How to bring back appetite for IPOs

Success has eluded SGX's securities business, but not for lack of trying. Big foreign IPOs such as Hutchison Port Holdings Trust have flopped, dropping 37 per cent from its issue price four years ago.
Success has eluded SGX's securities business, but not for lack of trying. Big foreign IPOs such as Hutchison Port Holdings Trust have flopped, dropping 37 per cent from its issue price four years ago.PHOTO: BLOOMBERG

The answer may lie right at our doorstep

AS RECENTLY as 12 months ago, the now red-hot Shanghai stock market was anything but febrile. Words like "moribund" and "lacklustre" were bandied about to describe the market as Chinese investors struggled to cope with a bear run that lasted five long years.

Today, however, the Chinese equities market is the toast of the international investment community, notwithstanding the recent wild price swings. The Shanghai Composite Index has surged 102 per cent in the past year and the Shenzhen Composite Index has skyrocketed 132 per cent.

For millions of Chinese retail investors - some of whom have never before traded stocks - betting on new shares sold by companies making debuts on the sizzling Shanghai and Shenzhen markets is like a one-way ticket to riches. The result is that Chinese investors in initial public offerings (IPOs) have been all but guaranteed "easy money".

The prices of many of these IPOs gained 44 per cent - the maximum advance which a mainland stock can make in a single day under local regulations - on their first day of trading. The IPO fever was so intense that when one Chinese brokerage - Guotai Junan Securities - launched its public offering recently, it locked up a staggering 2.35 trillion yuan (S$509 billion) of funds.

Foreign market watchers may conclude that the frenzy must have the tacit approval of the Chinese government.

Some claim that Beijing is using a looser monetary policy to inflate a state-sanctioned stock market bubble to tempt millions of savers to switch from cash to equities as the property market - a traditionally popular investment for the Chinese - falters. They may cite as proof the 0.25-percentage- point cut in interest rate to 4.85 per cent by the central bank over the weekend as Shanghai slumped 7.4 per cent on Friday, wiping off hundreds of billions of dollars in the value of Chinese stocks.

Still, it cannot be denied that China stocks are hot as Shanghai overtakes New York to become the world's busiest bourse.

To get a sense of the scale of trading, take, for example, trading in Shanghai on May 28. It chalked up a record turnover of US$201.4 billion (S$271 billion), more than double the daily record turnover of $79.5 billion achieved by the New York Stock Exchange on March 20. The average daily turnover on the Singapore Exchange (SGX) is a relatively minuscule US$875 million.

The Chinese stock market fever is reminiscent of the roaring Singapore bourse of the early 1990s, when it saw its biggest bull run in history.

The local equivalent of Guotai Junan then was Kim Eng Holdings - also a broking house - whose IPO in January 1990 to raise $32.5 million attracted an eye-popping record $22.9 billion in subscription monies. It went on to make a stunning debut as its share price tripled on its first trading day.

The stock frenzy unleashed by Kim Eng culminated three years later in the listing of Singtel - billed as the world's biggest IPO of that year. It converted a generation of Singaporeans, including this columnist, into stock investors after they secured the telco's shares at a discounted price.

So even as investors in Shanghai today enjoy a similar boom, we can only look back wistfully at the heady past, wishing the SGX can bring back its mojo and whet retail investors' appetite for stocks once more.

As concerns over the twin woes of low prices and weak liquidity on the local bourse grow, the drought in new listings continues. This year to date, there have been only three IPOs, raising just US$41.3 million. Neighbouring Asean markets have done considerably better. In Thailand, IPOs have raised a total of US$2.8 billion and in Malaysia, they drew US$1.1 billion.

SGX's outgoing boss, Mr Magnus Bocker, is convinced the flow of IPOs will resume when a slew of reforms to overhaul the market takes effect. But the worry is that SGX may lose relevance as a listing destination if the decline of the IPO market is not arrested quickly.

It is difficult to see how tweaking the rules will encourage global brands such as Chinese e-commerce giant Alibaba to list here or convince sceptical retail investors to part with hard-earned cash to invest in shares, given the hammering they suffered when S-chips and penny stocks went belly-up.

As a medium-sized bourse operator, SGX must live by its wits to survive in a globalised trading environment. It has succeeded in doing so with the derivatives business.

For instance, predecessor Simex got its big break by trading the Nikkei-225 contract more than 30 years ago, when Tokyo was still a relatively closed market to foreigners.

The success was replicated with the launch of the China A50 contract - tracking the Shanghai stock market, another closed market to foreigners. It became a hot-ticket item this year as China stock prices surged.

Success, however, has eluded SGX's securities business, but not for lack of trying. Big foreign IPOs such as Hutchison Port Holdings Trust have flopped, dropping 37 per cent from its issue price four years ago.

Instead of finding ways to grow the pie, remisiers here have wasted precious time harping over issues such the scrapping of the lunch break.

They seem to have forgotten that during the 1993 stock market bull run, they gladly skipped lunch and went without sleep, working late into the night to clear the backlog of contracts executed during trading hours.

And surely, there is no shortage of retail investor interest in stock investing, judging from the hundreds of participants who sign up for SGX Academy's stock seminars. Topics such as Reits draw an even bigger crowd.

With Shanghai showing that IPOs can still whet the appetites of hungry retail investors, perhaps SGX should try to repeat history.

While it may be good for SGX to try to attract more foreign IPOs here, the biggest task for new boss Loh Boon Chye is to convince the Government to allow national assets such as PSA and Changi Airport to be listed in order to give more depth and liquidity to the local bourse.

In other words, to put the buzz back back into the securities business, the SGX need not look for the solution in some foreign country: Salvation may lie right here in the Little Red Dot.

A version of this article appeared in the print edition of The Straits Times on June 29, 2015, with the headline 'How to bring back appetite for IPOs'. Print Edition | Subscribe