under the offering prices. This demonstrates that the pricing of these stocks is returning to a normal level that reflects their fair value.

The upturn in prices is also affecting the stocks of companies that conducted IPOs during the first five months of 2007. Several of these stocks have staged dramatic rallies during May and June. FreeBit (TSE Mothers 3843), which had a March IPO, and AQ Interactive (JASDAQ 3838), which had a February IPO, recorded the biggest price increases. But not all 2007 IPO stocks are climbing, resulting in stock prices that are moving in two directions. At the end of May, 24 of the 2007 IPO stocks had market prices below their offering prices. Currently, only one of these stocks has returned to a level above its offering price. Obviously, the recovery in IPO stocks still has a long way to go.

In July, there will be five IPOs compared with eight one year earlier. It is too early to start talking about performance for all of 2007. But I can say that, at the current pace, the number of IPOs this year will be far below 150. So the number of issues is falling even as the IPO market regains its strength. This is very unfortunate for individual investors. But the smaller number of issues is probably good for preserving the balance between supply and demand in small-company stock markets, which are just now starting to recover.

The most significant July IPO is the offering by Nineyou International Limited, a China-based online game company. This will be an enormous issue that procures \19 billion and gives this company a market capitalization of more than \90 billion, based on the estimated offering price. Making this issue even more noteworthy is the position of Morgan Stanley Japan Securities as lead underwriter for an IPO on OSE Hercules. The offering price also deserves attention. Nineyou International is priced at a forward PER of only about 20, much less than the multiples for the IPOs of Japanese online game companies. But there is a negative side, too. Funds and other institutions account for the majority of the top shareholders at Nineyou International. Therefore, even though the valuation is attractive, there are worries about the supply-demand dynamics of this stock.

Another Chinese company, Asia Media, conducted an IPO in Japan last April. Currently, about two months after the IPO, the market price is about twice as high as the offering price. We may be about to see a surge in interest in Chinese companies among investors in Japan.

 

Nishibori Takashi
Tokyo IPO.com Chief Editor

Email to :editor@tokyoipo.com