Published October 12, 2009

MALAYSIA INSIGHT

Keeping foreign IPO taps flowing

Bursa's challenge is to ensure value creation to excite investors

By PAULINE NG
KL CORRESPONDENT

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THE Malaysian stock exchange last week saw fit to issue a statement defending the integrity of its listing process following a spate of news reports on the dismal performance of foreign initial public offerings on the local bourse.

The perception that foreign companies chose to list on the local exchange because they were unable to get listed elsewhere is 'inaccurate,' Bursa Malaysia said.

After courting foreign listings for a few years, it landed its first this year in Xingquan International Sports Holdings - a China IPO - subsequently followed by another Chinese company.

Unfortunately, the IPOs of both sports shoes makers are languishing. Xingquan issued its shares at RM2.10 per share, but they are now RM1.40 or a third lower. Multi Sports is in the same boat, some 37 per cent off its issue price of RM0.85.

With a number of China IPOs still in the pipeline, the local bourse is understandably concerned. 'In a downturn situation, the resilience of our market and fair market valuations have been key factors that attracted these Chinese companies to choose Malaysia as their capital raising platform.

'The government's pro-business stance, its enhanced ties and cordial relationship with China has also helped to provide confidence to these Chinese companies and profile Malaysian capital market in the international stage,' it stressed last week.

It would not be fair to take their slide as an indication of what lies ahead for future China listings, but their performance could give pause to those looking to follow in their footsteps.

These firms are usually smaller Chinese ones, far behind the listing queue in China's gradual liberalisation of its capital markets, which has prompted companies by the hundreds to tap public funds for expansion purposes.

The ones that get ushered to the top of the queue are the cream of the crop. Witness for example, Malaysia's red carpet rollout for Maxis's planned re-listing. The telco, which is selling a third of its existing shares to the public, is expected to raise at least RM11 billion (S$4.5 billion). In its share sale, Xingquan raised about RM200 million.

Bursa is right in that it is not fair to stereotype Chinese companies as lacking quality 'based on the perception of what happened in other parts of the region.'

Indeed, Xingquan and Multi Sports - two of the six listings so far this year - remain profitable. And to be fair, only one IPO - that of integrated crane specialist Handal Resources - is in the money, while the others remain depressed or flat. The IPO trend could also be true of other markets.

Which is why Maxis's return to the market has caused such a splash. A known quality and brandname, its IPO is expected to make investors money - or at the very least, subscribers know they are unlikely to lose money. Hence companies like Maxis are afforded higher valuations, better premiums.

Retail investors tend to be sceptical of China companies, probably because they are afraid of being burnt, said a fund executive who bought Xingquan shares because he believed in the 'China growth story' and the fact that it has its own brandname.

He also believed - irrationally he conceded - that because it was 'Malaysia's first foreign listing' its success would be ensured. He is still willing to consider China IPOs, but as with most, will set his criteria even higher.

Whether giving lower valuations to these firms - at least until they establish a sound track record - would make for more attractive IPOs is debatable.

But with foreign investors focused on only selective, liquid big caps - if they are looking at the Malaysian market at all - smaller cap firms will have to rely on local investors.

Borderless trading, however, has made this group even smaller. In the age of instant gratification, the younger set especially, are gravitating towards higher beta markets for what they perceive to be faster and more exciting returns.

Because it's a trend faced by all markets, the authorities have their work cut out. There are no easy answers, but one solution presumably is to ensure enough value creation in one's market so that it doesn't fall off the radar of investors and that they remain excited. Concerns that the local bourse could be sliding further down in the scale of relevance remain very real.

And if investors remain indifferent, never mind China IPOs - few companies will get the valuations they think they deserve.